Bargain Down or Shop Around? Outside Options and IMF Conditionality∗ Richard Clarky June 23, 2020 Abstract When do overlapping international organizations (IOs) serve as credible outside options to one another? Utilizing an original dataset on cooperation among IOs in the emergency lending space, I find that exit options are only credible when IOs compete as opposed to cooperate with one another. While the literature frames the International Monetary Fund (IMF) as a monopoly organization, I show that it increasingly competes with Regional Financing Arrangements (RFAs). When RFAs compete with the IMF, they become credible forum shopping destinations that member states can leverage in negotiations over conditional lending at the Fund. I first offer original descriptive analysis of patterns of cooperation among these IOs. I then hypothesize that as states become members of competitive IOs, but not cooperative institutions, they ought to receive less intrusive conditionality from the IMF. A series of regressions lend support for my theory, as do supplemental interviews and text analysis. Keywords: outside options, forum shopping, international organizations, IMF, condi- tionality Word Count: 10,808 ∗I thank Allison Carnegie, Don Casler, Lindsay Dolan, Nikhar Gaikwad, Randall Henning, Felicity Vabulas, and Noah Zucker for helpful comments on previous drafts. Participants at the Barcelona Workshop on Global Governance and several workshops at Columbia University also provided valuable feedback. All remaining errors are my own. yRichard Clark (Email: [email protected]) is a Ph.D. Candidate, Department of Political Science, Columbia University, New York, NY. In April 2013, the International Monetary Fund (IMF) and Tunisia agreed to a two- year, $1.75 billion Stand-By Arrangement (SBA).1 Disbursement began in June 2013, with Tunisia taking on 20 loan conditions mandating various economic and institutional reforms. Meanwhile, Tunisia was party to a second emergency lending institution – the Arab Monetary Fund (AMF) – which Tunisia co-founded in 1976. The AMF remained on the sidelines as Tunisia negotiated its IMF deal. However, in February 2014, the AMF agreed to join the IMF program as a co-financier.2 That same month, the IMF notified Tunisia that it was increasing the number of conditions that the country had to meet under the loan program from 20 to 35 – an increase of 75 percent.3 Insofar as the number of conditions attached to a loan proxies for its stringency, Tunisia’s obligations suddenly became much more burdensome. I argue that the simultaneous nature of (1) the AMF’s decision to co-finance the loan program and (2) the addition of new conditions to the program is far from coincidental. Rather, when the AMF signed onto the loan, it eliminated Tunisia’s only outside option to IMF lending. Without the credible threat to forum shop at the AMF, Tunisia lost a great deal of bargaining leverage at the IMF, allowing the Fund to mandate additional reforms. This story places a spotlight on the agency of international organizations (IOs) under regime complexity – a situation where multiple, partially overlapping IOs govern a single issue space.4 It therefore contrasts much of the literature, which emphasizes the agency of member states of multiple IOs, as they can secure bargaining leverage by threatening to forum shop or simply select the forum offering the least stringent set of rules.5 Critically, I suggest that the credibility of outside options under regime complexity hinges on whether IOs cooperate or compete with one another. When do overlapping IOs become credible outside options for states seeking forum shop- ping opportunities? I contend that the credibility of outside options under regime complexity 1https://www.imf.org/external/pubs/ft/scr/2013/cr13161.pdf 2https://www.imf.org/external/pubs/ft/scr/2014/cr1450.pdf 3Conditionality figures come from Kentikelenis, Stubbs and King(2016). 4This is close to the definition offered by Henning(2017, 19). 5See Busch(2007); Davis(2009); Alter and Meunier(2009). 1 is shaped by whether the overlapping IOs in question cooperate or compete with one an- other. When IOs compete, member states have credible exit options, and IOs grant them concessions through more lenient policies to prevent forum shopping. By contrast, when IOs cooperate, the credibility of outside options is diminished, and IOs can better constrain state behavior. This paper therefore refines the typical narrative about when states can forum shop. Existing theories suggest that member states can forum shop any time they belong to more than one institution performing similar functions.6 Because cooperation undercuts the cred- ibility of outside options, I argue that forum shopping is only possible for member states when the overlapping IOs in question compete as opposed to cooperate with one another. Therefore, the interactions among institutions under regime complexity are critical for deter- mining whether states can credibly threaten to forum shop. Importantly, cooperation is then distinct from the negotiation of a division of labor or hierarchy, through which IOs seek to minimize substantive overlap in organizational mandates and activities.7 My theory applies to IOs whose operations substantively overlap, which might imply low levels of hierarchy or specialization. In particular, I consider two common types of cooperation: information sharing and co- financing.8 Both are formal, meaning that they are publicly announced – typically through policy papers, project documents, and press releases – and accompanied by changes to IOs’ policies. They can have finite end points, as when development IOs co-finance a single infrastructure project, or they can persist indefinitely, as when IOs sign a memorandum agreeing to share information. Formal cooperation stands in contrast to ad hoc or informal arrangements, such as handshake agreements among bureaucrats.9 I focus on formal coop- eration for feasibility and generalizability reasons – because informal cooperation is often 6See Alter and Raustiala(2018, 341) for a review, though also see Busch(2007); Helfer(2009); Morse and Keohane(2014) for specific examples. 7See Gehring and Faude(2014); Pratt(2018) for examples of such coordination. 8See Keohane and Victor(2011); Abbott et al.(2015) for more on the benefits of cooperation. 9See Henning(2017, 9) for examples of informal governance arrangements in Europe. 2 unobservable, it is difficult to study in a systematic way. While scholars have had some success qualitatively probing single instances of informal cooperation, my goal in this paper is to make generalizable predictions that can be tested across organizations and over time; I further discuss the situations to which my theory applies in the conclusion. My definition of competition, meanwhile, is simply the absence of cooperation among IOs whose activities overlap. This competition is therefore quite passive – if two IOs perform equivalent tasks and serve the same countries but fail to cooperate by sharing information or co-financing, member states can exercise their exit option by threatening to pursue support from the other organization unless more lenient terms are awarded. Competition then implies nothing more than the potential for mutual member states to forum shop. I argue that they can do so when (1) they belong to two or more IOs that perform very similar functions; (2) the outside IO can plausibly offer them more lenient terms; and (3) the IOs are not engaged in cooperation. Existing accounts of when states can forum shop focus only on the first condition.10 Cooperation undercuts the credibility of outside options by either synchronizing the infor- mation upon which IOs make decisions (information sharing) or by forcing IOs to explicitly agree to a common regulatory framework (co-financing). When IOs share private informa- tion, it harmonizes the information environment in which the organizations make decisions. Therefore, IOs that share information should design more similar policies for member states than competing IOs, which limits the extent to which members of these organizations can forum shop for more lenient conditions. Co-financing, meanwhile, occurs when two IOs mutually agree to fund a project governed by a single policy framework instead of offering competing terms to member states, thereby eliminating the exit option. To probe the validity of this theory, I study the emergency lending regime complex, which includes IOs that engage primarily in balance of payments lending. I do so for several reasons. First, scholars have characterized the IMF as possessing a pseudo-monopoly over 10See Alter and Raustiala(2018) for a review. 3 emergency lending (Lipscy 2015, 2017). I contradict this literature by showing that regional financing arrangements (RFAs) like the AMF, whose activities are substantively similar to those performed by the IMF, can serve as credible exit options to the Fund in the absence of cooperation. Second, emergency lending is an area where the stringency of the policies administered by IOs to member states is of the utmost importance. The policy terms attached to loans in this area are called conditionality. Given that conditions from the IMF often incite protests and political upheaval,11 one could argue that the burdensomeness of conditionality is even more important to recipient countries than the dollar amount of the loan. Therefore, countries have strong incentives to bargain down their conditionality burdens when they have the leverage to do so, as when