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How soon is now? The effects of the IMF on economic reforms in Latin America

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Abstract

This study assesses the effects of IMF loans on economic liberalization in Latin America. Specifically, we are interested in whether the Fund receives greater cooperation from Latin American borrowers in the initiation of some economic reforms over others. Using a two-stage treatment effects model as well as panel-corrected standard error (PCSE) regression for 15 Latin American countries from 1980 to 2003, we find that IMF participation tends to lead to greater trade and capital reforms and less reform in privatization. These relationships are tempered by the country’s relationship with the United States along with domestic group pressures.

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Notes

  1. With the very recent exceptions of Iceland, Greece, and Ireland, no other developed countries have pursued financial assistance from the Fund in more than 25 years.

  2. The countries in this study are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Mexico, Paraguay, Peru, Uruguay, and Venezuela.

  3. For a thorough history of the Fund, see James (1996) and Stone (2002).

  4. While the letter of intent varies from country to country, the Fund insists that the borrower institute economic reforms as part of the IMF’s commitment to market-oriented policies.

  5. For a thorough review of the literature that explains why developing countries accept IMF conditions, see Vreeland (2003a, 12–16).

  6. See also Dreher et al. (2009) who contend that Security Council membership reduces the number of conditions included in IMF programs, thus making compliance easier.

  7. See also Steinwand and Stone (2008) who show that democracies are not necessarily more prone to sign IMF agreements.

  8. See also Dreher (2006), which investigates the effects of specific political institutions (e.g., an independent and free press and adherence to rule of law) found in more advanced democracies on IMF compliance.

  9. See the IMF (2009), chapter 3, for more details on the Fund’s core activities.

  10. Although there are many who claim that a “one-size-fits-all” policy template is emblematic of the Fund (Pop-Eleches 2009; Stiglitz 2002), there are debates within the IMF about policy prescriptions that likely affects the Fund’s design of a program for a particular country, with an emphasis on one reform over another. Additionally, some countries may already have introduced some reforms. However, the IMF’s goal is to encourage countries to adopt market reforms and to have them continue to expand upon liberal policies. Until fairly recently most Latin American countries did not subscribe to market reforms and rarely are such policies without room for greater openness.

  11. Another impediment to privatization is the expected domestic critics, which we discuss later.

  12. However, a lack of commitment to privatize could affect attempts to renew SBAs.

  13. There are some U.S. banks that might lobby for domestic financial reform, but as we note in the discussion section, the U.S. financial community generally has not played an active role in regulation issues (e.g., setting borrowing and lending rates at banks and the reserves to deposits ratio) but is much more concerned about capital openness in Latin America.

  14. See Stiglitz (2002) who maintains that the IMF pushes vigorously for open capital markets at the request of treasury secretaries and central bankers, especially from the U.S., who themselves are lobbied by small financial groups at home.

  15. See Malesky (2008) who argues that foreign investors can influence domestic politics.

  16. See also Büthe and Milner (2008), who contend that trade and investment agreements create a stable and credible policy environment because of the high costs partners can impose for reneging on international commitments, which help reinforce trade reform.

  17. For the IMF’s perspective on tax reform, see Keen and Ligthart (1999) who discuss the benefits of consumption taxes (such as the VAT) for developing countries.

  18. We include a general reform measure, which we discuss in the dependent variable description.

  19. We also tried as an instrument, the number of countries under an IMF program in any given year. It is expected that as more countries operate under IMF programs, the costs for an individual country fall as leaders can show that their country is not alone. However, because the variable was not significant in any of the models, we decided not to include it as an instrument in the models.

  20. Besides executive ideology to assess interest group influence, we followed Stone (2008) and substituted the popular vote received by the executive’s party in the legislature. We also tested whether the government operated under divided rule, where the leaders from the executive and legislative branches are from different parties. The expectation is that divided government will handicap opportunities to carry out economic reforms, while greater legislative vote support for the executive branch will increase the likelihood for successful implementation of reforms. In general, we find that our main results appear to hold and that such institutional variables tend to have minimal effects except that divided government may discourage privatization (and support greater trade and capital reform), while added popular backing for the president’s party in the legislature may promote trade and tax reform and privatization. The results are available from the authors.

  21. Specific details about each reform measure are available in Morley et al. (1999/2003).

  22. We use affinity as a measure of U.S. influence over economic reforms and not BITs because interests in investment treaties may have very difficult goals with respect to specific reforms relative to affinity that more broadly captures U.S. influence.

  23. We use Pop-Eleches (2009) for 1990–2003, whose data begins in 1990. For the 1980s we used Coppedge’s (1997) data. His original coding is on a 0–4 scale, with 0 reflecting the most rightist parties and 4 the most leftist. We created a dummy variable with left and center-left parties coded as 1 and right and center parties receiving a 0.

  24. Some might recommend that we add if a country operated under an Extended Fund Facility (EFF) to our SBA measure. However, EFFs are fairly different from SBAs based on time duration and amount of money loaned, which affects the IMF’s leverage over borrowers. Unlike SBAs, where borrowers receive funding for 12–18 months usually to address cyclical balance of payments difficulties, EFFs deal with structural imbalances in a member country that involve fairly large amounts of money distributed over 3–4 years. The IMF has much greater leverage over EFF borrowers and not surprisingly, the results of our models are very different with the IMF successfully promoting privatization for countries under EFFs. Because of the differences between SBAs and EFFs, we choose not to combine the programs into one measure.

  25. There is debate about whether to count all SBAs or only those when money is drawn. Prior to the mid-1980s, countries often signed SBAs without drawing down funds. If monies are not drawn, the ability of the U.S. and the IMF to push for reform is likely muted as it signals weaker participation by the borrower. In any case, the results are essentially the same if we use all or only drawn years.

  26. IMF loan data are available at: http://www.imf.org/external/np/tre/tad/extarr1.cfm.

  27. We also replaced the SBA-affinity interaction with interactions between SBA and divided government and SBA and legislative support. The findings suggest that the divided government-SBA interaction tends to limit reforms, and the legislative support-SBA interaction has minimal impact. The results are available from the authors.

  28. See also McKeown (2009) who argues that the U.S. is usually the most influential member of international organizations and the place to begin for most research inquiries.

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Acknowledgments

An earlier version of this paper was presented at the Annual Meeting of the International Studies Association, New Orleans, LA, February 2010. We greatly appreciate the comments of Irfan Nooruddin, Shaun Goldfinch, Ilke Civelekoglu, Sema Kalaycioglu, Julie Mueller, as well as two anonymous reviewers. We are especially indebted to the suggestions of Axel Dreher.

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  1. Department of Political Science, Texas Tech University, Box 41015, Lubbock, TX, 79409, USA

    Glen Biglaiser

  2. Department of Political Science, The University of Alabama, Box 870213, Tuscaloosa, AL, 35487, USA

    Karl DeRouen Jr

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Correspondence to Glen Biglaiser.

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Biglaiser, G., DeRouen, K. How soon is now? The effects of the IMF on economic reforms in Latin America. Rev Int Organ 6, 189–213 (2011). https://doi.org/10.1007/s11558-011-9123-8

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