Roland Vaubel

This selection was excerpted from "The Political Economy of the IMF: A Public Choice Analysis," published in Perpetuating Poverty: The World Bank, the IMF, and the Developing World, edited by Doug Bandow and Ian Vasquez (1994). Roland Vaubel is a professor of economics at the University of Mannheim in Germany.

Why Discretionary Ex Post Conditionality?

The fund imposes its conditions after the member country has gotten into trouble. The requirements are supposed to prevent borrowers from hanging on to their subsidized IMF credits longer than necessary. But the fund could more effectively accomplish its goals if the conditions addressed the causes of the crisis. Nations that have negligently, or even deliberately, created a difficult situation should be barred from receiving IMF credits at all. Ex ante conditions could, for example, include a requirement that domestic credit expansion may not exceed the growth of production potential, that the budget deficit may not exceed a certain percentage of the gross national product, that the rules of the General Agreement on Tariffs and Trade must be strictly observed, and that there may be neither controls on capital movements nor expropriation of investors.

Of course, such "ex ante conditionality" would greatly limit the number of member countries entitled to borrow from the IMF. It would reduce the power of fund officials. Such reform, moreover, would be in the interests of neither borrower governments inclined toward negligence nor lender governments that like to use the IMF to promote foreign policy goals or satisfy domestic interest groups.

Even in the case of purely ex post conditionality, moral hazard could be reduced if the IMF would at least issue--and apply--strict rules for its conditions. The governments of typical debtor countries would then have no hope of getting away with weak conditions thanks to good relations with IMF officials or special negotiating skills. At present, however, the IMF practices ad hoc conditionality, or a case-by-case approach. Fund officials oppose strict rules about the application of IMF conditions because they limit the fund's discretionary power. Influential lenders and borrowers feel the same way.

Why Is The IMF's Conditionality Not More Transparent?

If the IMF adjustment programs are justified on the grounds that they constitute "new knowledge" and thus an international public good, their terms should be made known. Publication might also increase the probability of the fund and its borrowers adhering to their programs, which seem to be less and less effective.

Why are agreements not published? Secrecy helps a borrower government that does not intend to meet the stipulated conditions save face. If a borrower intends to fulfill the conditions, secrecy enables it to make the IMF a scapegoat for additional reform measures the IMF did not demand. IMF officials avoid unwanted public supervision and a serious assessment as to the effectiveness of IMF programs. Broken conditions suggest that the fund is ineffectual. If, by contrast, the fund's conditions are minimal and therefore easy to fulfill, it would become evident that the IMF has little impact on borrowers' policies.

Monitoring by the IMF, the banks, and the general public would also be easier and more effective if policy conditions were simple and few. But the fund seems to prefer a multitude of policy conditions. Moreover, policy targets, to be effective, must relate to easily controllable variables--either policy instruments or close intermediate economic targets. Otherwise, it is not clear whether a violation is due to policy failures or unforeseeable disturbances. Without controllability, there can be no responsibility. Targets for relatively uncontrollable variables are not only likely to be missed, as IMF experience shows, they are also unlikely to exert much influence on the conduct of economic policy.

The fund's policy targets, however, tend to include remote, endogenous variables, such as the current account balance, that depend heavily on any number of uncontrollable factors. A public choice perspective suggests that the IMF staff prefers those sorts of requirements because they reduce potential outside control and criticism of the fund's effectiveness. Further, a multiplicity of conditions, without weights attached to them, makes it difficult to evaluate the efficiency of any program, raises the cost of monitoring for external observers, and permits the fund to attribute the low degree of successful program implementation to target conflicts.

The fund's desire to protect itself against outside monitoring may also explain why it prefers highly variable ad hoc conditions to simple rules. Once more, the customary borrowers and the most influential lenders share the IMF staff's interest. The choice of remote endogenous target variables can serve a similar purpose. Missing a target can almost always be attributed to unforeseeable disturbances. In that way, the debtor governments can conceal their noncompliance and the IMF staff can conceal the ineffectiveness of its conditions.

Why Are Conditions Procyclical?

Several authors have noted that IMF conditionality varies procyclically: It is stricter when the world is in a recession than when there is a boom. The period from 1979 to 1982 is a particularly good example. There is also econometric evidence that tightening of conditionality reduces the volume of IMF credits. One need not be a Keynesian to criticize the procyclical effect of such variations in conditionality. Why does the IMF reinforce the cycle?

Fund officials have a vested interest in lending extensively and imposing strict economic policy conditions because both constitute an exercise of power and a source of prestige. At a time of worldwide recession, when the demand for IMF credits increases, fund officials can maximize their authority by tightening lending conditions but not more than is compatible with some increase in credit volume. In boom times, in contrast, the decline in demand for credits leads to eased conditions--as exemplified by the structural adjustment facility and the enhanced structural adjustment facility.

Varying conditionality thus becomes a substitute for altering interest rates since the rates the IMF can charge are fixed in advance. If that explanation is correct, it follows that Richard Cooper's 1983 proposal for countercyclical use of IMF conditionality is not feasible because it runs counter to the bureaucratic interest of the IMF staff.