1. Master or Servant? Agency Slack and the Politics of IMF Lending Mark Copelovitch Department of Political Science University of Wisconsin-Madison IPES Conference November 17, 2006

2. Who “Controls” the International Monetary Fund? “The IMF…is a set of ‘silk-suited dilettantes’ given to ‘champagne and caviar at the expense of the American taxpayer.’” –Sen. Lauch Faircloth (R-NC), The Wall Street Journal, 3/27/98 “Everywhere else in the world…politicians and businessmen insist that one of the biggest problems with the IMF is that…it acts as the United States Treasury's lap dog.” –David Sanger, New York Times, 10/2/98

3. The Politics of IMF Lending: Two Main Perspectives Technocratic economic criteria or staff rent-seeking (Knight/Santaella, Dreher/Vaubel) Executive Board? IMF staff Principal(s)Agent What explains lending variation? US geopolitical or financial interests (Thacker, Oatley, Broz, Stone) US government IMF staff

4. Existing Explanations: Problems and Questions A mixed empirical record Similar economic circumstances, different loans Some countries with strong ties to US get better deals than others Conceptual gaps US has strongest voice, but not veto, over IMF decisions –“G-5” countries all exercise significant authority Bureaucratic rent-seeking: when does the staff “get away” with it?

5. Argument in Brief A principal-agent model of IMF policymaking G-5 governments as the “collective principal” IMF staff as agent Main findings Both states and IMF staff exercise partial but incomplete control over Fund lending Agency slack is case-specific: staff autonomy is conditional on the intensity and heterogeneity of principal (G-5) interests –Must account for other large shareholders’ interests, not just US –IMF staff are not “runaway” bureaucrats

6. A Collective Principal Model of IMF Lending Borrower country IMF staff IMF Executive Board (“G-5”) US UK GE R JP N FR A Preferences influenced by domestic interests (geopolitical, financial) Preferences influenced by economic criteria and bureaucratic incentives Key question: how much “agency slack” in a given lending case?

7. G-5 Bank Exposure in Recent IMF Lending Cases Aggregate G-5 exposure ($billions) 68.539.550.360.634.60.36.9 SOURCE: Bank for International Settlements. Consolidated International Banking Statistics

8. Measuring Agency Slack: G-5 Interest Intensity and Heterogeneity Intensity of G-5 interests LowHigh G-5 consensus Largest loans G-5 conflict Large loans, but “logrolling” cost Low G-5 consensus Smallest loans G-5 conflict Small loans, but “rent-seeking” premium Heterogeneity of G-5 interests

9. Mean Loan Size (Amount/Quota) by G-5 Bank Exposure Short-term IMF loans, 47 countries, 1984-2003 Aggregate G-5 bank exposure Low*High* AMTQTA=2.04 (N=84) AMTQTA=1.12 (N=34) Low*AMTQTA=0.63 (N=26) AMTQTA=0.60 (N=64) G-5 bank exposure, coefficient of variation *Above or below sample mean in a given year

10. Empirical Analysis Dataset 197 short-term IMF loans to 47 countries, 1984-2003 Sources IMF archival documents IMF, World Bank, and BIS databases Dependent variables Loan size i,t – new short-term IMF lending/quota (log) Robust to alternative specifications (raw amount, amount/GDP) Models OLS, panel-corrected standard errors, “modified” lagged DV, country fixed effects Robust to alternative specifications

11. Variables Explanatory variables Measures of aggregate G-5 interests Bank exposure, foreign aid commitments, UN voting affinity Weighted by relative voting power of G-5 countries Measures of G-5 interest heterogeneity Coefficients of variation of bank exposure, foreign aid, and UN affinity 100*(std/mean) = measures dispersion as % of mean Control variables Borrower macroeconomic/political characteristics Temporal trends/global conditions “Modified” lagged DV (dummy for outstanding previous loans)

12. First Differences - IMF Loan Size (Model 3)

13. Effect of G-5 Interest Heterogeneity at Different Levels of G-5 Interest Intensity - Bank Exposure

14. Effect of G-5 Interest Heterogeneity at Different Levels of G-5 Interest Intensity - Foreign Aid

15. Effect of G-5 Interest Heterogeneity at Different Levels of G-5 Interest Intensity - UN Voting Affinity

16. Main Findings G-5 governments’ interests heavily influence IMF lending Amount and distribution of bank exposure and foreign aid significantly influence loan characteristics UN voting affinity has less clear effects Agency slack depends on G-5 interest intensity & heterogeneity Staff autonomy increases when G-5 interests are weak and divided IMF lending is highly political Evidence for both common political explanations, but each is conditional on the other

17. Implications and Conclusions Understanding IO behavior Beyond questions of cooperation and institutional design –How do IOs make decisions once the rules/institutions are established? Focusing on delegation/agency and internal decision-making rules is critical Reforming the IMF Abolishing the IMF/curtailing lending –Would not eliminate G-5 interests, but would simply shift the focus to bilateral/ad hoc official lending Executive Board voting reform –Replacing G-5 domestic interests with other countries’ is unlikely to remove politics from the process