The IMF, the WTO & the Politics of Economic Surveillance

Martin Edwards

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9780429656422
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

Both the International Monetary Fund (IMF) and the World Trade Organization (WTO) practice periodic surveillance of members to ensure that countries are adopting appropriate economic policies. Despite the importance of these procedures, they remain understudied by scholars. The global economic crisis has tested both organizations and brought surveillance to the forefront of policy debates. Understanding how surveillance works, then, contributes to both theoretical and policy concerns.

The world is paying increasing attention to issues of transparency and accountability, questioning whether these organizations are in part responsible for the global economic crisis, as well as assessing their responsiveness to the crisis. This comparative analysis of surveillance at the IMF and WTO fills a significant gap in the existing literature, drawing together a large range of empirical data and offering an extended critical analysis of this key issue.

Examining how and in what contexts surveillance is influential and how variations in institutional design shape the effectiveness of surveillance, Edwards moves on to offer recommendations of how surveillance can be designed differently to make it more effective in the future. This work will be of great interest to students and scholars of international organizations, international political economy and global governance.

1 Thinking theoretically and empirically about surveillance

• Surveillance as soft law

• The institutionalist tradition

• The socialization tradition

• Surveillance and the challenge of great power influence

• Surveillance and policy change: the importance of contexts

• Toward studying surveillance as a process

• Conclusion

Two recent vignettes from the IMF and the WTO help us to better understand the role of international organizations in economic surveillance. Consider the following examples.

The United States Article IV consultation with the International Monetary Fund was conducted in summer 2018. The press release following the Executive Board discussion of the staff report offered both positive and negative elements.¹ While it praised US policy makers for creating an impressive economic expansion with low unemployment, storm clouds were on the horizon. Concerns about rising budget deficits produced by the Administration’s tax cuts led, in turn, to worries about the future sustainability of the public debt. The Fund’s Executive Board raised questions about the White House’s priorities, as the tax cuts meant that the government will be less able to support desperately needed infrastructure spending. The administration’s adoption of supply-side economics also mean that there was little attention paid to combating inequality. The Fund also suggested that the economy would slow down over the medium term, giving rise to a public rebuke from the U.S. Treasury Department.

The Executive Board was also well aware of the headlines during the summer, and consistent with its mandate to focus on threats to economic stability, the press release also referenced concerns over trade policy. Recent unilateral actions taken by the US raised the danger of retaliation and the prospect of undermining the WTO, and this was also a focus of the Executive Board’s discussion.

Having joined the WTO in 2012, Russia’s first Trade Policy Review (TPR) was held in September 2016. The backdrop for the review was an economy that had fallen on hard times. A dramatic fall in oil prices and sanctions from the US, the European Union, and Canada imposed following the annexation of Crimea led to capital flight and a recession. In response to sanctions from Western countries, the Russian government imposed a ban on imports of agricultural products from these countries. As might be expected, the Russian government’s report submitted for the Trade Policy Review blames these sanctions for the economic downturn.² The government’s report does not discuss its retaliatory measures, although the Secretariat’s report does in detail.³

In the discussion of the review, member delegations were clear in their desire to keep the focus on trade policy and not political relations between Russia and the West: 53 delegations made statements, 33 countries submitted questions electronically, and another 5 countries asked follow-up questions electronically. The range of questions posed by members is illustrative of the breadth of the review process, including local content requirements for government procurement, Russian sanitary and phytosanitary measures, technical barriers to trade, and fossil fuel and fisheries subsidies. Also emblematic of the extensiveness of the review, the Russian government’s submission was 14 pages in length, while the Secretariat’s report was 173 pages long.

Both of these vignettes the important question of when and how surveillance can make a difference. Varying traditions in international relations theory offer different answers to the question of how surveillance can matter, and these are important because it tells us where to look for evidence. To empirically demonstrate that surveillance makes a difference requires that we think about some of the challenges that make studying soft law difficult. This is important because it also tells us how to look for that evidence as well. Both theory and research design are needed to develop appropriate tests and advance knowledge that will be useful to policy makers. In this chapter, I discuss both theory and research design, and then turn to discuss multiple types of effects of surveillance: effects on policy makers and domestic political debate, effects on media, and effects on third parties. Differences in contexts help to explain where the information in surveillance can make a difference and where it does not. This chapter thus sets the stage for the empirical evaluations in Chapters 3 and 4. Since surveillance is practiced differently at the IMF and the WTO, these evaluations are essential to conduct for both organizations. This helps us to ascertain if these effects are attributable to differences in the design of these respective organizations.

At the same time, we still need more background information on how surveillance at both organizations work. This discussion takes place in the following chapter, as I recap what surveillance at both organizations looks like and how it has changed over time. This background information is also essential to the empirical tests that follow.

Surveillance as soft law

As mentioned earlier, international relations scholars have characterized surveillance procedures as soft law.⁴ Soft law has three characteristics: low levels of obligation, low levels of precision, and low levels of delegation. Participating in surveillance procedures is framed as an obligation of the organization; membership in the IMF and the WTO means that a country needs to routinely participate in the surveillance process of the organization. In both organizations, countries with lapses or delays in their surveillance missions are noted. For example, Cuba and Venezuela have not completed their trade policy reviews in many years and the IMF reports delays in Article IV consultations of greater than 18 months for Burundi, Eritrea, Libya, Syria, Venezuela, and Yemen.⁵ It is worth stressing that neither of these organizations are directly punishing these countries for opting out, nor are other countries. The costs accrue in exclusion from loans or in less efficient trading arrangements. Neither of these organizations regard delays in the completion of the reviews as the primary barrier to the effectiveness of surveillance. As this list implies, far more countries participate in surveillance than opt out of it.

While participating in surveillance is thought of as an obligation of membership, implementing the findings of surveillance missions is certainly not. Thinking more about precision and delegation makes this point clear, reminding us that surveillance is soft law. What surveillance covers is either classified as issues relating to “the impact of a member’s trade policies and practices on the multilateral trading system,” in the case of the WTO, or “fostering orderly economic growth,” as in the case of the IMF. In either case, these requirements are not precise. So not only is the level of precision surrounding surveillance low, but the organization does not delegate additional authority to a third party to adjudicate issues relating to surveillance. Countries with concerns about how surveillance is practiced have no other recourse other than to take them up with the organization that developed it. This means that the level of delegation is also low.

The fact that surveillance is soft law raises the question of how it can possibly be effective in changing the behavior of member states. Many scholars have been moved by the words in Leviathan about the weakness of “covenants without the sword” to be pessimistic about the impact of surveillance.⁶ Recent theoretical contributions push back against this Hobbesian pessimism, and help to clarify the mechanisms by which the policy advice provided by the international economic organizations can produce policy change.

International Relations theorists have been wrestling with the question of how to think about the impact of soft law for decades. After all, if surveillance was immaterial, why would states continually frame it as an essential component of the mission of international organizations? Moreover, why would the heads of these organizations continue to support strengthening surveillance? The truth must lie somewhere between a world in which surveillance is inconsequential and a world in which states immediately implement the policy advice advocated by international organizations.

Surveillance can make a difference by both providing information and helping to socialize states. The purpose of this information is to remind states about appropriate practices and in so doing provoke policy change. In this way, it can, under some conditions, constrain states. Arguments based on information and socialization stem from differing research traditions. The notion that international organizations that use soft law can inform stems largely from the institutionalist tradition. The claim that soft law can socialize states stems from the constructivist tradition. Regardless of the theoretical foundations, soft law can, under certain conditions, lead states to change their behavior. I review each in detail below as a means to set up the broader argument, which focuses on how differences in contexts help to moderate the effects of information from surveillance.

The institutionalist tradition

The claim that international organizations reveal information and solve problems of market failure is at the core of the institutionalist tradition.⁷ We know that international organizations are often created by countries to monitor each other, and that many international organizations devote considerable energies to monitoring.⁸ In this tradition, uncertainty reduction is why these international organizations are created. Countries require assurances that others will honor their commitments. Lacking this assurance, countries will have little incentive to cooperate with one another.

The canonical model that underpins the importance of information revelation (and by extension, the value of international organizations) is Prisoner’s Dilemma.⁹ In this game, parties have an incentive to cheat, which means that allowing communication between the players is not enough. After all, the communication does not resolve the fact that the prisoners have incentives to lie to one another. In this model, information still makes a difference by helping to distinguish those countries that are cooperating from countries that are cheating. The international organization helps to coordinate expectations that make sanctioning more likely and more efficient.

While the institutionalist tradition called attention to the importance of strategic settings in shaping the incentives for cooperation, it has some natural limits. It does not problematize information. Information seems to be viewed as a universal good. However, we know from many studies that transparency by itself does not magically produce results. For transparency to result in policy change, we have to understand incentives to use this information in the first place.¹⁰ If information is accessible, but not in a useable form for policy makers, then it is hard to imagine that it will make a difference. Without a better understanding of how information can matter, it is difficult to understand how it can lead to policy change.

This tradition also starts with an assumption that the state is a unitary actor. This is a problem because for many international issues, the actual story about surveillance is about domestic politics: non-governmental organizations (NGOs) mobilize in response to human rights treaties, environmental treaties, and trade agreements, and their pressure on politicians leads to reforms.¹¹ To better understand whether information leads to policy change, then, it is necessary that we take the domestic level of analysis theoretically seriously.

How does information make a difference?

The emergence of the institutional tradition has meant that scholars pay increasing attention to the linkages between information and policy choices. The theoretical stakes are high here, for this helps us to understand how soft law can make a difference even in challenging cases. Since the advice of international organizations is not backed by enforcement, understanding how information can matter is of paramount importance. Information from surveillance can have influence because it reveals information about consequences or because it can lead to learning.

Because surveillance reports are future oriented, it is possible for them to suggest the consequences of inaction. IMF surveillance reports, because they focus more on the overall state of the economy, are ideally suited to do this. In the next chapter, I outline how Article IV reports increasingly discuss risks. As noted in the example at the start of this chapter, Article IV reports on the United States have been warning about the long-term consequences of failing to slow the growth of government spending. But this need not happen solely in the context of a policy review. Both the IMF and the WTO have offered sharp condem...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Acknowledgements
• List of Abbreviations
• Introduction
• 1. Thinking theoretically and empirically about surveillance
• 2. A natural history of surveillance
• 3. Evaluating the record of IMF surveillance
• 4. Evaluating the record of WTO surveillance
• 5. Conclusions and reflections
• Bibliography
• Index