Ali Wardhana

1. Ali Wardhana

2. Domingo Cavallo

3. Ngozi Okonjo-Iweala

4. �The Silent Revolution:� Professional Characteristics, Sympathetic Interlocutors, and IMF LendingJeffrey M. ChwierothLondon School of Economics

5. Introduction What explains IO behavior? Technocratic considerations? Powerful member states? Attributes of countries where IOs operate? Examine IMF lending behavior to provide some answers Conventional wisdom Technocracy Political Organization

6. The Argument I An Alternative View of the IMF IMF Programs are largely a staff product We need to investigate how they approach this task Go beyond �thin� assumptions of the conventional wisdom IMF, like other IOs, is also shaped by collectively shared beliefs and institutional incentives that shape staff behavior Focus on the �Silent Revolution�

7. The Argument II A synthesis of rationalist and constructivist insights. IMF Loans � a joint decision between the Fund and the borrower Supply-Side Considerations Budget maximization and loan pushing? (�Hard Core� Public Choice) But the Fund does suspend and cancel loans Career advancement � number, size, likelihood of success (�Soft Core� Public Choice) Failure � damages career prospects, IMF reputation, and legitimacy of principles Loan size and perceived likelihood of program success interconnected Fear of failure induces excessive insurance not cost effectiveness Cost effectiveness programs take on excessive risk and invite scrutiny But loan size alone does not guarantee success Staff also must find and work with sympathetic interlocutors Career advancement incentives lead staff to seek out these officials

8. Scholarly Views on Sympathetic Interlocutors 1 Miles Kahler: �Close alignment between a cadre of national economic technocrats and the IFIs [international financial institutions] seems to have been a prerequisite for agreement [on reform].� �Technocratic Realignment�

9. Scholarly Views on Sympathetic Interlocutors 2 Stephan Haggard: �In the absence of a countervailing �stabilizing cadre� capable of articulating the long-term political, as well as economic, benefits of adjustment, programs are likely to fail. The core of this cadre is a cohesive group of sympathetic economic technocrats forming the domestic half of a transnational coalition with the Fund. When these groups are absent or politically marginal, commitment falters�These networks, perhaps more than resources per se, are the political bases for the power and influence of these organizations [IMF and World Bank]. The existence of an IMF-sympathetic �stabilizing cadre� within the state appears to be a prerequisite for program success.�

10. The Argument III How do the Fund staff select their allies? Staff professional characteristics are a critical determinant of how they approach their tasks. Such training transfers technical knowledge, provides a particular understanding of the problems economies face, the relevant information to manage such problems, and the range of possible and �appropriate� solutions. Staff has historically been and continues to be predominantly Anglo-American-trained economists

11. Overall IMF Staff Profile

12. Disaggregated Staff Profile

13. The Argument IV Staff seek out interlocutors with similar professional characteristics. Agreement on appropriate policy prescriptions less challenging because common professional characteristics help create: Shared �constitutive norms� Transnational �epistemic communities� �Common knowledge� and �focal points� Personal relationships of trust Greater program �ownership� Staff will likely make a special effort to craft larger programs for countries with sympathetic interlocutors Fits with staff career advancement incentives Fits with staff normative bias

14. Symptoms of Powerful Member State Influence? �Strong version� � staff pushed to reward countries Political pressure is the exception rather than the rule Undermines benefits of delegation and the legitimacy of the IMF Control mechanisms already in place, so good reason to permit staff a degree of autonomy and discretion Limited and valuable stock of borrowing country influence with powerful member states Strong version overstates the extent to which lending decisions result from direct member state pressure

15. Symptoms of Powerful Member State Influence? �Weak version� � staff recognize powerful member state preferences and adjust behaviour accordingly Staff recognize �outer structural constraint� of member state preferences But without active intervention, we would be attributing too much influence to these actors and not enough to the autonomous staff behavior. Bar for autonomous staff behavior is set too high IO autonomy is not solely acting contrary to member state interests IO autonomy also: Helping member states realize and advance their interests even though such policies do not stem directly from member state demands (�autonomy by design�) IMF decides how, among the several possible ways they could advance member state interests, these interests are best served. A �symptom of autonomy� rather than �symptom of influence.�

16. The Argument V Demand-Side Considerations Severity of economic problems and political considerations of chief of government (COG) But what about cases where the COG is uncertain of or opposed to need for reform? Two �instruction sheets�

17. The Argument VI Liberals find it easier to reach agreement with the Fund than nationalists Why? Because liberals and IMF staff tend to share common professional characteristics COGs defer to liberals because they perceive their connections with external financiers to be critical for accessing resources and enhancing credibility �Ceremonial conformity� to normative standards and beliefs of external actors �Positive signals� due to the meaning bestowed on them by beliefs of external actors Beliefs of external actors define credibility and place severe constraint on what policies are perceived as sustainable Liberals also use privileged access to private information about Fund�s negotiating position to command deference. Liberals can present their prescriptions as the �only way out.� Liberals request larger loans to: (1) lower economic and political costs of adjustment; (2) raise bargaining leverage Nationalists request smaller loans to: (1) lower sovereignty costs of IMF program; (2) minimize diversion of resources to debt repayment

18. Some Caveats and Additional Remarks Fund staff and sympathetic interlocutors will not see eye-to-eye on every detail. �Silent Revolution� provided �intellectual strength.� But, on average, a stronger consensus should result. COG manipulation is also a possibility But this is likely to be a risky strategy. �Sell out� �Rejection costs� from official and private creditors Do short-term gains outweigh long-term pain? No strong a priori reason to expect manipulation to be the modal strategy.

19. Testing the Argument 1 Annual data on 146 IMF loans extended to 29 emerging markets and developing countries from 1974 to 1998 under the Stand-By and the Extended Fund Facility programs. Method: GLS regression with random effects and robust standard errors Dependent Variable: Size of Loan (SDRs) Independent Variable: Interaction of Proportion of Anglo-American Trained Economists in Respective IMF Area Department * Proportion of Anglo-American Trained Economists in Head of Central Bank and Finance Ministry Other combinations possible and complete agreement unlikely But these possibilities make it harder to uncover a positive relationship. Uninteracted Coefficients � partly captures dissimilar beliefs so we should expect no or a negative relationship.

20. Testing the Argument 2 Control Variables: Reserves / Imports, Money Supply / Reserves, Debt / GDP, Debt / X, Short-term Debt / Total Debt, Currency Crisis, Banking Crisis, U.S. Treasury Bill Rate IMF Quota Share UN Affinity Scores and Commercial Bank Exposure for US, UK, France, Germany, and Japan Time Trend and Dummy Variables for debt crisis (1982-1989), Mexican peso crisis (1994-1995), Asian financial crisis (1997-1998).

21. Results Interaction term is positive and significant across all model specifications. Uninteracted IMF area department coefficient negative and significant in some specifications. Other results: IMF quota share positive and significant across most model specifications. French commercial bank exposure and Asian financial crisis positive and significant in some models. Money Supply / Reserves negative and significant in one models. Significantly, model selection criteria (R2, AIC, BIC) indicate that inclusion of professional characteristic variables improves fit of models over conventional specifications.

22. Conditional Effect of Sympathetic Interlocutors

23. Conditional Effect of IMF Area Department Staff

24. Conclusions & Implications Theoretical implications: We need to improve our understanding of how IOs use their autonomy. IOs are not simply �technocracies� or �political� organizations. The staff�s normative orientation and career advancement incentives also shape IO behavior. We also need to refine our understanding of the relationship between domestic politics and international institutions. Broaden our focus on the types of actors that may use institutions in their domestic political struggles. Policy implications: Working with sympathetic interlocutors leaves the Fund susceptible to claims that it elevates certain goals over others, faces blind spots in its analysis, and downplays local knowledge. Should the IMF �empower� or �create� reformers? Seeking out reform-minded officials alone means that those uncertain, skeptical, or opposed to reform will be left out. To put it differently, programs will not have sufficiently broad �ownership.� These findings should give greater impetus for calls to broaden the staff recruitment base and to expand the array of actors with which the staff engage. Both should help alleviate the Fund�s current legitimacy crisis.