The strategic politics of IMF conditionality

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 analysis of public and fiscal sector conditions strongly supports the domestic politics hypotheses and yields the following findings. First, democratic countries receive fewer conditions than autocracies that are freer from electoral competition, suggesting 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 domestic 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 international 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.