COMPARATIVE INSTITUTIONAL ANALYSIS: The Politics of International Finance James Raymond Vreeland School of Foreign Service Georgetown University 1

What did we learn so far? 1.Trilemma 2.Bretton Woods: its causes & its collapse 3.Politicians care about survival –Economic growth important 4.What is the IMF? i.Like an inter-governmental credit union ii.Members deposit iii.IMF lends to countries in trouble iv.  moral hazard v.Solution? Conditionality a)Let’s you lose b)Governments may not want to sacrifice sovereignty 2

This session: Domestic politics and IMF conditionality 3

So you’ve learned which democracies will survive (developed) Which will have the most stable policies? 4

Unpacking democracy 5

Pick out the pair: Italy United Kingdom United States Suggestions?? 6

What is a “veto player”? Individual or collective actors whose agreement (by majority rule for collective actors) is required for a change of the status quo. 7

It may be misleading to examine institutional features in isolation. “VETO PLAYER” approach offers a consistent framework for comparing across regimes, legislature types, and party systems. 8

Consider US, UK, & Italy. Culturalists group US & UK together as different from Italy (Anglo Saxon v. Latin). Party theorists also group US & UK together (2 party v. multiparty). But parliamentary theorists group UK & Italy as different from the US. Who would group US and Italy together? 9

ItalyUKUS # parties Multi 2 party RegimeParlParlPres CultureLatin AngloSaxo n 10

On the veto player dimension: UK: Almost always 1. US: Up to 3. Italy: Usually about 4. US and Italy are predicted to be more similar with respect to policy stability than UK. 11

ItalyUKUS # parties Multi 2 party RegimeParlParlPres VPS413 CultureLatin AngloSaxo n 12

How does the # of veto players affect policy stability? By definition of “veto player,” unanimity between such players is required for policy change. 13

Straightforward prediction: Increasing # of veto players  Increases policy stability. 14

Enter the IMF

Domestic politics of IMF programs IMF programs do not just consist of loans. There are policy conditions attached. We often hear that governments want to avoid “conditionality.” But sometimes governments actually want conditions to be imposed. 16

Executive Without the IMF With the IMF Veto player Accept Reject Payoff to veto player -1 (change policy) 0 (maintain the status quo) -r (reject the IMF) Figure 1: The logic of bringing in the IMF Veto player Accept Reject -1 (change policy) + loan How does bringing in the IMF help push through economic reform? 17

The argument requires there to be at least one veto player who prefers less “reform” than the executive. In the aggregate, the probability that at least one veto player prefers less reform than the executive increases with the # of veto players. As the number of veto players increases, –the probability that the agreement is helpful to the executive also increases –(probably at a diminishing rate). Hypothesis: # veto players has a positive effect on entering into IMF programs. But what about the International Politics? 18

The International Relations Problem: Veto players story requires a credible commitment The IMF must punish noncompliance. We have seen from the IR literature that this commitment is not always credible. So the effect of veto players should depend on country-US relations. 19

Thank you WE ARE GLOBAL GEORGETOWN! 20