The Causes and Consequences of IMF Interventions in the Southern Cone

The London School of Economics and Political Science The Causes and Consequences of IMF Interventions in the Southern Cone Javier Díaz-Cassou A thesis submitted to the Department of International Development of the London School of Economics and Political Science for the degree of Doctor of Philosophy, London December 2012 1 Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The Copyright of the thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. The thesis may not be reproduced without prior written consent of the author. I warrant that this authorization does not, to the best of my knowledge, infringe the rights of any third party. Javier Díaz Cassou December 20, 2012 2 Abstract The International Monetary Fund has often been accused of adopting a one-size-fits-all approach to the resolution of financial crises. However, its programs present substantial differences in terms of their relative size and conditionality among other characteristics. This dissertation examines the causes and consequences of this variation through the lenses of two cases in which the contrast between the Fund´s interventions was particularly marked: Argentina and Uruguay during the period that surrounds the financial crash of 2001-02. The first part of this study analyses the determinants of these multilateral interventions through an adaptation of Robert Puntam´s two level games, exploring the way in which national politics interacted with international priorities to produce distinct outcomes in Argentina and Uruguay. The two experiences confirm that domestic ratification processes impose significant constraints on the negotiation of IMF programs, potentially conferring localized bargaining advantages to borrowing governments. Beyond a certain point, however, an intensification of these ratification constraints can result in a suspension of the Fund´s support, after which borrowers´ bargaining position weakens dramatically. That this point of rupture was reached in Argentina but not in Uruguay was due primarily to the different propensity to cooperate exhibited by political actors in these two countries, itself the product of certain institutional conditions such as the strength of their systems of checks and balances or a varying distribution of veto power. In turn, the second part of this thesis applies a hypothetical counterfactual approach to assess the consequences of the multilateral decisions adopted during the 2001-02 crisis in the Southern Cone. Although the contrast between the suspension of the Argentine program in December 2001 and the Uruguayan bailout of August 2002 had surprisingly modest macroeconomic consequences, its impact on politics and institutions was profound both in the short and in the medium-term. As a result of these findings, this dissertation argues that a better understanding of the implications of multilateral crisis resolution loans on the political economy of the countries concerned is still needed. 3 Acknowledgement and Gratitude This project could not have been completed without the support and guidance of my supervisors, Dr. Ken Shadlen and Dr. Lauren Phillips. Both have been a great source of inspiration as well as challenging teachers. Their encouragement, dedication, candid criticism and openness gave me the confidence to turn my thoughts and findings into this thesis. A special word goes to all the wonderful friends that I left in London. I will not forget the camaraderie, intellectual dynamism and, above all, the sense of humor of Chris, Giulia, Borge, Dominik, Laureen, Sheila, Ignacio, Gianlu and Arik among others. I really miss you all. I am thankful to the LSE Research Studentship, Fundación Cajamadrid, the Santander travel fund and Universidad Torcuato di Tella for their generous funding and research support. My gratitude also goes to all the interviewees that participated in this research project. In particular, I would like to thank Paulina Beato, Enrique Iglesias, Jorge Batlle and Miguel de las Casas, who opened many doors in Buenos Aires, Montevideo and Washington DC. Last but not least, I am deeply indebted to my parents, Raymonde Cassou and Jose-Luis Díaz Fernández. Their support and inspiration have made me what I am. This dissertation is dedicated to Monica Gozzi, my fiancée, for having helped me cope with the ups and downs of a PhD at the London School of Economics. I love you so much! 4 A Moni, por compartir la búsqueda 5 Table of Contents Chapter 1: 12 Introduction 1.1 Research topics and questions 12 1.2 On the causes of IMF interventions 15 1.3 On the consequences of IMF interventions 19 1.4 Chapter plan 21 Chapter 2 22 Towards a two-level interpretation of IMF programs 2.1 The international level of analysis 23 2.1.1 The Neo-liberal and public choice approaches 23 2.1.2 The constructivist approach 28 2.1.3 The realist approach 31 2.2 The domestic level of analysis 33 2.2.1 The politics of domestic adjustment 33 2.2.2 Domestic politics and IMF programs 37 2.3 Bridging the gap: the two-level game analytical framework 42 2.3.1 Putnam´s two-level games 42 2.3.2 Some preliminary considerations 45 2.3.3 A stylized representation 48 2.4 Conclusion 54 6 Chapter 3 56 Approximating the Contours of IMF Negotiators’ Win-sets: Institutional Design and Rules in Multilateral Crisis Lending 3.1 Chief-negotiators, constituents and power at the IMF 57 3.2 Official finance 66 3.3 Private sector involvement 73 3.4 Conditionality 80 3.5 Conclusion 84 Chapter 4 88 Argentina and the IMF 4.1 A decade of financial programs 90 4.1.1 Crisis prevention 92 4.1.2 Crisis management 94 4.1.3 Restoring debt sustainability 99 4.2 Crisis prevention 102 4.3 Crisis management 109 4.4 Restoring debt sustainability 119 4.5 Conclusion 128 Chapter 5 133 Uruguay and the IMF 5.1 A decade of financial programs 135 5.1.1 Crisis prevention 137 5.1.2 Crisis management 140 5.1.3 Restoring debt sustainability 142 5.2 Crisis prevention 146 5.3 Crisis management 152 5.4 Restoring debt sustainability 159 7 Chapter 6 172 Cross-sectional Variation: the Argentine and the Uruguayan Case Studies in Comparative Perspective 6.1 Cross-sectional variation 175 6.2 The international level of analysis 178 6.3 The domestic level of analysis 184 6.4 Conclusion 192 Chapter 7 195 The Consequences of IMF Interventions in Argentina and Uruguay 7.1 Review of the literature and empirical strategy 196 7.2 Economic performance 203 7.3 Politics and Institutions 217 7.4 Conclusion 228 Chapter 8 232 Conclusion 8.1 Recapitulating the research design 232 8.2 Main empirical findings 236 8.3 Extensions 232 References 247 Appendix A 266 List of interviews Appendix B 270 The Reform of the International Financial Architecture: Key Decisions 8 Appendix C 279 The Argentine Financial Crisis: Key Decisions Appendix D 296 The Uruguayan Financial Crisis: Key Decisions 9 List of Figures and Tables Table 2.1: Macroeconomic Determinants of Participation in IMF programs 39 Figure 2.1: The cooperative outcome 51 Figure 2.2: Amplification of the shock 52 Figure 2.3: Narrowing sin-set 53 Figure 2.4: Political instrumentation of IMF programs 54 Figure 3.1: Actors and relationships in the IMF´s decision-making process 58 Figure 3.2: Voting power of constituencies and of selected coalitions at the EB 62 Figure 3.3: Average number of structural conditions per program 82 Table 4.1: IMF programs in Argentina (1996-2005) 91 Figure 4.1: Financial transactions between Argentina and the IMF 92 Figure 4.2: Provincial governments in Argentina (1996-2005) 108 Table 5.1: IMF programs in Uruguay (1996-2005) 136 Figure 5.1: Financial transactions between Uruguay and the IMF 137 Figure 6.1: Veto Players 185 Table 7.1: Macroeconomic effects of IMF programs 199 Figure 7.1: Real economy indicators 204 Figure 7.2: Terms of Trade 207 Figure 7.3: The Current Account 209 Figure 7.4: Gross financing via international capital markets 211 Figure 7.5: External Debt 211 Figure 7.6: Foreign Direct Investment 212 Figure 7.7: Macroeconomic management 214 Figure 7.8: Foreign exchange reserves 215 Figure 7.9: Credit to the private sector 216 Table 7.2: Poverty and inequality 217 10 Figure 7.10: Economic freedom index 222 Figure 7.11: WBI composite governance indicators 225 Figure 7.12: Change in the WBI governance indicators 226 Figure 7.13: ICRG composite governance indicators 227 Figure 7.14: Change in the ICRG governance indicators 228 11 CHAPTER 1 Introduction 1.1 Research topic and questions After three years of recession and several months of negotiations, the International Monetary Fund (IMF) suspended its financial support to Argentina in late November 2001. A few weeks later the country had descended into chaos, triggering an almost immediate contagion effect on neighbouring Uruguay. But the international community responded very differently to that crisis, approving a financial rescue package which until recently was the largest IMF program in history if measured against the size of the recipient economy. This dissertation looks at these contrasting experiences in order to shed some light on the causes and consequences of the multilateral response to financial crises. More specifically, the main research questions that will be addressed are the

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