Poor States, Power and the Politics of IMF Reform

Drivers of Change in the Post- Washington Consensus

Mark Hibben

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137577504
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

This books provides a timely comparative case study that reveals the factors driving the International Monetary Fund's policy reform in Low Income Developing Countries (LIDCs), as a resurgent IMF expands its footprint in the world's poorest states. Through a research design that employs both mainstream and critical IPE theory, Mark Hibben uncovers three major tendencies. Principal-agent analysis, he argues, demonstrates that coalition formation among powerful states, IMF staff and management, and other influential actors is necessary for policy reform. At the same time, he uses constructivist analysis to show that ideational frameworks of what merits appropriate macroeconomic policy response also have an impact on reform efforts, and that IMF management and staff seek legitimacy in their policy choices. In response to the crises in 1999 and 2008, the author maintains, poverty and inequality now 'matter' in IMF thinking and serve as an opportunity for policy insiders and external actors to deepen the institution's new commitment to 'inclusive' growth. Finally, Hibben draws on neo-Gramscian analysis to highlight how the IMF looked to soften the destabilizing effects of globalization through reforms focused on stakeholder participation in poor states and will continue to do so in its support of the new United Nation Sustainable Development Goals. This means that the 2015-2030 time period will be a critical juncture for IMF LIDC reform. By drawing from diverse theoretical traditions, the author thus provides a unique framework for the study of contemporary IMF change and how best those interested in LIDC policy reform can meet this objective.

© The Editor(s) (if applicable) and The Author(s) 2016

Mark HibbenPoor States, Power and the Politics of IMF ReformInternational Political Economy Series10.1057/978-1-137-57750-4_1

Begin Abstract

1. The IMF, LIDC Reform, and the Post-Washington Consensus

Mark Hibben¹

(1)

Assistant Professor of Political Science, Saint Joseph’s College of Maine, Portland, Maine, USA

End Abstract

The International Monetary Fund (IMF) is back. Relegated to the sidelines of global governance in the first decade of the twenty-first century, the fallout from the 2008 global financial crisis has restored the institution’s prestige and power. This revival is expressed most directly by a sharp upsurge in the Fund’s lending activity. Between 2009 and 2014, the IMF dispensed 118 loans valued at US$622 billion to its member states, a stark contrast to the comparatively paltry US$82 billion allocated between 2003 and 2008.¹ IMF engagement in the G-20, along with its role in the troubled Eurozone and during the Greek crisis, also has raised the profile of the institution.² In addition, Managing Director Christine Lagarde has called on the Fund to lead ‘a new multilateralism for the 21st century’. For Lagarde, the IMF is uniquely positioned to battle increased risks of systemic economic contagion, protectionism and unilateralism, and even political extremism (Lagarde 2014). Perhaps more so now than ever in its seven-decade history, the resurgent IMF sees itself as the indispensable cornerstone of a liberal economic and political global order.

The post-2008 rebirth of the IMF includes another dynamic that has generally slipped under the radar of its contemporary studies. After several decades of often controversial engagement in the global South, the Fund has substantially increased resources and institutional focus on its poorest member countries. These 60 states, currently categorized as ‘low income developing countries’ (LIDCs) or ‘low income countries’ (LICs) within the Fund, consist of nations that fall below an annual US$2390 per capita gross national income (GNI) level.³ Supported in large part by the sale of one-eighth of the IMF’s gold reserves in 2009, financing available for LIDCs now stands at approximately US$18 billion. Fund lending to LIDCs from 2009 to 2014 totaled US$10.1 billion, which in annual terms stands at four times the institution’s historical average. In addition, forums focused on LIDC issues, support for regional technical assistance (TA) centers, and institutional outreach to stakeholders in poor states increased after the 2008 crisis.⁴ IMF management, led initially by former Managing Director Dominique Strauss-Kahn, also has advocated for greater LIDC ‘voice’ in Fund decision making. The currently stalled 14th Review of General Quotas, for example, would increase the voting share of LIDCs and expand the number of alterative executive directors for African states. And finally, the IMF’s concessionary lending facility designed for LIDCs was overhauled in 2010.

As documented in the IMF literature, the institution impacts macroeconomic and development outcomes in poor states (Bird 1995; Barnett and Finnemore 2004; Dreher 2006; Woods 2006; Vreeland 2007; Boughton and Lombardi 2009). This proves particularly salient in LIDCs. Given their extreme poverty, often limited institutional capacity, and high dependence on multilateral and bilateral assistance, LIDCs enjoy little leverage in their dealings with the Fund. LIDC governments are instead highly reactive to both direct IMF policy pressure and indirect forms of its institutional and ideological power. Conditions tied to Fund loans include monetary and fiscal policy targets and economic restructuring benchmarks that affect growth and poverty rates, education and health outcomes, environmental quality, and employment levels. TA programs focused on improving economic performance through institutional reform also represent a key variable that shapes LIDC policy choices. Other non-financial programs include the Policy Support Instrument (PSI). The PSI is specifically designed to send signals to markets and the donor community that the LIDC in question is pursuing ‘appropriate’ policy choices. The IMF also champions a liberal market model that has been internalized by member state elites as de facto ‘common sense’ (Taylor 2004; Rückert 2007). This ability to influence the policy agenda and shape preferences in LIDCs arguably represents a key component of the Fund’s power in poor states.

1.1 What Drives Post-Washington Consensus IMF LIDC Reform and Why Does It Matter?

This book is a response to four facts. First, the policy choices and belief systems of the IMF directly and indirectly impact the lives of approximately 1.2 billion people who reside in LIDCs. Second, the resurgent IMF has increased its policy footprint in LIDCs. Third, the post-2008 period has witnessed increased policy debates within the institution that could fundamentally shift macroeconomic and development outcomes in LIDCs. These debates include an emerging chorus of influential voices in the institution that are pushing the IMF to seriously engage with issues of inequality, unemployment, and ‘inclusive growth’ in LIDC policy. If formal IMF policy reforms that address these issues are adopted and implemented, the lives of many of the world’s poorest people will substantially improve. And fourth, while scholarship focused on the IMF has identified variables that influence policy choices in the institution, the literature has not specifically elucidated what factors drive successful cases of LIDC policy reform.

Addressing this gap in the literature fulfills both practical and academic objectives. With regard to practical outcomes, the knowledge gained from this book provides a roadmap for development practitioners and activists focused on the global South to more effectively shape contemporary IMF LIDC policy and reform. This is particularly timely as a series of new initiatives focused on the world’s poorest states are being developed by multilateral institutions. These include the new Sustainable Development Goals (SDGs) that were adopted by the United Nations (UN) in 2015. The 17 SDGs replaced the expired Millennium Development Goals (MDGs) and commit the global community to eradicating poverty, reducing inequality, increasing gender equality, promoting inclusive growth, and combating climate change by 2030. The IMF has been a prominent supporter of the SDGs. This offers a unique opportunity to influence IMF policy in a manner that substantively facilitates the successful realization of the SDGs in LIDCs.

With regard to academic objectives, this book advances knowledge of the IMF in several key areas. Foremost, literature on the IMF has not undertaken a comparative study of contemporary cases of LIDC reform. This includes the most recent case that replaced the concessionary Poverty Reduction and Growth Facility (PRGF) in 2010. Evidence drawn from a comparative analysis of LIDC reform is crucial, as it clarifies what factors facilitate or block IMF policy changes for its poorest member states. Second, with its specific focus on a subset of countries within the Fund, this book unpacks further the ‘black box’ of the institution previously pried open by IMF literature. Among other findings, this study demonstrates that there is a history of LIDC staff divergence from a broader institutional culture that reinforces homogeneous thinking, and these differences matter in processes related to reform. And third, I draw from three theoretical platforms in this study of contemporary LIDC reform. These include ‘mainstream’ rationalist and constructivist theory, as well as a historical structural framework rooted in the neo-Gramscian tradition. Despite the ontological and epistemological tensions within such an approach, I maintain that the use of a diverse theoretical arsenal maximizes analytical leverage when explaining LIDC reform. This framework also could be effectively used in other studies of multilateral institutional change.

Given the intention and focus of this book, I examine first IMF scholarship that specifically focuses on the institution’s LIDC policy. Most developed in this regard are the contributions of Liam Clegg and Jacqueline Best. Clegg (2013), in a comparative study of the IMF and World Bank, examines mechanisms of control exerted by powerful states (‘shareholders’) and groups representing individuals on the ground in LIDCs (‘stakeholders’) on the institution’s concessional lending programs. In Clegg’s model, crisis points are key vectors of change as they destabilize the IMF’s and World Bank’s understanding of how they should operate to fulfill institutional objectives. If shareholders establish ‘a new standard of appropriateness’ during a crisis, new norms emerge, and subsequent shifts in operational practices quickly follow. Otherwise, a more incremental and open-ended process of change can occur. Clegg finds that the dynamics within the IMF and World Bank demonstrate that shareholders have maintained high levels of control over processes tied to concessionary lending following crisis points. Stakeholders in the IMF have enjoyed far less control or integration into decision-making processes. Rather, in response to the rising importance of private finance in lending arrangements, domestic stakeholders have evolved to take on ‘disciplinary’ roles designed to check corrupt or dysfunctional government behavior. Despite the privileged position of shareholders, Clegg (2012a) documents an important division within the powerful states that impact IMF LIDC policy. The USA has historically argued against expanding the IMF’s policy focus on development issues through concessionary lending initiatives. In contrast, the UK and France have advocated for the integration of development concerns into IMF LIDC programs. In periods of crisis including the late 1990s and 2008, this ‘developmentalist’ wing has produced coalitions that successfully countered the US ‘minimalist’ position.

In addition, Clegg (2012b) highlights how powerful state interests shape policy norms through dynamics found in executive board meetings. While examining the debates leading to the 1987 adoption of the Enhanced Structural Adjustment Facility (ESAF), Clegg uncovers that the viewpoints of the powerful states in support of strict conditionality were reported by the managing director as the formal consensus of the board. The preferences of the poor states against such provisions, in contrast, were downplayed and not reported. This dynamic allowed staff to fully move forward with conditional lending programs and subsequently produced a norm change in the institution toward LIDCs. A more recent study (Clegg 2014) focused on processes of change in concessional lending policy. Clegg identifies three intervening variables that facilitate ‘rapid operational change’ relative to US congressional preferences. These include a legally binding ‘legislative mandate’ by the US Congress that requires the US executive director to use her voting power in the institution in a manner consistent with congressional objectives. Support of the policy change from powerful state executive directors and an effective hierarchical bureaucratic structure that enforces staff compliance with the new policy directives sanctioned by the executive board are also necessary for rapid operational change.

Jacqueline Best (2007, 2014) argues that the IMF’s post-Washington Consensus reforms are driven by a series of policy failures that have challenged the Fund’s ‘expert authority’. Fallout from the Asian crisis and LIDC policy failures in Africa, for example, have sparked a broad-based ‘legitimacy crisis’ that has spurred the IMF and other multilateral institutions into action. Best highlights that a shif...