| A target of criticism from both the left and the right, the International Monetary Fund has come under fire for its policy of conditionality—the act of requiring countries to honor certain conditions as a prerequisite for obtaining financial assistance. Despite the furor over conditionality, the Fund's conditional lending programs break down frequently. How can we understand these outcomes? Why do some Fund programs succeed and others fail?; I argue that the problem with conditionality is an informational one. The Fund does not know ex ante whether a state will honor the commitments that it makes when it signs a letter of intent. Both committed reformers and reform minimizers have incentives to sign Fund agreements. As a result, conditionality does not function as a screening device.; This low information argument brings with it several testable hypotheses, which are addressed in separate chapters of the dissertation through a combination of game theory, decision theory, and maximum likelihood sample selection techniques. First, the signing of a Fund program does not serve as an endorsement to financial markets, and as a result, there is no evidence that signing a Fund program produces a catalytic response by potential lenders and investors. Second, the Fund “tips the balance” for reform rarely and only under specific domestic institutional conditions. Third, even after controlling for the effects of institutions on economic performance, we see that the Fund's enforcement regime is inefficient, as it consistently sanctions states when there is no evidence that they have violated the bargain of conditionality. These hypotheses are tested using a sample of 126 developing countries that entered a total of 367 Fund programs between 1979 and 1995.; This project suggests that future progress in making Fund programs more credible and more successful can come from taking the effects of political institutions seriously. Moreover, it poses severe challenges to both realist explanations for the behavior of international institutions, as we find limited evidence suggesting that US influence drives Fund behavior, and liberal explanations, as the Fund does not play a role as an information provider. |
