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Room for discretion? Biased decision-making in international financial institutions

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Abstract

We exploit the degree of discretion embedded in the World Bank-IMF Debt Sustainability Framework (DSF) to understand the decision-making process of international financial institutions. The unique, internal dataset we use covers the universe of debt sustainability analyses conducted between December 2006 and January 2015 for low-income countries. These data allow us to identify cases where the risk rating implied by the application of the DSF's mechanical rules was overridden to assign a different official rating. Our results show that both political interests and bureaucratic incentives influence the decision to intervene in the mechanical decision-making process. Countries that are politically aligned with the institutions' major shareholders are more likely to receive an improved rating; especially in election years and when the mechanical assessment is not clear-cut. These results suggest that the room for discretion international financial institutions have can be a channel for informal governance and a source of biased decision-making.

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... Particularly for governments not rated by traditional credit rating agencies, the DSA risk categories serve as a highly public signal of sovereign creditworthiness. The World Bank and IMF also accompany downgrades with "hardening terms" on future loans (World Bank Group, 2018a, b, p. 21) and reduced access to both loans and debt relief until the debt is lowered below the threshold once more (Lang & Presbitero, 2018). 34 out of 39 countries subject to DSA thresholds are in Sub-Saharan Africa, giving many African governments similar incentives to keep debt levels below DSA thresholds. ...
... Governments usually approach the IMF under severe financial strain (Moser & Sturm, 2011), but even among countries in distress, governments are more likely to engage with the IMF when there is sufficient political will to support fiscal consolidation (Vreeland, 2002). Further, program assignment varies across a government's regime type (Bauer et al., 2012), bureaucratic capacity (Barro & Lee, 2005), and relationship with the Fund's major shareholders (Dreher & Jensen, 2007;Lang & Presbitero, 2018). ...
... In addition, borrowers' relationships with other states can influence their credit market behavior and could change the incentives to hide debt. IMF loan conditions may be less constraining for countries that are politically important to the United States (Dreher et al., 2009;Lang & Presbitero, 2018). It follows that these borrowers may be less concerned about World Bank thresholds or IMF scrutiny, as support from the United States shields them from sharp consequences if IFI constraints are violated (Hyde & O'Mahony, 2010). ...
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Hidden debt is endemic throughout the sovereign credit market and poses a serious threat to global financial stability. Yet, little is known about why governments conceal their liabilities from creditors. I argue that governments intentionally hide debts from international financial institutions (IFIs) to maximize their ability to borrow while avoiding punishment for rising debt burdens. IFIs frequently penalize governments in low-income countries for borrowing beyond their means. By hiding some debt, governments are able to continue borrowing without being disciplined. I test this using recently released data that reveals half of the Chinese loans in Sub-Saharan Africa are missing from sovereign debt records. I find that borrower governments hide loans to avoid violating World Bank debt sustainability thresholds. However, governments hide less debt while under IMF scrutiny so as to reduce the risk that they will be discovered and punished. These findings offer evidence that borrower governments use hidden debt as a strategic tool to pursue fiscal goals. Further, this work reveals the unintended consequences of IFI intervention in less-developed countries, as efforts to ensure fiscal stability increase governments’ incentives to hide debt.
... However, cases of such interference are not the rule in IO operations. Constant meddling would directly undercut an IO's independence, on which its legitimacy and neutrality claims depend (Lang & Presbitero, 2018;Stone, 2008). As Stone (2008, pp. ...
... In lower salience cases, where major shareholders have no strong interest in intervening in decision-making, we expect bureaucrats to be able to decisively influence policy design. We formulate the ensuing hypothesis with reference to the geopolitical interests of the United States, the IMF's largest shareholder, which has been shown to skew IMF decisions to favor its allies (Dreher et al., 2009;Lang & Presbitero, 2018;Stone, 2008): ...
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This article advances a novel argument about the policy output of international organizations (IOs) by highlighting the role of individual staffers. We approach them as purposive actors carrying heterogeneous ideological biases that materially shape their policy choices on the job. Pursuing this argument with an empirical focus on the International Monetary Fund (IMF), we collected individual-level information on the careers of 835 IMF "mission chiefs"-staffers with primary responsibility for a particular member state-and matched them to newly coded data on more than 15,000 IMF-mandated policy conditions over the 1980-2016 period. Leveraging the appointment of the same mission chief to different countries throughout their career, we find that individual staffers influence the number, scope, and content of IMF conditions according to their personal ideological biases. These results contribute to our understanding of the microfoundations behind IO output and have implications for the accountability and legitimacy of IOs. Contemporary globalization is underpinned by a dense web of international organizations (IOs) that make momentous policy decisions affecting the activities of states, businesses, and civil society around the world. It is no surprise, then, that political scientists have devoted persistent attention to unpacking how these international bureaucratic structures make decisions, and they have done so using distinct lenses. One line of argument foregrounds the geopolitics that infuses many aspects of IO operations: states care deeply about what these organizations do and correspondingly engage in global bargaining and "horse-trading" to influence them (Copelovitch,
... This article contributes to the literature on the decision-making processes of international financial institutions (IFIs) in two ways. First, it contributes to the body of research that examines the informal influence of powerful member states on IFIs (Kilby 2013, Stone 2013, Lang and Presbitero 2018, Clark and Dolan 2021 by providing a better understanding of biases in the decisionmaking process related to MIGA's allocation of political risk guarantees. Second, by studying the role of MIGA staff in the project evaluation process, this study contributes to the growing debate on the influence of international bureaucrats on policy-making by IFIs (Eckhard and Ege 2016, Heinzel and Liese 2021, Heinzel 2022. ...
... Furthermore, our analysis suggests that MIGA risk insurance is awarded based on political considerations advanced indirectly by the Agency's main donor through MIGA staff, the latter not only seeking to meet the Agency's objective to enhance FDI flows to developing countries, but also striving to manage and optimise the use of its main shareholder's funding. Evidence that the politicisation of MIGA insurance allocation is primarily staff-led aligns with the findings of other studies of the informal influence of the US on the decision-making processes of IFIs (Stone 2013, Lang and Presbitero 2018, Clark and Dolan 2021. ...
Article
Many scholars have investigated the politics of World Bank Group (WBG) lending, often finding that WBG loans are distributed in ways that advance US policy interests. However, the organisation’s other major activity, promoting foreign direct investment (FDI), has received little attention. This study fills this void in the literature, with attention to the Multilateral Investment Guarantee Agency (MIGA), the youngest of the five agencies that collectively make up the WBG. MIGA provides multinational companies with insurance to protect their investments from non-commercial risks in host countries, such as the outbreak of civil war or government expropriation. Given considerable evidence that WBG loans support US interests, MIGA’s risk insurance may be similarly politicised. However, since MIGA is financially independent and prohibits political activity, we theorise that US influence operates informally through MIGA staff, who reward US-aligned countries to ‘please the principal,’ and hence ensure that the US continues to support the Agency. Empirical analysis based on over 1500 MIGA-insured investments covering 121 member countries over the 1990–2020 period shows that MIGA insurance is disproportionately rewarded to investments in host countries that support US policy interests. Our findings suggest that this politicisation is primarily staff-led.
... The World Bank has taken a prominent role in the global pandemic response, and its website provides lending information in real time (a feature we exploit for this analysis). Despite a charter that prohibits political considerations, there is ample evidence of politics in World Bank operations, including the speed of project preparation (Kilby, 2013b), lending decisions (Dreher et al., 2009), disbursement (Kersting & Kilby, 2016;Kilby, 2013a), enforcement of conditionality (Clark & Dolan, 2021), project evaluation (Kilby & Michaelowa, 2019), and debt sustainability rating (Lang & Presbitero, 2018). While anecdotes suggest influence by various stakeholders, there is substantial statistical evidence of U.S. influence, evidence underscored by patterns tied to U.S. domestic politics (Kersting & Kilby, 2021). ...
... Inflation and trade balance have long occupied an important role in World Bank assessment of a country's macroeconomic performance (Kilby, 2009). External debt is a central component of the Debt Sustainability Rating done jointly by the IMF and World Bank to assess a country's eligibility to borrow (Lang & Presbitero, 2018). Finally, the CPIA is perhaps the ideal variable: it reflects the World Bank's own internal assessment of the country's overall economic policy quality. ...
Article
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Do the normal rules of the game apply in international organizations during a global pandemic? We explore this question by comparing regular and COVID-19 World Bank loans. Analyzing lending from April 2, 2020 (the start of COVID-19 lending) to December 31, 2020, we find different results for the two types of World Bank loans. Looking at regular loans, countries that vote more in line with the U.S. on UN General Assembly resolutions are more likely to receive loans. For COVID-19 loans, geopolitics is not a significant factor. In contrast to ordinary business, the World Bank appears to have kept politics out of its pandemic response, instead more effectively focusing on provision of an important international public good.
... These are the situations in which political actors are in a relatively 64 In addition, evidence exists that governments favor areas with electorally more important constituents in their funding allocations (e.g., Kauder et al., 2016;Kriner & Reeves, 2015). Similarly, manifold evidence documents political biases and the existence of political budget cycles in the domain of foreign aid (e.g., Bommer et al., 2019;Dreher et al., 2019;Faye & Niehaus, 2012) and the Bretton-Woods-institutions (e.g., Eichenauer et al., 2020;Lang & Presbitero, 2018). Kuziemko & Werker (2006) and Dreher et al. (2009) show, for instance, that states with a temporary seat on the U.N. Security Council receive more U.S. aid and a higher number of World Bank projects respectively. ...
... 67 To rule out remaining endogeneity concerns about the alignment status, we show that our results hold in subsamples of close election outcomes, where it is essentially random whether the incumbent governor is aligned or unaligned with the president. Lang & Presbitero, 2018). Our analysis provides the first systematic test for a nonlinear political bias. ...
Thesis
This dissertation contains four separate chapters. CHAPTER 1 This chapter examines the current, lagged, and indirect effects of tropical cyclones on annual sectoral growth worldwide. The main explanatory variable is a new damage measure for local tropical cyclone intensity based on meteorological data weighted for individual sectoral exposure, which is included in a panel analysis for a maximum of 205 countries over the 1970–2015 period. I find a significantly negative influence of tropical cyclones on two sector aggregates including agriculture, as well as trade and tourism. In subsequent years, tropical cyclones negatively affect the majority of all sectors. However, the Input-Output analysis shows that production processes are sticky and indirect economic effects are limited. CHAPTER 2 People in low-lying coastal areas live under the potentially great threat of damage due to coastal flooding from tropical cyclones. Understanding how coastal population settlements react to such events is of high importance for society in order to consider future potential adaptation strategies and policies. In this study, we generate a new global hydrological data set on storm surge damage for the period 1850–2010. By combining this new data set with spatial data on human populations at a resolution of 10 km, we analyze the influence of storm surge damage on the rural, urban, and total population in low elevation coastal zones. We find that 8% of the global coastal population moved away per decade over the 1950–2010 period as a consequence of storm surges, on average. It is the urban population where we find the largest reductions (-15%). We show that the exposed coastal population has adapted over time and started to reduce its exposure in recent decades. This finding applies to most regions, with the exceptions of North America, Oceania, and Western Asia. CHAPTER 3 Allocation decisions are vulnerable to political influence, but little is known about when politicians can use their discretion to pursue their strategic goals. We show the nonlinearity of political favoritism in an exogenous framework of U.S. disaster relief. Based on a simple theoretical model, we demonstrate that political biases are most pronounced when the need for a disaster declaration is ambiguous. Exploiting the spatiotemporal randomness of all hurricane strikes in the United States from 1965–2018, we find that presidents favor areas governed by their fellow party members when allocating disaster declarations. Our nonlinear estimations reveal that political influence varies immensely with respect to storm intensity. The alignment bias for medium-strength hurricanes exceeds standard linear estimates eightfold. CHAPTER 4 We examine the design and implementation of the United Nations Flash Appeal triggered in response to the highly destructive 2015 Nepal earthquake. We consider how local need and various distortions affect the proposed project number, the proposed financial amount, and the subsequent funding decision by aid donors. Specifically, we investigate the extent to which the allocation of this humanitarian assistance follows municipalities’ affectedness and their physical and socioeconomic vulnerabilities. We then analyze potential ethnic, religious, and political distortions. Our results show that aid allocation is associated with geophysical estimates of the earthquake damage. Controlled for disaster impact, however, aid allocation shows little regard for the specific socioeconomic and physical vulnerabilities. It is also worrisome that the allocation of the flash appeal commitments favors municipalities dominated by higher castes and disadvantages those with a greater distance to the Nepali capital Kathmandu.
... The IMF administration's autonomy is, in comparison to others, mainly a result of high administrative permanence, strong research capacities, relatively strong sanctioning capacities, and independent financing. The IMF has significant formal powers (Lang and Presbitero 2018), which is also how its personnel perceive it: "While [other IGOs] may actually be much stronger on some topics than the Fund, for example climate change, the Fund still gets more attention and recognition in this area…. This really shows the power of the Fund" (IMF 7). ...
Chapter
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This chapter investigates how formal autonomy and informal administrative working styles of international public administrations (IPAs) are interrelated empirically. Recent research on IPAs identified a paradoxical constellation. Some IPAs with low structural autonomy, such as the Organization for Security and Co-operation in Europe Secretariat, are able to compensate this restriction by developing an entrepreneurial administrative style with emphasis on initiating new policies and sound internal management (paradox of weakness). Other IPAs, such as the formally autonomous European Commission, were found to anticipate member state control and voluntarily restrict themselves to a more passive servant style (paradox of strength). This finding raises the question whether the two paradoxes are idiosyncratic features of the two cases or a more universal phenomenon of international bureaucracies. To answer this question, this chapter introduces the concepts of structural autonomy and administrative styles and lay out a strategy for their measurement. It compares the empirical pattern of autonomy and style in eight IPAs. It concludes with some propositions about potential consequence for international bureaucratic influence.
... Kaya and Reay (2019) analyze 12,000 IMF documents from 1982-2011 to examine shifts in the IMF's discourse on the Washington Consensus, illustrating fragmentation and variability over-time. Lang and Presbitero (2018) consider the IMF's surveillance activities in the context of its debt sustainability analyses, finding considerable room for discretion. Aldenhoff (2007) finds evidence of bias in IMF growth forecasts arising from its surveillance and data gathering activities. ...
Article
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What are the effects of the International Monetary Fund’s (IMF) monitoring activities? We argue that IMF surveillance exercises – known as Article IV consultations – move financial markets. Our argument is based on the design of the IMF’s surveillance function, which is a relatively strong form of monitoring by the standards of most international organizations (IOs). We test this argument using an event study analysis of 428 IMF Article IV consultations. We find that the average surveillance mission has a substantial impact on sovereign debt with much greater impacts in emerging than high income economies. Interviews with market participants support and help to contextualize these findings. By illustrating the effects of surveillance, this article contributes to our understanding of whether, and to what extent, international institutions are a source of vital public information.
... 9 Fund/Bank staff can overrule the risk rating implied by the mechanical signals, particularly when the rating implied by the signals is not clear cut. Lang and Presbitero (2018) note that discretionary adjustments tend to favor countries that are politically aligned with the major shareholders of these institutions. shift in 2018 from a CPIA-based assessment to a CI-based assessment. ...
Article
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Public debt levels in sub-Saharan Africa rose sharply in the wake of the global financial crisis, and a number of countries are now classified by the World Bank and International Monetary Fund as at high risk of debt distress. By contrast with the debt crisis of the 1980s and 1990s, however, concerns were not region wide as recently as early 2020, and the policy environment for growth remains robust for the majority of countries in the region. The external environment nonetheless poses a set of region-wide risks that include the economic effects of the COVID-19 pandemic and are exacerbated by the increase in market-based debt and the retreat of the Paris Club among official creditors. Changes in perceived creditworthiness can now drive distress, and new challenges of creditor coordination will complicate the debt restructuring process. We motivate a research agenda that focuses on development assets at risk as rising debt service obligations crowd out development as well as operational and maintenance budgets. Preserving and enhancing these assets, which include advances in human capital and infrastructure and an improved investment environment, should be a central objective of domestic policy actions, preventative debt restructurings and institutional approaches to debt distress.
... In order to realise truly additional, positive net transfers, debt relief under the Common Framework will need to complement rather than replace grants and (concessional) lending by bilateral and multilateral donors/creditors. 20 It is also important 18 The application of judgement in DSAs is inevitable and necessary to take into account country-specific characteristics but may introduce bias (Lang and Presbitero 2018 to consider potential second-round resource effects. Whether or not deep debt relief is an appropriate vehicle to increase resource availability depends on the importance of debt overhang effects and on the consequences of the relief for the private market access of debtor countries. ...
Article
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When the COVID-19 pandemic added to already elevated debt vulnerabilities in low-income countries, the G20 launched the Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments beyond the DSSI, which have provided limited relief so far. For several countries, deeper and more wide-ranging debt treatments will likely be needed to secure future debt sustainability. This paper looks at the Heavily Indebted Poor Countries (HIPC) initiative, the largest and most comprehensive debt relief effort for low-income countries to date, as a potential reference point for the 2020s. While the HIPC initiative appears to have been a qualified success, its replication in the current context would be infeasible and undesirable. Creditor base heterogeneity justifies a more flexible, differentiated approach to debt restructuring. Yet, the HIPC experience holds valuable lessons. "Delay and replay" tendencies should be avoided. Involving commercial creditors is a real challenge, requiring carrots and sticks. And imposing extra conditionality on debt relief proceeds could be helpful but should not be overdone. Even if the Common Framework is unlikely to suffice in case of a systemic debt crisis, its inter-creditor dialogue could perhaps serve as the basis for a more inclusive advisory body or forum for debt restructuring. JEL codes: F34, F63, H63
... The fundamentals in this regression are fairly standard in the literature, and include both country-specific variables (debt-to-GDP ratio, terms of trade, inflation, and institutional quality 8 ), as well as global ones (the VIX un-certainty index and S&P500 stock returns). While credit ratings or debt sustainability assessments by the IMF/World Bank might affect spreads as well, we do not include them as regressors, as they are not fundamentals themselves and may suffer from various biases: Ferri, Liu, and Stiglitz (1999) for example document a procyclical bias for credit rating agencies, arguing that they pay insufficient attention to fundamentals during economic booms, while Lang and Presbitero (2018) document biases in debt sustainability analyses by the IMF and World Bank. In particular, when sentiment is positive, credit rating agencies or international financial institutions might be reluctant to "rock the boat" and pop the bubble -pandering towards the optimistic consensus view instead (Genberg, Martinez, and Salemi, 2014); Bolton, Freixas, and Shapiro (2012) show that such incentives are particularly strong during boom periods. ...
Article
We find that countries which are able to borrow at spreads that seem low given fundamentals (for example because investors take a bullish view on a country's future), are more likely to develop economic difficulties later on. We obtain this result through a two-stage procedure, where a first regression links sovereign spreads to fundamentals, after which residuals from this regression are deployed in a second stage to assess their impact on future outcomes (real GDP growth and the occurrence of fiscal crises). We confirm the relevance of past sovereign debt mispricing in several out-of-sample exercises, where they reduce the RMSE of real GDP growth forecasts by as much as 15 percent. This provides strong support for theories of sentiment affecting the business cycle. Our findings also suggest that countries shouldn't solely rely on spread levels when determining their fiscal strategy; underlying fundamentals should inform policy as well, since historical relationships between spreads and fundamentals often continue to apply in the medium-to-long run.
... This increases the ability of staff to pursue their own interests. Multiple studies observe IMF behavior that reflects staff interests like maximizing budgets, responsibilities, and autonomy, and find that IMF officials are able to push for longer programs, larger loans and more far-reaching conditionality than what is economically optimal (Barnett and Finnemore 2004;Copelovitch 2010;Lang and Presbitero 2018;Vaubel 2006). A second strand of this research shows that staff's ideological beliefs and policy preferences are also reflected in the IMF's policy decisions (Barro and Lee 2005;Chwieroth 2007a;Nelson 2014). ...
Article
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Does the International Monetary Fund (IMF) increase inequality? To answer this question, this article introduces a new empirical strategy for determining the effects of IMF programs that exploits the heterogeneous effect of IMF liquidity on loan allocation based on a difference-in-differences logic. The results show that IMF programs increase income inequality. An analysis of decile-specific income data shows that this effect is driven by absolute income losses for the poor and not by income gains for the rich. The effect persists for up to 5 years, and is stronger for IMF programs in democracies, and when policy conditions, particularly those that demand social-spending cuts and labor-market reforms, are more extensive. These results suggest that IMF programs can constrain government responsiveness to domestic distributional preferences.
... For over three decades, the IMF was the only international institution providing short-term crisis finance. However, RFAs have recently grown to become a major component of the global financial safety net, boasting a combined lending capacity that rivals the 1 Access is not guaranteed, and relies-among other elements-on debt sustainability requirements (Lang & Presbitero, 2018). ...
Article
Multilateral financial institutions have pledged to do whatever it takes to enable emerging market and developing countries to fill a 2.5trillionfinancinggaptocombatCovid19andsubsequenteconomiccrises.Inthisarticle,wepresentnewdatasetstotracktheextenttowhichmultilateralfinancialinstitutionsaremeetingthesegoals,andconductapreliminaryassessmentofprogresstodate.WefindthattheInternationalMonetaryFundandtheprincipalregionalfinancialarrangementshavemaderelativelytrivialamountsofnewfinancingavailableandhavebeenslowtodisbursethefinancingattheirdisposal.AsofJuly312020,theseinstitutionshadcommitted2.5 trillion financing gap to combat Covid-19 and subsequent economic crises. In this article, we present new datasets to track the extent to which multilateral financial institutions are meeting these goals, and conduct a preliminary assessment of progress to date. We find that the International Monetary Fund and the principal regional financial arrangements have made relatively trivial amounts of new financing available and have been slow to disburse the financing at their disposal. As of July 31 2020, these institutions had committed 89.56 billion in loans and 550millionincurrencyswaps,totaling550 million in currency swaps, totaling 90.11 billion—just 12.6% of their current capacity. The new datasets allow scholars, policymakers, and civil society to continue to track these trends, and eventually examine the impact of such financing on health and development outcomes.
... Nonetheless, opportunities for IPAs to exert influence exist during almost all stages of the policy cycle (see table 1). Except for the actual act of voting, which is exclusively reserved for member state representatives, the stages of policy initiation, policy drafting, and policy implementation all offer access points for IPA influence (Weinlich 2014;Knill et al. 2019). 2 Throughout these stages, IPA influence can be exerted both directly (e.g., by using room for administrative discretion, see Hinterleitner, Sager, and Thomann 2016;Lang and Presbitero 2018) and indirectly (e.g., by lobbying member states and transnational actors). Influence can be targeted at both content-related and procedural aspects of policy-making (Weinlich 2014;Knill and Bauer 2016), and it may occur in core areas of an IPA's mandate (Biermann and Siebenhüner 2009a) or in new fields by means of "mission creep" (Littoz-Monnet 2017). ...
Article
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An impressive amount of evidence has been collected underpinning the importance of international public administrations (i.e., the secretariats of international govern ental organizations) in a variety of policy areas, actor configurations, and multilevel political contexts. However, the problem of how to systematically observe and explain bureaucratic influence still lies at the core of the research puzzles that scholars presently attempt to solve. While acknowledging the achievements of recent research efforts, we argue that it is no coincidence that the results remain rather scattered and disconnected—as no consensus has been reached about how bureaucratic influence beyond nation states might be reasonably defined or reliablyobserved and how the individual insights gained could feed intothe construction of a more general theory of bureaucratic influence in transnational governance. Based on a review of the literature, the essay describes what we see as the characteristic pitfalls of current research and presents two modest proposals on how the underlying challenges can be addressed. We first suggest defining the target of influence in terms of a particular policy and second advocate the inclusion of bureaucratic policy preferences into the influence concept. In order to help researchers to observe and compare policy influence across IPAs, we present a simple heuristic measurement scheme, which, if systematically applied, may help overcome the central ailment of recent influence studies. We demonstrate the applicability of the scheme by means of two empirical illustrations. The argument is that in the absence of a comprehensive descriptive, let alone analytical, theory of bureaucratic influence in transnational policymaking, our proposal may help to boost the accumulative potential of current research in the area.
... His institutional affiliation helped us to get access to the internal data used for the analysis and allowed us to conduct interviews with IMF and World Bank staff to gather background information. The paper was published in the Journal of Development Economics before this dissertation was submitted (Lang and Presbitero 2018). ...
Thesis
This dissertation consists of four essays on the decision-making and the effects of international organizations. Its empirical focus is on the International Monetary Fund (IMF). The dissertation shows that political interests influence the IMF's decision-making and that IMF programs have important economic effects on sovereign creditworthiness and income inequality. Chapter 1: Buying Votes and International Organizations: The Dirty-Work Hypothesis; Chapter 2: Room for Discretion: Biased Decision-Making in International Financial Institutions; Chapter 3: Stigma or Cushion? IMF Programs and Sovereign Creditworthiness; Chapter 4: The Economics of the Democratic Deficit: The Effect of IMF Programs on Inequality
... S&P covers most high and middle-income countries. The IMF itself -jointly with the World Bank -rates the risk of debt distress under the so-called Debt Sustainability Framework (seeLang and Presbitero 2018). 9 Fitch Rating is dual-headquartered in London, UK and New York, USA. ...
Article
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IMF programs are often considered to carry a “stigma” that triggers adverse market reactions. We show that such a negative IMF effect disappears when accounting for endogenous selection into programs. To proxy for a country's access to financial markets, we use credit ratings and investor assessments for 100 countries from 1988 to 2013. Our instrumental variable strategy exploits the differential effect of changes in IMF liquidity on loan allocation. We find that the IMF can “cushion” against falling creditworthiness, despite contractionary adjustments related to its programs. This positive signaling effect is also visible in monthly event-based specifications using country-times-year fixed effects. A text analysis of rating statements indicates a positive signal to investors if countries under IMF programs commit to economic reforms.
Article
The study of international organizations’ (IOs) peer review systems has focused largely on their efficacy in disseminating best practices, with mixed results. This paper informs the debate from a new angle: We evaluate the extent to which decisions about who reviews whom and where result from bureaucratic guidelines, or whether these decisions are shaped by the particularistic interests of member states that would need to be considered in efficacy evaluations of peer reviews. Our empirical case is the OECD Development Assistance Committee (DAC) which requires that DAC donors have their practices reviewed by two peer examiners every few years. Using quantitative and qualitative methods, we study (i) the assignment of peer examiners (1962–2020) and (ii) the selection of recipient countries visited for in-depth assessment during the review (1994–2020). Our analyses show that the choice of peer examiners is driven by the IO’s bureaucratic process. The selection of recipient countries for field visits is also largely in line with Secretariat guidelines, with some room for the preferences of reviewed donors to play a role.
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We review the state of the sovereign debt literature and point out that the canonical model of sovereign debt cannot be easily reconciled with several facts about sovereign debt pricing and servicing. We identify and classify more than 20 puzzles. Some are well-known and documented, others are less so and are sometimes based on anecdotal evidence. We classify these puzzles into three categories: puzzles about how sovereigns issue debt; puzzles about the pricing of sovereign debt; and puzzles about sovereign default and the working out of defaults. We conclude by suggesting possible avenues for new research aimed at reconciling theory with what we observe in the real world.
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Can debt moratoria help countries weather negative shocks? We exploit the Debt Service Suspension Initiative (DSSI) to study the bond market effects of deferring official debt repayments. Using daily data on sovereign bond spreads and synthetic control methods, we show that countries eligible for official debt relief experience a larger decline in borrowing costs compared to similar, ineligible countries. This decline is stronger for countries that receive a larger relief, suggesting that the effect works through liquidity provision. By contrast, the results do not support the concern that official debt relief could generate stigma on financial markets. (JEL F34, G12, H63, O16)
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Bilateral aid procurement is politicised and strongly favours suppliers from donor countries. Does multilateral development assistance eliminate the procurement bias favouring donor countries because international bureaucrats make procurement decisions? Existing evidence from the World Bank, which delegates procurement responsibilities to aid recipient countries, cannot answer our theoretical question. Using official data from 20 UN organisations during the 2013–2018 period and applying regression and mediation analysis, we find that the procurement of international organisations still favours donor countries when international bureaucrats make procurement decisions. We identify donor state representation within the UN staff as a key stepping stone linking donation to procurement bias. In contrast, member states whose nationals are heads of a UN bureaucracy do not enjoy procurement advantage, suggesting that UN procurement bias operates through an informal bottom-up channel. Our paper contributes to the debates on the independence of international organisations in the context of multilateral development assistance and procurement.
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The study intends to investigate the working capital management of Chinese SMEs promoting economic development during COVID-19 by mediating the role of managerial personality traits and overconfidence behavior. Data from the Chinese managers are collected through a survey questionnaire using multi-stage cluster sampling and structural equation modeling for analysis. The results highlighted that extroversion, openness to experience, and agreeableness determined overconfidence bias from personality traits. Conscientiousness and neuroticism traits were insignificant with overconfidence behavior. Overconfidence behavior was significantly mediated during COVID-19 between managerial personality traits (e.g., extroversion and agreeableness traits) and working capital management. Time was a significant limitation in doing this study. The study extended the knowledge by studying working capital management practices during COVID-19 in Chinese SMEs and contributed by presenting multiple implications for effective working capital management. This study is one of the earlier studies investigating recent topicality to the best of our understanding.
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Did the International Monetary Fund (IMF) play a role in the United States and its Western allies efforts to contain the advance of communism during the Cold War? To answer this question, we construct a new database containing the number of conditions applied to over 500 IMF loans since 1970 and analyze how the distance from a borrowing country to its closet communist neighbor affected the IMF conditionality. We show that the Fund imposed fewer conditions on loans to countries geographically closer to the communist bloc. Results are stronger when neighboring communist countries were not part of the Warsaw Pact. This pattern persisted during the 1990s, when the Fund helped former communist countries in their transition to market economies. However, we find no strong evidence of such discretionary treatment by the IMF after 2001, when the containment of communism had ceased to be the West’s top priority.
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Many operational International Organizations (IOs) rely on national staff when implementing projects in member states. However, fears persist that the loyalties of national IO staff may be divided when working in their home countries. The article studies differences in more than 50,000 procurement decisions taken in 1729 projects overseen by World Bank staff working as expatriates or in their home countries. The empirical results show that when staff work in their home countries, national suppliers' probability of winning procurement contracts increases. However, these increases are not driven by restricted procurement processes—that exclude competition—which are often seen as red flags for corruption. Instead, restricted procurement processes seem to be less likely when staff work in their home countries. These findings imply that national IO staff use their country-specific knowledge to increase the development effectiveness of procurement in line with the mandate of the World Bank.
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en Conditionalities, measures that a borrowing country should adopt to obtain loans from the International Monetary Fund (IMF), are pervasive in IMF programs. Empirical work on the determinants of IMF conditionalities typically employs indicators based on the number of conditions as proxies for program austerity. This paper estimates the effects of political and economic factors on a different measure of stringency of conditionality: the fiscal balance requested in an agreement. The correlation between the number of conditions and the requested fiscal adjustment is close to zero in our sample. The requested adjustment is strongly linked to the country's fiscal deficit but is also affected by politics. For middle-income and upper-income countries, political alignment with the US has a significant negative effect on the fiscal effort required by the IMF. Résumé fr Déterminants des conditionnalités fiscales du FMI: facteurs économiques ou politiques? La « conditionnalité », c’est-à-dire l’ensemble des mesures qu’un pays emprunteur doit adopter pour obtenir des prêts du Fonds monétaire international, est un élément systématique des programmes du FMI. En règle générale, les travaux empiriques sur les déterminants des conditionnalités du FMI utilisent un certain nombre d’indicateurs basés sur le nombre de conditions à respecter, lesquelles servant de substituts aux programmes d’austérité. Dans cet article, nous évaluons l’effet des facteurs économiques et politiques sur une autre mesure de rigueur des conditionnalités, à savoir l’exigence d’équilibre fiscal. Dans notre échantillon, la corrélation entre le nombre de conditions et l’exigence d’ajustement fiscal est proche de zéro. L’ajustement exigé est fortement lié au déficit fiscal du pays, mais également à des facteurs politiques. Pour les pays à revenu intermédiaire, l’alignement politique avec les États-Unis a un effet négatif important sur l’effort fiscal exigé par le FMI.
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This paper investigates how World Bank lending responds to upcoming elections in borrowing countries. We find that investment project loans disburse faster when countries are aligned with the United States in the UN. Moreover, disbursement accelerates in the run-up to competitive executive elections if the government is geopolitically aligned with the U.S. but decelerates if the government is not. These disbursement patterns are consistent with global electioneering that serves U.S. foreign policy interests but jeopardizes the development effectiveness of multilateral lending.
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We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Specifically, we test whether the effect of aid on economic growth is reduced by the share of years a country served on the United Nations Security Council (UNSC) in the period the aid is committed, which provides quasi-random variation in aid. Our results show that the effect of aid on growth is significantly lower when aid was committed during a country’s tenure on the UNSC. This holds when we restrict the sample to Africa, which follows the strictest norm of rotation on the UNSC and thus where UNSC membership can most reliably be regarded as exogenous. We derive two conclusions from this. First, short-term political favoritism reduces the effectiveness of aid. Second, results of studies using political interest variables as instruments for overall aid arguably estimate the effect of politically motivated aid and thus a lower bound for the effect of all aid.
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Trades of money for political influence persist at every level of government. Not surprisingly, governments themselves trade money for political support on the international stage. Strange, however, is the tale of this book. For, in this study, legitimacy stands as the central political commodity at stake. The book investigates the ways governments trade money for favors at the United Nations Security Council – the body endowed with the international legal authority to legitimize the use of armed force to maintain or restore peace. With a wealth of quantitative data, the book shows that powerful countries, such as the United States, Japan, and Germany, extend financial favors to the elected members of the Security Council through direct foreign aid and through international organizations, such as the International Monetary Fund and the World Bank. In return, developing countries serving on the Security Council must deliver their political support … or face the consequences.
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The World Bank and the IMF have adopted a debt sustainability framework (DSF) to evaluate the risk of debt distress in Low Income Countries (LICs). At the core of the DSF are empirically-based thresholds for each of five different measures of the debt burden (the “debt threshold approach†DTA). The DSF contains a rule for aggregating the information contained in these five different variables which we label the “worst-case aggregator†(WCA) in view of the fact that the DSF considers a breach of any one of the thresholds sufficient to indicate a high risk of debt distress. However, neither the DTA nor the WCA has heretofore been subject to empirical testing. We find that: (1) the DTA loses information relative to a simple proposed alternative; (2) the WCA is too conservative (predicting crises too often) in terms of the loss function used in the DSF; and (3) the WCA is less accurate than some simple proposed alternative aggregators as a predictor of debt distress.
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Bailouts sponsored by the International Monetary Fund (IMF) are famous for their conditionality: in return for continued installments of desperately needed loans, governments must comply with austere policy changes. Many have suggested, however, that politically important countries face rather weak stringency. Obstacles to testing this hypothesis include finding a measure of political importance that is not plagued by endogeneity and obtaining data on IMF conditionality. We propose to measure political importance using temporary membership on the United Nations Security Council and analyze a newly available dataset on the level of conditionality attached to (a maximum of) 314 IMF arrangements with 101 countries over the 1992 to 2008 period. We find a negative relationship: Security Council members receive about 30 percent fewer conditions. This suggests that the major shareholders of the IMF trade softer conditionality in return for political influence over the Security Council.
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International organizations (IOs) suffuse world politics, but the International Monetary Fund (IMF) stands out as an unusually important IO. My research suggests that IMF lending is systematically biased. Preferential treatment is largely driven by the degree of similarity between beliefs held by IMF officials and key economic policy-makers in the borrowing country. This article describes the IMF's ideational culture as “neoliberal,” and assumes it to be stable during the observation window (1980–2000). The beliefs of top economic policy-makers in borrowing countries, however, vary in terms of their distance from IMF officials' beliefs. When fellow neoliberals control the top economic policy posts the distance between the means of the policy team's beliefs and the IMF narrows; consequently, IMF loans become less onerous, more generous, and less rigorously enforced. I gathered data on the number of conditions and the relative size of loans for 486 programs in the years between 1980 and 2000. I collected data on waivers, which allow countries that have missed binding conditions to continue to access funds, as an indicator for enforcement. I rely on indirect indicators, gleaned from a new data set that contains biographical details of more than 2,000 policy-makers in ninety developing countries, to construct a measure of the proportion of the top policy officials that are fellow neoliberals. The evidence from a battery of statistical tests reveals that as the proportion of neoliberals in the borrowing government increases, IMF deals get comparatively sweeter. Stephen C. Nelson is Assistant Professor of Political Science at Northwestern University, Evanston, Illinois. He can be reached at stephen-nelson@northwestern.edu.
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Researchers have scrutinized foreign aid's effects on poverty and growth, but anecdotal evidence suggests that donors often use aid for other ends. We test whether donors use bilateral aid to influence elections in developing countries. We find that recipient country administrations closely aligned with a donor receive more aid during election years, while those less aligned receive less. Consistent with our interpretation, this effect holds only in competitive elections, is absent in US aid flows to non-government entities, and is driven by bilateral alignment rather than incumbent characteristics.
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In the regression-discontinuity (RD) design, units are assigned to treatment based on whether their value of an observed covariate exceeds a known cutoff. In this design, local polynomial estimators are now routinely employed to construct confidence intervals for treatment effects. The performance of these confidence intervals in applications, however, may be seriously hampered by their sensitivity to the specific bandwidth employed. Available bandwidth selectors typically yield a “large” bandwidth, leading to data-driven confidence intervals that may be biased, with empirical coverage well below their nominal target. We propose new theory-based, more robust confidence interval estimators for average treatment effects at the cutoff in sharp RD, sharp kink RD, fuzzy RD, and fuzzy kink RD designs. Our proposed confidence intervals are constructed using a bias-corrected RD estimator together with a novel standard error estimator. For practical implementation, we discuss mean squared error optimal bandwidths, which are by construction not valid for conventional confidence intervals but are valid with our robust approach, and consistent standard error estimators based on our new variance formulas. In a special case of practical interest, our procedure amounts to running a quadratic instead of a linear local regression. More generally, our results give a formal justification to simple inference procedures based on increasing the order of the local polynomial estimator employed. We find in a simulation study that our confidence intervals exhibit close-to-correct empirical coverage and good empirical interval length on average, remarkably improving upon the alternatives available in the literature. All results are readily available in R and STATA using our companion software packages described in Calonico, Cattaneo, and Titiunik (2014d, 2014b).
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How is the United States able to control the IMF with only 17 per cent of the votes? How are the rules of the global economy made? This book shows how a combination of formal and informal rules explain how international organizations really work. Randall W. Stone argues that formal rules apply in ordinary times, while informal power allows leading states to exert control when the stakes are high. International organizations are therefore best understood as equilibrium outcomes that balance the power and interests of the leading state and the member countries. Presenting a new model of institutional design and comparing the IMF, WTO and EU, Stone argues that institutional variations reflect the distribution of power and interests. He shows that US interests influence the size, terms and enforcement of IMF programs, and new data, archival documents and interviews reveal the shortcomings of IMF programs in Mexico, Russia, Korea, Indonesia and Argentina.
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This paper examines how the staff exercise informal governance over lending decisions of the International Monetary Fund (IMF or Fund). The essential component of designing any IMF program, assessing the extent to which a borrowing country is likely to fulfill its policy commitments, is based partly on informal staff judgments subject to informal incentives and normative orientations not dictated by formal rules and procedures. Moreover, when country officials are unable to commit to policy goals of the IMF, the IMF staff may bypass the formal channel of policy dialogue through informal contacts and negotiations with more like-minded actors outside the policymaking process. Exercising informal governance in these ways, the staff are motived by informal career advancement incentives and normative orientations associated with the organization’s culture to provide favorable treatment to borrowers composed of policy teams sympathetic toward their policy goals. The presence of these sympathetic interlocutors provides the staff both with greater confidence a lending program will achieve success and an opportunity to support officials who share their policy beliefs. I assess these arguments using a new dataset that proxies shared policy beliefs based on the professional characteristics of IMF staff and developing country officials. The evidence supports these arguments: larger loan commitments are extended to countries where government officials and the Fund staff share similar professional training. The analysis implies informal governance operates in IOs not just via state influence but also through the evolving makeup, incentive structure, and normative orientations of their staffs.
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When states face an international cooperation problem requiring enforcement, when do they decide to make that enforcement formal versus informal? I introduce a research design for investigating how informal mechanisms might be relevant to formal international agreements. I present an overall theory of punishment provisions and a set of hypotheses about whether any needed punishments will be formalized or not. This theory gives rise to a two-part empirical analysis conducted on a large-n dataset. First, the presence of enforcement mechanisms in agreements is predicted, and, second, those cases that are "misclassified"-ones in which the model predicts the presence of such mechanisms, but the agreements lack them-are analyzed. These misclassified agreements, candidates for informal enforcement, are characterized by regime heterogeneity and military asymmetries among parties. Case study evidence supports the results.
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Analysts have long suspected that politics affects the lending patterns of the International Monetary Fund (IMF), but none have adequately specified or systematically tested competing explanations. This paper develops a political explanation of IMF lending and tests it statistically on the developing countries between 1985 and 1994. It finds that political realignment toward the United States, the largest power in the IMF, increases a country's probability of receiving an IMF loan. A country's static political alignment position has no significant impact during this period, suggesting that these processes are best modeled dynamically. An analysis of two subsamples rejects the hypothesis that the IMF has become less politicized since the end of the cold war and suggests that the influence of politics has actually increased since 1990. The behavior of multilateral organizations is still driven by the political interests of their more powerful member states.
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This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
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This article introduces a large new cross-country database, the Database of Political Institutions. It covers 177 countries over 21 years, 1975-95. The article presents the intuition, construction, and definitions of the different variables. Among the novel variables introduced are several measures of checks and balances, tenure and stability, identification of party affiliation with government or opposition, and fragmentation of opposition and government parties in the legislature.
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Combined with the expansion of economic literature on the role of ethnicity, new indices were developed to do justice to its complexity. The current indices are generally based on pre-defined groups, disregarding the (dis)similarities between them. This is sufficient to calculate the most common indices of ethnic fractionalization and polarization. But they do not measure ethnic diversity as for any diversity index the introduction of distances between groups is essential. This paper includes the distance between groups as a crucial aspect of a country’s ethnic set-up. Language, ethno-racial and religious characteristics are combined in a consistent way for a composite (dis)similarity value. The resulting distance adjusted ethno-linguistic fractionalization index (DELF) is based on an extensive amount of data, containing more than 12,000 groups defined along all three characteristics and covering a wide range of countries. By applying the equivalent approach as that of the diversity measure for single countries, the DELF offers an assessment of cultural differences between countries. As the new index measures a country’s ethnic diversity, it is a good starting point to review some of the existing approaches linking ethnicity to economic outcomes.
Article
Computational assistance and useful suggestions from Ralf Seisreiner and Bernhard Boockmann are gratefully acknowledged. I also wish to thank Lord Bauer Sir Alan Walters for helpful comments. The analysis has shown that the World Bank, like the IMF, suffers from bureaucratic inefficiency and an increasing lack of external control. The growth of its staff exceeds the growth of comparable institutions (including even the IMF) by a wide margin even though it has been significantly restrained by the rise of real salary cost. At the same time, labour productivity at the World Bank seems to have declined. In the IMF and in the IBRD weakening of external control is significantly related to the dilution of voting power which has undermined the incentive of the major principals to check bureaucratic growth and waste. Moreover, the principals (the governments of the member states) are misled by hurry-up lending at the time of review: IDA tends to increase the change of its capacity utilisation when the Board of Governors is due to decide about the next replenishment, and IDA expressly refers to the resulting lack of unused lending capacity when asking for additional resources (cf., for example, the Annual Report 1968). Walters (1994, p. 14) reports that, for example under President McNamara, there was pressure on loan officers and regional departments to make sure they used up their funds and that their budgets, status, staffing and promotion depended on such a performance. If bureaucratic growth and waste at the World Bank are to be brought under control, decisions about staff size and staff salaries must be delegated to a small group of donor governments. Decisions about the Bank's administrative budget must no longer be left to the Executive Directors whose salaries, power and prestige depend on the Bank's administrative expenditure. They lack an incentive to control the Bank's spending because they benefit from it. By reducing bureaucratic waste and removing the pressure to lend, the governments of the member states could save resources and improve the quality of World Bank lending.
Article
Recent scholarship has uncovered convincing evidence of systematic donor influence in international financial institutions (IFIs) such as the World Bank. Less clear is how donors influence IFI decisions. Possible avenues are formal and informal: formal influence through official decisions of the board of executive directors and informal influence over decisions not made at the board level. This paper explores the role of informal influence at the World Bank by examining the flow of funds after loans are approved. Controlling for commitments (loan approvals), are subsequent disbursements linked to the geopolitical interests of important donors? Since the board of executive directors is formally involved in loan approval but not in disbursement decisions, this provides an interesting case to identify the avenues of influence. The results indicate the scope of reforms needed to bolster the independence of the World Bank.
Article
In the last few years, numerous econometric studies have unearthed evidence of donor influence over the geographic distribution of funds from international financial institutions (IFIs). Scholars are now beginning to use quantitative methods to delve into the details of donor influence to understand better how IFIs function and to guide institutional reform. The evidence suggests that donors influence both the amount of funds committed (the number and size of loans) and the disbursement of committed funds. This paper advances the literature by applying stochastic frontier analysis to a novel data source to examine factors that affect how quickly World Bank projects proceed from identification to approval, i.e., how long it takes to prepare a project. Accelerated preparation is one explanation for how the World Bank might increase the number of loans to a recipient member country within a fixed time frame, for example in response to that country siding with powerful donor countries on important UN votes or while that country occupies an elected seat on the UN Security Council or the World Bank Executive Board.
Article
In the 1990s, the American executive organized financial rescues for Mexico and several Asian economies. These rescues were controversial in Congress, where members voted repeatedly to reduce or eliminate the executive's freedom to engage in them. I analyze these roll calls with an eye toward explaining who opposes and who supports international financial rescues. I argue that the interests of private actors (district constituencies and interest groups) have an important effect on member voting. Following Stolper-Samuelson reasoning, I find that a member is significantly more likely to favor (oppose) rescues as the proportion of high-skilled (low-skilled) workers in a district increases. In addition, I find that campaign contributions from international banks increase the probability that a member will vote in favor of rescues. Overall, the findings suggest that the distributional effects of rescues find expression in Congress and constrain U.S. international financial policymaking.
Article
What explains the substantial variation in the International Monetary Fund’s (IMF) lending policies over time and across cases? Some scholars argue that the IMF is the servant of the United States and other powerful member-states, while others contend that the Fund’s professional staff acts independently in pursuit of its own bureaucratic interests. I argue that neither of these perspectives, on its own, fully and accurately explains IMF lending behavior. Rather, I propose a “common agency” theory of IMF policymaking, in which the Fund’s largest shareholders—the G5 countries that exercise de facto control over the Executive Board (EB)—act collectively as its political principal. Using this framework, I argue that preference heterogeneity among G5 governments is a key determinant of variation in IMF loan size and conditionality. Under certain conditions, preference heterogeneity leads to either conflict or “logrolling” within the EB among the Fund’s largest shareholders, while in others it creates scope for the IMF staff to exploit “agency slack” and increase its autonomy. Statistical analysis of an original data set of 197 nonconcessional IMF loans to 47 countries from 1984 to 2003 yields strong support for this framework and its empirical predictions. In clarifying the politics of IMF lending, the article sheds light on the merits of recent policy proposals to reform the Fund and its decision-making rules. More broadly, it furthers our understanding of delegation, agency, and the dynamics of policymaking within international organizations.
Article
The International Monetary Fund (IMF) is in the process of re-inventing itself with bilateral and multilateral surveillance emerging as a key function. The paper analyses how IMF surveillance announcements may be influenced by political power that member countries exert at the IMF. First, we analyze the content of Article IV Public Information Notices (PIN), and second, we use the financial market reaction to the released PINs as tools to identify the role of political economy factors for IMF surveillance. For a set of emerging market economies, the paper finds that financial markets react more favorable to PIN releases for politically influential member countries. Moreover, IMF surveillance appears to be systematically more favorable for countries with larger IMF loans outstanding, consistent with the finding in the literature that the IMF may engage in [`]defensive surveillance'.
Article
There is growing awareness that the distribution of IMF facilities may not be influenced only by the economic needs of borrowers. This paper focuses on the fact that the IMF may favour geopolitically important countries in the distribution of IMF loans, differentiating between concessional and non-concessional facilities. To carry out the empirical analysis, we construct a new database that compiles a wide array of proxies for geopolitical importance for 107 IMF countries over 1990-2003, focusing on emerging and developing economies. We use a factor analysis to capture the common underlying characteristic of countries' geopolitical importance as well as a potential analysis since we also want to account for the geographical situation of the loan recipients. While controlling for economic and political determinants, our results show that geopolitical factors influence notably lending decisions when loans are non-concessional, whereas results are less robust and in opposite direction for concessional loans. This study provides empirical support to the view that geopolitical considerations are an important factor in shaping IMF lending decisions, potentially affecting the institution's effectiveness and credibility.
Article
Traditional aid conditionality has been attacked as ineffective in part because aid agencies – notably the World Bank – often fail to enforce conditions. This pattern undermines the credibility of conditionality, weakening incentives to implement policy reforms. The standard critique attributes this time inconsistency to bureaucratic factors within the aid agency such as pressure to lend, defensive lending, or short-sighted altruism. Pressure from powerful donors provides another potential explanation for lax enforcement. This paper presents an empirical analysis of the political economy of conditionality in international organizations using the case of the World Bank and the United States. The analysis examines panel data on World Bank disbursements to 97 countries receiving structural adjustment loans between 1984 and 2005. Using UN voting as an indicator of alignment with the U.S., the paper presents evidence that World Bank structural adjustment loan disbursements are less dependent on macroeconomic performance in countries aligned with the United States.
Article
We investigate whether elected members of the UN Security Council receive favorable treatment from the World Bank, using panel data for 157 countries over the period 1970–2004. Our results indicate a robust positive relationship between temporary UN Security Council membership and the number of World Bank projects a country receives, even after accounting for economic and political factors, as well as regional, country and year effects. The size of World Bank loans, however, is not affected by UN Security Council membership.
Article
We investigate whether temporary members of the United Nations Security Council receive favorable treatment from the International Monetary Fund (IMF) using panel data for 197 countries over the period from 1951 to 2004. Our results indicate a robust positive relationship between temporary Security Council membership and participation in IMF programs, even after accounting for economic, political, and country-specific factors. There is also evidence that Security Council membership reduces the number of conditions included in IMF programs. IMF loans seem to be a mechanism by which the major shareholders of the Fund can win favor with voting members of the Security Council.
Article
IMF loans react to economic conditions but are also sensitive to political-economy variables. Loans tend to be larger and more frequent when a country has a bigger quota and more professional staff at the IMF and when a country is more connected politically and economically to the United States and major European countries. These results are of considerable interest for their own sake. More importantly for present purposes, the results provide instrumental variables for estimating the effects of IMF loan programs on economic growth and other variables. This instrumental estimation allows us to sort out the economic effects of the loan programs from the responses of IMF lending to economic conditions. The estimates show that a higher IMF loan-participation rate reduces economic growth. IMF lending does not have significant effects on investment, inflation, government consumption, and international openness. However, IMF loan participation has small negative effects on democracy and the rule of law. The reduction in the rule of law implies an additional, indirect channel whereby IMF lending reduces economic growth.
Article
This paper explores the impact of donor supervision on development project performance using data from World Bank-funded projects. Maximum likelihood estimation of a restricted ordered probit function finds that early supervision has a positive impact on performance. Given the size of World Bank-funded projects, gains from increasing supervision far outweigh the costs. The results provide evidence of an institutional bias toward lending at the expense of increased development impact. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: F35; O19; O22.
Article
We investigate agency variation in credit quality assessment (Standard and Poor's vs. Moody's vs. Fitch) employing sovereign ratings data for 129 countries, spanning the period 1990-2006. While we find that the credit rating agencies often disagree about credit quality, it is usually confined to one or two notches on the finer scale. We find that several variables have varying importance in explaining ratings across agencies which leads us to conclude that material heterogeneity exists between them. Also, while watch and outlook procedures are generally strong predictors of rating changes relative to other public data, additional significant variables suggest that it might be possible to augment these agency data to provide better forecasts of future rating changes.
Article
We develop estimation methods that use the amount of selection on the observables in a model as a guide to the amount of selection on the unobservables. We show that if the observed variables are a random subset of a large number of factors that influence the endogenous variable and the outcome of interest, then the relationship between the index of observables that determines the endogenous variable and the index that determines the outcome will be the same as the relationship between the indices of unobservables that determine the two variables. In some circumstances this fact may be used to identify the effect of the endogenous variable. We also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of the endogenous variable to selection bias. We use our methods to estimate the effect of attending a Catholic high school on a variety of outcomes. Our main conclusion is that Catholic high schools substantially increase the probability of graduating from high school and, more tentatively, college attendance. We do not find much evidence for an effect on test scores.
Article
In this paper, we analyze whether International Monetary Fund (IMF) conditionality is exclusively designed to be in line with observable economic indicators or whether it is partly driven by the IMF's major shareholder, the United States. A panel data analysis of 206 letters of intent from 38 countries, submitted during the period April 1997 through February 2003, revealed that the number of conditions on an IMF loan depended on a borrowing country's voting pattern in the UN General Assembly. Closer allies of the United States (and other Group of 7 [G7] countries) received IMF loans with fewer conditions, especially prior to elections. These results are relevant to current public policy debates on the role and process of setting IMF loan conditions and provide broader insight into the influence of the United States and other G7 countries on international institutions.
Article
Having lost its systemic role following the demise of the Bretton Woods system, the International Monetary Fund (IMF) acquired a more specific role providing financial assistance and policy advice to developing countries. However, its involvement exposed it to wide-ranging criticism from both the right and left of the political spectrum. Unfortunately much of the criticism has been based on only partial evidence. A detailed review of the role of the IMF as both a financing and adjustment institution yields a nuanced picture. Certainly shortcomings emerge, but these help draft an appropriate strategy for reform which, in many ways is at odds with the proposals currently being canvassed by the major industrialized countries. Copyright 1996 by MIT Press.
Article
Standard sufficient conditions for identification in the regression discontinuity design are continuity of the conditional expectation of counterfactual outcomes in the running variable. These continuity assumptions may not be plausible if agents are able to manipulate the running variable. This paper develops a test of manipulation related to continuity of the running variable density function. The methodology is applied to popular elections to the House of Representatives, where sorting is neither expected nor found, and to roll-call voting in the House, where sorting is both expected and found.
Article
What explains the changes in International Monetary Fund (IMF) conditionality? I argue that IMF conditionality agreements are influenced by supplementary financiers. The IMF regularly relies on external financing to supplement its loans to countries facing payments imbalances. As a result, these supplementary financiers are able to exercise leverage over the IMF and the design of its conditionality programs. I consider the influence of one type of supplementary financier, private financial institutions, on IMF conditionality. Conclusions are supported by a data set of 249 conditionality arrangements, coded according to their terms, and two case studies. Many thanks to Judy Goldstein, Steve Krasner, and Tom Willett for reading multiple versions of this article and providing incisive, constructive comments each time. I am also grateful to David Andrews, Timothy Bei, Stephen Haber, Peter Henry, Simon Jackman, Jeff Legro, Lisa Martin, John Owen, Louis Pauly, Herman Schwartz, Jim Vreeland, and two external reviewers for helpful comments on earlier drafts. Errors are entirely my own. Many thanks also to the staff of the International Monetary Fund archives who generously assisted me in my research. I also gratefully acknowledge support from the University of Virginia and the following Stanford University sources: the Graduate School of Business, the Graduate Research Opportunity program, the Admiral and Mrs. John E. Lee Fund of the Social Science History Institute, and the O Bie Schultz Fellowship in International Studies from the Institute for International Studies.
A Rating Agency for Europe -a Good Idea? Centre for Economic Policy Research Working Paper
  • B Bartels
  • B Weder Di Mauro
Bartels, B., Weder di Mauro, B., 2013. A Rating Agency for Europe -a Good Idea? Centre for Economic Policy Research Working Paper.