nach oben

The Review of International Organizations

Erschienen in:

01.06.2012

Certified or branded?

A game-theoretic analysis of the IMF’s policy support instrument

verfasst von: Rune Jansen Hagen

Erschienen in: The Review of International Organizations | Ausgabe 2/2012

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

While often considered a purely financial institution, the IMF has throughout its history performed non-financial services for its membership. The latest example is the Policy Support Instrument (PSI), a certification mechanism established in 2005 for which only poor members are eligible. Based on a formal game-theoretic model, I argue that it is unlikely that the PSI will serve well the intention of facilitating capital market access for members requesting the service. Their low income, the lack of significant consequences for markets, the IMF’s traditional reluctance to criticize members, as well as the need to promote the use of the new arrangement indicate that the Fund could emphasize participants’ welfare over the interests of private lenders. The continued importance of foreign aid in eligible countries also puts the IMF in the role of gatekeeping such flows, which might conflict with sending clear signals to commercial actors. All these reasons imply that in many cases its seal of approval will be of little use to third-parties, despite the high standards to which PSI-countries are supposed to adhere. The best argument in favor of the PSI being a useful addition to the Fund’s tool kit for low-income members is the fact that several countries have already signed a second one.

Vorheriger Artikel Looking in the mirror: Comparing INGO networks across issue areas

Nächster Artikel Susan Park and Antje Vetterlein (eds.). 2010. Owning development: Creating policy norms in the IMF and the World Bank (New York: Cambridge University Press)

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

See the excellent discussion of the pros and cons of various mechanisms for signalling the private information of the Fund to outsiders without committing financial resources, including those that are defunct or never made it past the proposal-stage, in IMF (2004).

See IMF (2005a) as well as Policy Support Instrument—Framework, Decision No. 13561-(05/85), as amended. The PSI framework was slightly revised in connection with the recent revamping of the Fund’s concessional facilities, c.f. A New Architecture of Facilities for Low-Income Countries and Reform of the Fund’s Concessional Financing Framework, Decision No. 14385-(09/79).

In terms of technical assistance, the PSI is no different from a financial program. I thank Camelia Minoiu of the IMF Institute for clarifying this point.

According to Taylor (2006: 386), “[...] a series of requests for this type of program from the finance ministers of HIPCs in Africa was what first put this idea on the reform agenda [...]” The IMF itself conducted surveys of both LIC-members as well as other stakeholders in connection with both the initial decision as well as the first review of the PSI (IMF 2005b, 2009a). These surveys provide some support for there being such a demand. However, the independent survey by Martin et al. (2009) paints a more sanguine picture.

Cape Verde is currently classified as a lower middle-income country by the World Bank, but falls under the exception of “small island economies.” For the sake of simplicity I will sometimes speak of PSI-eligible IMF members as LICs, though there are potential and actual exceptions to this rule like Cape Verde.

A formal model showing how a concern for its reputation in surveillance could explain why IMF conditional lending does not work is provided by Marchesi and Sabani (2007).

Recent studies look at this issue from a somewhat different angle. Gelos et al. (2011) and Thomas (2009) analyze what factors give poor countries access to private capital markets. The former find no significant effect of IMF programs once the quality of policies is controlled for, whereas the latter finds that in contrast to IDA-eligible countries the market access of IDA graduates is positively affected by the time spent in IMF programs. The results of Bauer et al. (2011) indicate that with respect to FDI the sign of the catalytic effect depends on the political regime.

See, e.g., Bird et al. (2004) and Joyce (2005).

The exceptions are Cape Verde and Nigeria. The other five have benefitted from the Multilateral Debt Relief Initiative too.

With the exception of Rwanda they also have the lowest concessionality requirements due to their low risk of debt distress, c.f. Table 1 in IMF (2009b).

On the “Millennium Rush”—the rapid increase in the number of HIPC-countries in 2000—that resulted from external pressure on the World Bank and the IMF to speed up the process of delivering debt relief, see Killick (2004). Marchesi (2003) finds that in the period covered by the Baker and Brady plans, IMF programs facilitated debt relief from private creditors.

See, e.g., Dollar and Levin (2006) and Claessens et al. (2009).

This assumption is common in the literature on sovereign debt, c.f. the review by Eaton and Fernandez (1995).

For more on the legal issues of sovereign debt, see, e.g., Roubini and Setser (2004) and Panizza et al. (2009).

Acharya and Diwan (1993) have shown that a debtor buying back its debt might signal its willingness to invest to creditors. To concentrate on the IMF’s strategic role I therefore assume that the country’s initial debt is zero.

The necessity of assuming \(1+\rho >\lambda\left( 1+\kappa^{H}\right) \) is then clear: one more unit of borrowing increases the left-hand side of the condition for indifference with respect to default by 1 + ρ and the right-hand side by \(\lambda\left( 1+\kappa^{H}\right) \). If the latter exceeded the former lenders could lend an infinite amount without ever risking default. \(\overline{B}^{P}\) is found in corresponding fashion.

For an analysis of the impact of aid on commercial credit from a different perspective, see Pedersen (2003).

For theoretical analyzes, see Hagen (2006), Martens et al. (2002), Pedersen (1996, 2001), and Svensson (2000). On the record of multilateral conditionality, see e.g. Mosley et al. (1991), Killick et al. (1998), Dollar and Svensson (1998), Ivanova et al. (2003), and Easterly (2005).

If anything, the problem is magnified in the sphere of aid by the broken feed-back loop from ultimate beneficiaries (the poor in developing countries) to the ultimate donors (taxpayers in rich countries), which tend to make outputs such as the amount spent the measuring rod for performance instead of outcomes on the ground.

That the Fund has been under considerable pressure in recent years to allow aid to be “scaled up” to achieve the Millennium Development Goals. This indicates that quantity still matters as much as quality in aid. Moreover, the political support for the Paris Agenda seems to be waning in important countries like the UK. Hence, aid policy could also backslide and become less selective again.

It is of course unrealistic to assume that the IMF becomes as knowledgeable as the country’s authorities, but it is a useful simplification at this stage. Moreover, the results should continue to hold as long as the IMF has an informational advantage over private lenders and donors. Including information costs is left for future research.

Admittedly, this formulation is somewhat awkward in a two-period model. However, the important point is that the model is static, and considering the dynamics of this state variable would take us too far afield.

Both the latter argument as well as the argument about the need for maintaining a reputation with capital market participants are really arguments about the Fund’s long-term incentives. In a static model like the current one, however, they can usefully be taken as arguments for including the objectives of these actors amongst those that are more narrowly the IMF’s own goals.

Such variation—reflected in the size of IMF loans and the stringency of its conditionality—has been documented for middle-income countries by Copelovitch (2010), Pop-Eleches (2009), and Stone (2002). As argued by these authors, this most likely follows from temporal variations in the interests of the dominant members and the Fund bureaucracy. However, as argued below it is more difficult to see why this should apply to the PSI-countries, which are neither economically important to the major shareholders nor systemically important.

If pooling at L or H was allowed for, I would have to change the message space when investigating whether such PBE are neologism-proof to maintain the possibility of the IMF literally stating, say, that the review revealed i = H (as a pooling equilibrium statement H would then convey the meaning “no conclusion”). As noted, Farrell (1993) also assumes that neologisms are always available.

C.f. Proposition 2.

Here is where the normalization in Eq. 5 contributes to the cleanliness of the results.

For \(\beta<\widehat{\beta}\) and \(\theta<\widehat{\theta}\) the lemons actually also suffer from the IMF’s inability to credibly convey its private information to donors and lenders.

For a review of the political economy of the IMF, see Steinwand and Stone (2008). A recent empirical analysis of which economic and political factors robustly affect the signing of IMF financial agreements and their size is provided by Moser and Sturm (2011).

Acharya, S., & Diwan, I. (1993). Debt buy-backs signal sovereign countries’ creditworthiness: Theory and tests. International Economic Review, 34, 795–817.CrossRef

Bauer, M. E., Cruz, C., & Graham, B. A. T. (2011). Democracies only: When do IMF agreements serve as a seal of approval? Review of International Organizations, forthcoming.

Bevan, D. (2009). The IMF’s approach to macroeconomic policy in low-income countries. In J. M. Boughton & D. Lombardi (Eds.), Finance, development, and the IMF. Oxford: Oxford University Press.

Bird, G., et al. (2004). Many happy returns? Recidivism and the IMF. Journal of International Money and Finance, 23, 231–251.CrossRef

Bird, G., & Rowlands, D. (1997). The catalytic effect of lending by the international financial institutions. World Economy, 20, 967–91.CrossRef

Bird, G., & Rowlands, D. (2007). The IMF and the Mobilisation of Foreign Aid. Journal of Development Studies, 43, 856–870.CrossRef

Bordo, M. D., & James, H. (2000). The International Monetary Fund: Its present role in historical perspective. National Bureau of Economic Research Working Paper 7724.

Claessens, S., Cassimon, D., & Van Campenhout, B. (2009). Evidence on changes in aid allocation criteria. World Bank Economic Review, 23, 185–208.CrossRef

Copelovitch, M. S. (2010). The International Monetary Fund in the global economy. Banks, bonds, and bailouts. Cambridge, UK: Cambridge University Press.CrossRef

Cottarelli, C., & Giannini, C. (2002). Bedfellows, hostages, or perfect strangers? Global capital markets and the catalytic effect of IMF crisis lending. IMF Working Paper 02/193.

Dollar, D., & Levin, V. (2006). The increasing selectivity of foreign aid, 1984–2003. World Development, 34, 2034–2046.CrossRef

Dollar, D., & Svensson, J. (1998). What explains the success or failure of structural adjustment programs? Economic Journal, 110, 894–917.CrossRef

Easterly, W. (2005). What did structural adjustment adjust? The association of policies and growth with repeated IMF and World Bank adjustment loans. Journal of Development Economics, 76, 1–22.

Eaton, J., & Fernandez, R. (1995). Sovereign debt. In G. Grossman, & K. Rogoff (Eds.), Handbook of international economics (Vol. III). Elsevier Science.

Farrell, J. (1993). Meaning and credibility in cheap-talk games. Games and Economic Behavior, 5, 514–531.CrossRef

Gelos, R., Sahay, R., & Sandleris, G. (2011). Sovereign borrowing by developing countries: What determines market access? Journal of International Economics, 83, 243–254.CrossRef

Guitián, M. (1992). The unique nature of the responsibilities of the International Monetary Fund. IMF Pamphlet Series 46.

Hagen, R. J. (2006). Samaritan agents? On the delegation of aid policy. Journal of Development Economics, 79, 249–263.CrossRef

Hagen, R. J. (2009). Basic analytics of multilateral lending and surveillance. Journal of International Economics, 79, 126–136.CrossRef

IEO (2002). Evaluation of prolonged use of IMF resources. Washington, DC: IMF.

IMF (2004). Signaling by the Fund—a historical review. Prepared by the Policy Development and Review Department. Washington, DC: IMF.

IMF (2005a). Implementation of the policy support instrument. Prepared by the Policy Development and Review and Legal Departments. Washington, DC: IMF.

IMF (2005b). Policy support and signaling in low-income countries. Prepared by the Policy Development and Review Department. Washington, DC: IMF.

IMF (2008). Review of the Fund’s financing role in member countries. Prepared by the Policy Development and Review Department. Washington, DC: IMF.

IMF (2009a). Review of the experience with the policy support instrument. Prepared by the Strategy, Policy and Review Department. Washington, DC: IMF.

IMF (2009b). Changing patterns in low-income country financing and implications for Fund policies on external financing and debt. Prepared by the Strategy, Policy and Review Department. Washington, DC: IMF.

Ivanova, A., Mayer, W., Mourmouras, A., & Anayiotos, G. (2003). What determines the implementation of IMF-supported programs? IMF Working Paper 03/8.

Joyce, J. (2005). Time past and time present: A duration analysis of IMF program spells. Review of International Economics, 13, 283–297.CrossRef

Killick, T. (2004). Politics, evidence and the new aid agenda. Development Policy Review, 22, 5–29.CrossRef

Killick, T., Gunatilaka, R., & Marr, A. (1998). Aid and the political economy of policy change. London: Routledge.

Lane, T. (2009). Signaling, aid, and IMF financial arrangements for low-income countries. In J. M. Boughton & D. Lombardi (Eds.), Finance, development, and the IMF. Oxford: Oxford University Press.

Marchesi, S. (2003). Adoption of an IMF programme and debt rescheduling. An empirical analysis. Journal of Development Economics, 70, 403–423.CrossRef

Marchesi, S., & Sabani, L. (2007). IMF concern for reputation and conditional lending failure: Theory and empirics. Journal of Development Economics, 84, 640–666.CrossRef

Martens, B., Mummert, U., Murrell, P., & Seabright, P. (2002). The institutional economics of foreign aid. Cambridge: Cambridge University Press.CrossRef

Martin, M., Johnson, A., & Rabinowitz, G. (2009). What is the point of the PSI? The views of African policymakers. London: Development Finance International.

Moser, C., & Sturm, J.-E. (2011). Explaining IMF lending decisions after the cold war. Review of International Organizations, 6, 307–340.

Mosley, P., Harrigan, J., & Toye, J. (1991). Aid and power. The World Bank and policy-based lending. London: Routledge.

Panizza, U., Sturzenegger, F., & Zettelmeyer, J. (2009). The economics and law of sovereign debt. Journal of Economic Literature, 47, 651–698.CrossRef

Pedersen, K. R. (1996). Aid, investment and incentives. Scandinavian Journal of Economics, 98, 423–38.CrossRef

Pedersen, K. R. (2001). The Samaritan’s dilemma and the effectiveness of foreign aid. International Tax and Public Finance, 8, 693–703.CrossRef

Pedersen, K. R. (2003). Foreign aid and incentives in commercial credit markets. Institute for Research in Economics and Business Administration Working Paper 67/03.

Pop-Eleches, G. (2009). From economic crisis to reform: IMF programmes in latin America and Eastern Europe. Princeton: Princeton University Press.

Radelet, S. (2006). IMF facilities for poststabilization low-income countries. In E. M. Truman (Ed.), Reforming the IMF for the 21st century. Institute for International Economics Special Report 19.

Rodrik, D. (1996). Why is there multilateral lending? In M. Bruno & B. Pleskovic (Eds.), Annual World Bank conference on development economics 1995. Washington, DC: the World Bank.

Roubini, N., & Setser, B (2004). Bailouts or bail-ins? Responding to financial crises in emerging market economies. Washington, DC: Institute for International Economics.

Steinwand, M. C., & Stone R. W. (2008). The International Monetary Fund: A review of the recent evidence. Review of International Organizations, 3, 123–149.CrossRef

Stone, R. W. (2002). Lending credibility: The International Monetary Fund and the post-communist transition. Princeton: Princeton University Press.

Svensson, J. (2000). When is foreign aid policy credible? Aid dependence and conditionality. Journal of Development Economics, 61, 61–84.CrossRef

Taylor, J. B. (2006). The policy support instrument: A key component of the recent IMF reform movement. In E. M. Truman (Ed.), Reforming the IMF for the 21st century. Institute for International Economics Special Report 19.

Thomas, A. (2009). Access to market financing for IDA-Eligible countries—The role of external debt and IMF-supported programs. IMF Working Paper 09/217.

Titel: Certified or branded?
A game-theoretic analysis of the IMF’s policy support instrument
verfasst von: Rune Jansen Hagen
Publikationsdatum: 01.06.2012
Verlag: Springer US
Erschienen in: The Review of International Organizations / Ausgabe 2/2012
Print ISSN: 1559-7431
Elektronische ISSN: 1559-744X
DOI: https://doi.org/10.1007/s11558-011-9135-4

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 2/2012

Crossing the threshold: A positive analysis of IBRD graduation policy

Susan Park and Antje Vetterlein (eds.). 2010. Owning development: Creating policy norms in the IMF and the World Bank (New York: Cambridge University Press)

Looking in the mirror: Comparing INGO networks across issue areas

Soo Yeon Kim. 2010. Power and the governance of global trade: From the GATT to the WTO (Ithaca, New York: Cornell University Press)

Punctuated equilibrium in the energy regime complex

Premium Partner