Abstract

Keywords

JEL classification

۱٫ Introduction

۲٫ Argument

۳٫ Research design

۳٫۱٫ CBI conditionality

۳٫۲٫ Checks and balances

۳٫۳٫ Control variables

۳٫۴٫ Methods

۴٫ Results

۴٫۱٫ The determinants of CBI conditionality

۴٫۲٫ Related outcomes

۵٫ Conclusion

Appendix A. Supplementary data

Data availability

References

Abstract

International organizations (IOs) often drive policy change in member countries. Given IOs’ limited political leverage over a member country, previous research argues that IOs rely on a combination of hard pressures (i.e., conditionality) and soft pressures (i.e., socialization) to attain their political goals. Expanding this literature, we hypothesize that IOs can enhance their political leverage through loan conditions aimed at enhancing the political independence of key administrative units. Studying this mechanism in the context of the International Monetary Fund (IMF), we argue that through prescribing structural loan conditions on central banks (CBI conditionality), the IMF empowers central banks to gain more political leverage with the aim to limit a government’s ability to (ab)use monetary policy for political gain. Divorcing monetary authorities from their respective government, the IMF intends to alter political dynamics towards achieving greater program compliance and enhance long-term macro-financial stability. Relying on a dataset including up to 124 countries between 1980 and 2012, we find that the IMF deploys CBI conditionality to countries with fewer checks and balances, a less independent central bank, and where the government relies more heavily on the monetization of public debt.

۱ Introduction

International organizations (IOs) often drive policy change in member countries. However, given that IOs have few (if any) means of direct enforcement, it remains unclear how they achieve policy change in member countries. Scholars have distinguished between policy conditionality, the practice of providing loans in exchange for commitments to policy reform (Steinwand and Stone, 2008); ‘naming and shaming’, the practice of reviewing country policies against best-practice standards (Kelley and Simmons, 2015); and socialization, the practice of acculturating policymakers into specific sets of policies emanating from consistent belief systems (Chwieroth, 2013)— as tools for IOs to drive policy reform in member countries.

The goal of our paper is to introduce a novel mechanism into this debate. We argue that IOs can promote policy reform through loan conditions that target the institutional foundations of a member country. In particular, IOs can deploy institution-building measures to divorce key administrative or bureaucratic units from a government through enhancing their political independence. Applying such a strategy, an IO can shield central administrative units from political interference, constrain a government’s ability to (ab)use its power for short-run political gain, and thus enhance its own political leverage.1 Hence, we argue that such institution-building measures can work as an important instrument to attain desired policy change.

We study this mechanism in the context of the International Monetary Fund (IMF). In this respect, IMF conditionality provides a unique laboratory for our theoretical claim. Since the 1980s, IMF has been using a combination of quantitative targets and structural conditions when coming to the financial rescue of countries (Vreeland, 2003; Dreher and Vaubel, 2004; Kentikelenis and Babb, 2019). In prescribing these adjustment programs, the Fund aims to achieve its twin goals of short-term stabilization and long-term policy reform. Knowing about the political costs of these adjustment programs, governments often try to avoid turning to the Fund for financial relief.