The US and IMF Lending Process

In Addition to the conditionality associated with lending, the negotiating process can also influence the outcome of a IMF lending decision. In the determination of parameters for country programs—size of drawing and conditions attached to the various tranches—approval by the United States was critical, and in the first decade of the IMF, negotiations between the United States and countries seeking assistance sometimes excluded the Fund staff. As Southard describes, “in the 1950s the US voice in the Fund was decisive—indeed a task of the US executive Director was to keep that voice muted so as not to frustrate Board and Management/staff activity. The practical question in those years, in any prospective large use of Fund resources, was whether the United States would agree—and the answer was usually obtained by direct inquiry.”²⁵⁶ The most famous example of the US position in the Fund was the negotiations between the United States and Britain.

American negotiators believed that the British request for $ 750 million was insufficient, and thus

254 http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf.

255 Wall Street Journal, September 21, 1981, 1:1.

256 Frank Southard, The Evolution of the International Monetary Fund, pp. 19-20.

agreed to a $ 1.3 billion drawing by Britain. This clearly reflected the central US role in setting the terms and amounts of financing available through the IMF.²⁵⁷

After the relative decline of US quotas and voting power, the US had to bargain and negotiate for its preference. A loan agreement between the IMF and a country is usually negotiated through four phrases: initiation, internal preparation, negotiation, and review of a letter of intent. The negotiation phase is the most crucial. In the negotiation process, the IMF’s internal ratification politics are important. The relationship between the executive board and the managing director is particularly significant. The American Delegation makes frequent direct contacts with the management, staff, and the offices of Executive Directors within the Fund, either individually or in groups. The US Treasury also uses bilateral relations, the G-7 framework, to garner support for positions in the IMF.

Early work by Stiles did find evidence that not all borrowers were treated equally and that large and important countries received favorable treatment in terms of the design of conditionality.²⁵⁸ Thacker finds that ideological proximity to the United States exerted a positive effect on the probability of receiving IMF loans and that such political factors enhanced the ability of models to explain IMF lending.²⁵⁹ A similar effect of the US is found by Barro and Lee who argue that the effect does not extend to other industrial countries.²⁶⁰ Although measured in a different way, the

“US factor” is confirmed by Stone in his analysis of IMF lending to transition economies during the 1990s. He also found that other industrial countries do not exert a similar influence.²⁶¹

On the other hand, the Third World has enhanced its negotiating capability in the IMF. An example of the increasing influence of the Third World within the International Monetary Fund was the creation of the Committee of Twenty in mid-1972. This group was charged with studying basic reforms in the international monetary system. It was composed of governors of the Fund. Nine of its members came from the Third World. Prior to the creation of the Committee of Twenty, discussions had been carried out by the Committee of Ten, whose members were drawn exclusively from

257 Frank Southard, The Evolution of the International Monetary Fund, p. 20.

258 Kendall W. Stiles, Negotiating Debt: The IMF Lending Process. Boulder: Westview Press, 1991.

259 Strom C. Thacker, “The High Politics of IMF Lending,” World Politics, 52 (October 1999), pp. 38-75.

260 Robert J. Barro and Jong-Wha Lee, “IMF Programs: Who Is Chosen and What are the Effects?” at http://www.imf.org/External/Pubs/FT/staffp/2001/00-00/pdf/rbjl.pdf.

261 Randall W. Stone, “The Political Economy of IMF Lending in Africa,” American Political Science Review, Vol.

98, No. 4, November 2004.

industrialized countries.²⁶²

The emergence of competing blocs further eliminated the influence of the US in the Fund. For instance, America could not bloc all the large Fund standbys that it was dissatisfied with. The Indian economy had been dominated by state-owned enterprises and excluded private economic power. Its economic policy was also nationalistic and tended strongly to provide protection to its homemade industrial products. The US had been advocating private enterprise, a free market, and international free trade as the principles of the IMF’s conditionality. However, in 1981, the Fund approved a $5.8 billion standby under a three-year Extended Fund Facility for India, the largest given to that date, and larger than drawings by industrialized countries such as Great Britain and Italy. The Reagan administration, in refusing to vote in favor of the loan at the IMF executive board meeting in 1981, cited the lack of strict conditionality as one reason for disapproval.²⁶³ The U.S. executive director abstained on the final vote when it became apparent that there would not be enough votes to block the loan.²⁶⁴ Subsequently, with the end of the Cold War and the collapse of the former Soviet Union in 1990, the US perception of India changed. American policy makers showed growing interest in economic and security cooperation with India. As a result, unlike the 1981 loan negotiation, the United States showed willingness to cooperate with the efforts of the IMF and other industrialized countries in bailing India out of its balance of payments crisis. This change in US policy meant that any IMF loan negotiation with the Indian government would not meet with opposition from the most important member. Needless to say, the US willingness to cooperate contributed to a widening of the IMF’s successful loans.²⁶⁵

Additionally, there is also evidence that sympathetic governments of countries considered to be of strategic importance to the United States have, on occasion, received favored treatment from multilateral institutions. Thus, the IMF showed remarkable flexibility in renewing its assistance to

262 The Group of Ten (G-10) refers to the group of countries that have agreed to participate in the General Arrangements to Borrow (GAB), a supplementary borrowing arrangement that can be invoked if the IMF’s resources are estimated to be below member's needs. The GAB was established in 1962, when the governments of eight IMF members—Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom, and the United States—and the central banks of two others, Germany and Sweden, agreed to make resources available to the IMF. The GAB was strengthened in 1964 by the association of Switzerland, then a nonmember of the Fund, but the name of the G-10 remained the same. Please refer to IMF Website: http://www.imf.org/external/np/exr/facts/groups.htm.

263 Cheryl Payer, “The IMF and India,” Edited by Kjell J. Havnevik, The IMF and the World Bank in Africa, Uppsala:

Scandinavian Institute of African Studies, 1987, p.72.

264 Wall Street Journal, November 9, 1981, 6:1.

265 Kishore C. Dashi, “India’s International Monetary Fund Loans: Finessing Win-Set Negotiations within Domestic and International Politics,” Asian Survey, Vol. 39, No. 6 (Nov.- Dec., 1999), pp. 884-907.

the Sudan in the years 1981 to 1985 in the face of repeated contraventions of the terms of its agreements. This was in response to pressure from the US government that even went so far as to divert its bilateral aid to the repayment of Sudan’s arrears to the IMF so as to permit the Fund to continue to enter into negotiations and agreements with the Sudan.²⁶⁶

In addition, when South Africa drew on IMF assistance in 1982, at the same time, it experienced a sharp fall in export volume and prices due to the global recession and again mounted political opposition to the apartheid policies that undermined the confidence of foreign private investors. The decision to grant loans from the IMF was very controversial; so controversial that an Executive Board meeting was leaked to the anti-apartheid movement, giving outsiders a unique insight into the internal debate and the eventual informal voting pattern among Executive Directors.

It appears that despite opposition from no less than 68 countries, assistance was finally approved by countries holding 51.9% of total IMF votes. The US, in particular, was strongly in favor, arguing that assistance was justified on financial grounds and on the basis of need.²⁶⁷ Yet several of the Executive Directors, representing mainly Third World countries, argued that the request should have been denied on purely technical grounds. The need for assistance was questioned in the light of South Africa’s huge gold reserve and its capacity at that time to borrow in the private capital market, given its credit worthiness and its very low (7.9%) debt servicing ratio.²⁶⁸

Many analysts observed the revival of the US influence on IMF lending through the informal channel including material incentives or soft power attraction. For instance, Calomiris talked about the political factors in the recent lending process. “Ecuador has been suffering a deepening fiscal crisis for several years caused by the combination of an unresolved internal policy struggle, adverse economic shocks to its terms of trade, and a poorly regulated banking system… As yet, there is no consensus for reform in Ecuador, and there is no reason to believe that reforms will be produced by a few hundreds of millions of IMF dollars. Why in the world is the IMF sending money to Ecuador?

Some observes claim that IMF aid to Ecuador is best understood as a means of sending political payola to the Ecuadorian government at a time when the United States wishes to ensure continuing

266 Browne Richard, “International Response to Sudan’s Economic Crisis: 1978 to the April 1985 Coup d’Etat”, Development and Change, Vol. 17, No. 3, 1986.

267 John Loxley, “IMF, World Bank & Sub-Saharan Africa,” Edited by Kjell J. Havnevik, The IMF and the World Bank in Africa, p .55.

268 Ibid.

use of its military bases there monitoring drug traffic.” Another example is Pakistan. “A knowledgeable insider informs me that the U.S. government has told Pakistan that its access to IMF subsidized lending depends on its willingness to sign a nuclear nonproliferation treaty. According to this person, unless Pakistan agrees, the U.S. will block its IMF program.”²⁶⁹ The following Section 6 elaborates on the US impact on the IMF’s reaction to the East Asian Financial Crisis.