The Strategic Politics of Imf Conditionality
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THE STRATEGIC POLITICS OF IMF CONDITIONALITY DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of the Ohio State University By Byungwon Woo, B.A./M.A. Graduate Program in Political Science The Ohio State University 2010 Dissertation Committee: Daniel Verdier, Advisor Irfan Nooruddin Alexander Thompson c Copyright by Byungwon Woo 2010 ABSTRACT The dissertation theorizes how domestic politics in a borrowing country influences the design of IMF conditionality, a set of policy reform measures included in an International Monetary Fund program. Considering the ways in which domestic politics can shape the outcome of negotiation between the IMF and a government, there are two alternative logics that can play out: the government can either tie its hands to the IMF to force reforms to domestic interests or tie its hands to domestic interests to extract a better deal from the IMF. Using a game theoretic model, I demonstrate that the effect of domestic politics on the IMF program design hinges on the interaction of three parameters and suggest the following propositions: a government that is more sensitive to vote losses or less reform-minded is more likely to extract more lenient conditions from the IMF; a government free from electoral pressure receives more conditions; for those governments that are electorally less constrained, the severity of conditionality is limited only when there exist strong domestic interests that can hinder proper implementation of reform conditions. To test the hypotheses, I constructed an original dataset of IMF conditionality by coding all 263 letters of intent agreed in between 1994 and 2006. I coded the number of conditions by conditionality type and by affected economic sector. The empirical ii analysis of public and fiscal sector conditions strongly supports the domestic poli- tics hypotheses and yields the following findings. First, democratic countries receive fewer conditions than autocracies that are freer from electoral competition, suggest- ing that the IMF is strategic in limiting how much it pushes politically vulnerable negotiating partners. Furthermore, I show that among democracies, a government that won the previous election by a narrower margin receives fewer public sector conditions than a government that won the previous election with a wider margin and a government that has a more proximate election receives fewer public sector conditions than a government with a more distant election. Finally, strong domes- tic interests reduce the number of public sector conditions in an autocratic country but exert little influence over the number of conditions in a democratic country. While domestic political institutions and interests exert considerable influence over the design of IMF conditionality in public and fiscal sector conditions, where each additional policy condition is politically costly, the influence of domestic and interna- tional politics vary substantially by affected economic sector. In designing financial sector conditions, where domestic financial interests are nascent or actually support financial reforms, domestic politics plays little role; instead, international politics plays a greater role. The empirical results justifies the disaggregation approach that I take in empirically examining the design of IMF conditionality by affected economic sectors. iii I dedicate the dissertation to those who have shaped who I am: my late, dearly-missed grandma and my family iv ACKNOWLEDGMENTS I am indebted to many individuals who have helped me throughout the disser- tation journey. Amazingly, they all generously allowed me to be indebted, without imposing any conditionality to me. I am grateful for their advice and support, and hope that my words can deliver at least a small fraction of my appreciation. I am deeply grateful to my advisor, Daniel Verdier. Since my first year in graduate school, he has taught me to think more logically as a political scientist, and from the inception of the dissertation idea to the conclusion of the final draft, he has provided me with many rounds of insightful comments, critical advices, and much-needed encouragements. His generous criticisms and suggestions undoubtedly improved the quality of the dissertation. I admire his keen ability to recognize the core logic and his strict discipline toward his own research. I only hope that I can follow in his footsteps through my academic career. I owe a great debt to Irfan Nooruddin. His cheerful encouragements have lifted me up and made me feel more confident, when I was frustrated with myself. During the dissertation stage, he not only provided me with crucial feedback on earlier drafts, but also presented me with many opportunities to experience the academia. He taught me how to make a better research presentation and how to prepare for the v academic job market. Collaborating with him on a research project also allowed me to firsthand experience the best practice of doing research. Alex Thompson has guided my academic career ever since I first met him 10 years ago. I was only an aspiring undergraduate student when I first met him, and he has advised me at every critical juncture in my transformation into a credible political scientist. He helped me when I applied for a graduate school, he taught me IR, he advised me to learn game theory, and he served on my dissertation committee. I deeply appreciate his ability and willingness to read many earlier drafts of the dissertation and to give constructive and encouraging comments. I am eternally thankful to Autumn Lockwood Payton and Daniel Blake for their camaraderie throughout the years in graduate school. Our ABD meetings were the most helpful venue to receive honest and good-hearted criticisms on earlier drafts of the dissertation, and they made our meetings something that I would look forward to. They also provided emotional support, without which the dissertation writing could have been far more miserable. I am very fortunate to have A and D as colleagues, coauthors, and friends. I hope we continue our comradeship through our academic careers and beyond. I would like to thank Jan Box-Steffensmeier and Alan Wiseman. Jan gave me many opportunities to work with her, first as a research assistant and later as a PRISM fellow, and provided financial assistance that allowed me to take time off from teaching. Alan taught me game theory, allowed me to work as his teaching assistant, and encouraged me to explore further studying opportunities outside of the university. I am also grateful for their willingness to serve as a reference. vi I am grateful to Brian Pollins for his rigorous training. He has helped me to become a better political scientist. His 747 is the best course that I have taken in graduate school and his constant push during the dissertation workshop have shaped the overall direction of the dissertation at its early stage. I thank to all the wonderful friends that I have made in Columbus. In particular, Quintin Beazer always makes people around him happier with his bright personality, TongFi Kim always takes care of people around him, and Chaekwang You always makes people laugh with his own kind of humor. My years in Derby have been a lot more enjoyable thanks to all my friends, and I hope that we can have lasting friendships beyond graduate school. On a more personal note, I am eternally grateful to my parents. I have always been their proud son, even at times when I was not very confident of myself. Their unconditional love and belief in me have sustained me throughout this long journey. I am thankful to my brother for filling my shoes when I have been largely absent from family occasions. I also want to thank my in-laws for believing in Hee-Jung and me. I am eternally thankful to my wife, Hee-Jung Jun. Her incredible work ethics has constantly inspired me and her emotional support has kept me going. Writing two dissertations was not easy for us, but we somehow managed to do it. We shared our joys and suffered together in the process, and I believe we understand and love each other better and more as a result. Thank you, Hee-Jung, for being amazing. vii VITA 1977 . Born in Korea 2003 . B.A. in Political Science 2005 . M.A. in Political Science 2003-Present . Graduate Teaching/Research Associate, The Ohio State University FIELDS OF STUDY Major Field: Political Science Specialization: International Relations Specialization: Political Methodology & Formal Theory viii TABLE OF CONTENTS Abstract . ii Dedication . iii Acknowledgments . .v Vita......................................... viii List of Tables . xii List of Figures . xiv CHAPTER PAGE 1 Introduction . .1 1.1 Introduction . .1 1.2 IMF Program Design as International Bargaining . .8 1.2.1 IMF Program . .8 1.2.2 IMF Conditionality . .9 1.2.3 Negotiating IMF Conditionality . 11 1.2.4 Variation in IMF Conditionality . 13 1.3 Literature Review . 16 1.3.1 Economic Account . 17 1.3.2 Political Account . 19 1.3.3 Two-Level Games Literature . 28 1.4 Criticisms and Preview of the Argument . 31 1.5 Conclusion and Plan of the Dissertation . 34 2 A Theory of IMF Program Design . 36 2.1 Introduction . 36 ix 2.2 Description of the IMF Lending Procedure . 39 2.3 IMF Program Negotiation . 41 2.4 The Model . 47 2.4.1 Conditionality . 48 2.4.2 The Players . 50 2.4.3 Sequence of the Game . 52 2.4.4 Payoffs . 55 2.4.5 Solutions . 65 2.5 Theoretical Implications . 83 2.5.1 Hypotheses . 85 2.6 Conclusion . 86 3 IMF Programs and Public Sector Reforms . 89 3.1 Introduction . 89 3.2 Public Sector Conditions . 91 3.3 Dataset of IMF Conditionality . 93 3.4 Hypotheses . 97 3.5 Empirical Analysis . 102 3.5.1 Dependent Variable .