The International Monetary Fund (IMF) has been the focus of a great deal of scholarly attention in recent years. While we increasingly understand how the IMF makes loans, whether or not the conditions attached to these loans will be implemented by borrowing countries, and how to assess the broader effects of these programs, we still know every little about the day-to-day work of the IMF. One of the Fund's main jobs is to engage in annual reviews of member country economies to ensure that countries are adopting growth-enhancing policies. In contrast to the Fund's lending, very little attention has been paid to the IMF's surveillance activities.
One of the barriers to learning about surveillance has been that until very recently it was a private dialogue between the Fund and the member country. In recent years, these consultations have become transparent. Country decisions to release information regarding the consultation allow us to understand how the IMF writes its reports and how IMF surveillance affects both the responses of international markets and country economic policies. In addition, understanding cross-country variations in transparency tell us a great deal about how international norms spread.
These questions are important not merely because surveillance is unexplored, but also because understanding the effectiveness of IMF surveillance tells us about international cooperation more generally. Scholars study IMF lending because it is an area in which there is enforcement: countries that fail to implement loan conditions lose access to remaining installments of the loan. By contrast, surveillance is not backed by enforcement: any penalties that are incurred by countries not following the IMF?s advice are (presumably) inflicted by international investors who might withdraw capital. Learning about the effects of IMF surveillance helps understand when other international organizations that lack enforcement power can still be consequential.
The research strategy to be used in this project is almost exclusively quantitative. Student research assistants will help build datasets on country decisions to make their IMF consultations transparent and on the effects of transparency on international capital markets and country economic policies. In addition, the Principal Investigator will go to the IMF archives to code the Fund's reports (both published and not) to ascertain whether the Fund faces incentives to reveal information about a country's economy accurately. Information from the archival reports will in turn be used to build a dataset as well.
This project extends our understanding of one of the most important international organizations in the world. In so doing, it helps us to learn about country incentives for transparency and how transparency matters. Moreover, it helps devise broader lessons for international cooperation in noneconomic areas. Moreover, because this proposed project is under the Research at Undergraduate Institutions designation, it creates a nascent undergraduate research cluster addressing these issues.
Martin S. Edwards, Seton Hall University martin.edwards@shu.edu The International Monetary Fund (IMF) is mandated to oversee the global economy, and it carries out this mandate through annual consultations with member countries. These consultations allow the Fund to review the state of a member country’s economy and offer advice aimed at ensuring growth. Since the 1990s, this surveillance process has moved from being a private matter to being increasingly public, as countries are releasing more information about the consultation with the Fund on the IMF’s website. The goals of this grant were three-fold: 1) To understand why some countries are transparent about IMF surveillance while others are not 2) To measure how international financial markets respond to the release of information on their IMF consultations 3) To better understand what factors affect the tone of IMF surveillance reports This grant was administered through the Research at Undergraduate Institutions designation. It allowed me to fund half a dozen undergraduate research assistants, and it allowed me to bring four of them to Chicago to an annual political science convention, where they presented our research findings. Without the support of NSF, this project would simply not have been possible at my university. I’ll now turn to talk about what I’ve learned from this research: 1) Understanding transparency. I created a dataset of all IMF member countries from 1997 to 2008 to better understand why countries release information about their surveillance consultation with the Fund. There is strong evidence that democratic governments are more likely to release findings, as are wealthier countries. There is weak evidence that countries that borrow from the Fund are more likely to be transparent, and there’s strong evidence that countries’ choices about transparency are also shaped by what bordering countries choose. 2) Effects of transparency on financial markets. I created a dataset of borrowing costs for emerging market debt for 22 emerging market countries from 1997 to 2008. Even after controlling for economic factors, I find that those countries that release findings from their IMF surveillance missions have lower borrowing costs, suggesting that surveillance provides useful information for financial markets. Importantly, I recognize from the above discussion that countries choose to be transparent, and it is important to understand this in order to properly measure the effects of transparency on borrowing costs. I find little evidence that democratic countries have lower borrowing costs. The savings from transparency can be considerable: in the most conservative case, almost .5% GDP. 3) Factors affecting the tone of IMF surveillance. Extant research suggests geopolitical influence affects not only the probability that a country receives a loan from the IMF, but also the extensiveness of that country’s conditionality. To assess whether similar factors are at work in IMF surveillance, I assembled a random sample of 50 countries and coded each of their surveillance reports for content. I found that even after controlling for differences in economic performance that larger countries and UN Security Council member countries have more positive reports. Surveillance is prone to the same geopolitical biases that lending is. These findings have been disseminated in peer reviewed articles, op-eds, and blog posts, and the work on this grant has led to a book contract. Turning to the broader importance of this project, this research reveals three key lessons: Democracy and economic integration can coexist. The conventional wisdom is that globalization and democracy might be incompatible, an insight that we see emerge from austerity protests in Europe, debates about fiscal policy in the US, and protests during the Arab Spring. The finding that democracies are more likely to be transparent helps us to see that global markets and popular sovereignty can go hand in hand. Markets can be a ‘force multiplier’ for soft law. In this project, the IMF’s advice is not backed by threats of punishment for non-compliance. Conventionally, scholars look at such ‘soft law’ standards as unimportant. The finding that financial markets do reward countries for being transparent, however, suggests that standards that can be useful by markets are influential ones. Transparency is a double-edged sword. While the findings suggest that transparency is beneficial for emerging market countries, it has complicated the IMF’s job. The finding that geopolitical biases are present in the IMF’s surveillance work suggests that the Fund has to choose its words carefully when evaluating powerful countries. It further suggests that surveillance is less likely to be influential in this context, not only because countries have less need for the IMF’s endorsement, but also because the Fund’s message is muted.
