On Shifting Sands: The Evolution of the IMF

When delegates from 44 countries met at the Mount Washington Hotel in Bretton Woods, 320px-gold_room_bretton_woods_5New Hampshire in the summer of 1944, they resolved to establish an institution that would lend money to countries facing mounting balance-of-payments deficits so they could avoid debt defaults and continue to participate in international trade. Almost 70 years later, the International Monetary Fund (IMF) remains the world’s “lender of last resort,” but now primarily offers its funds to developing countries with substantial conditions attached – ranging from the cutting of deficits to deep, structural changes centered on market liberalization. How did the IMF change so much from its original mandate as neutral overseer of economic cooperation to supreme crisis manager, qualifying access to its resources on major overhauls to borrowers’ economic architecture? This paper utilizes the gradual change framework proposed by Mahoney and Thelen (2010) and argues that at least three shifts have taken place within the IMF: a conversion toward conditionality, a layering of the neoliberal agenda onto its mission and, most recently, a drift caused by a reassessment of its function and prescriptions, as the IMF deals with a series of major economic crises – and a crisis concerning its own role in the international economy.

Since its foundation, the IMF has been one of the leading multilateral institutions in the world. From the end of World War II to the 1970s, it presided over an era of high economic growth worldwide, the so-called “Golden Age of Capitalism,” that witnessed an average global growth rate of 4.8% and very low rates of unemployment (Skidelsky 2010). The IMF ensured that exchange rates remained fixed between countries, keeping trade arrangements smooth and reliable. Member countries pooled funding via a quota system that enabled the IMF to extend loans to countries to rebuild after the war as well as establish substantial welfare states. When the fiscal fiascos of the 1970s brought this status quo to an end, the IMF increased its profile as a major stabilizer in the world economy, supplying emergency funding to countries on course to bankruptcy or suffering serious debt liabilities. By adding conditions to its credit, the IMF accumulated incredible influence by essentially making policy for countries that borrowed from it. As globalization has linked more and more countries into a interconnected global marketplace, the IMF wields more authority than ever as a financial meltdown in one country or region can now rapidly ripple outward, requiring immediate intervention before crisis becomes calamity.

Yet, as the power and prominence of the IMF has grown, so has the controversy 320px-international_monetry_fund_building-name_shieldsurrounding it. Some critics have accused the IMF of being an impervious, bloated bureaucracy whose solutions to economic stagnation or imminent collapse after often worse than the problems they seek to address. More severe censures indict the IMF as a blunt instrument wielded by members of a vast neoliberal conspiracy that purposefully destroys emerging countries in the interests of the worldwide capitalist class. While there is widespread consensus that the IMF has indeed deviated from the functions intended in 1944, explanations for this change are widely divergent as well as worryingly one-dimensional. Rather than giving close attention to the myriad actors, ideologies and events that have shaped and continue to affect the IMF, many scholars who study the institution focus either exclusively on one aspect or another, typically focusing only on what the IMF does rather than why and how it has changed.

There are fundamentally two different approaches to the IMF and the change it has undergone to be found in the political, sociological and even popular literature. The first approach is that of “mission creep,” most commonly associated with the work of Joseph 180px-joseph_e-_stiglitz_-_croppedStiglitz, a former chief economist at the World Bank. The “mission creep” approach posits that the IMF has taken on additional undertakings beyond its constitutive mandate, specifically in regards to its attaching conditions to its loans. “Mission creep” scholars argue that “free market fundamentalists” used conditionality to not just stabilize the world economy but to build a new one based on precepts found in economic textbooks, regardless of the unique needs and risks of borrowing countries (Stiglitz 2002, 2008). Similarly, scholars associated with public choice theory also fault bureaucratic pathologies for the IMF inflating its authority, although for these scholars the responsible force for this expansion is not free market zealotry, but instead the rent-seeking behavior of profit-maximizing IMF staff members. For example, Roland Vaubel (1994) has asserted that the IMF tends to quickly approve loans during quota review years so as to bring about quota increases that will ensure more funds will be available for future IMF lending. These hasty approvals lead to a swelling of the IMF budget, enabling the IMF to issue more loans along with extensive conditions that maximize IMF control over countries that borrow from it.

In contrast to the “mission creep” approach is what has been called the “mission push” explanation. This approach holds that the United States, the primary shareholder of the IMF, has directed the IMF toward lending practices and harsh conditions that coincide with the interests of the U.S., its allies and major multinational corporations (Vreeland 2003, Stone 2004, Babb and Buira 2005). Such theories generally cite the fact that the IMF relies on quotas from its member countries, and since wealthy countries contribute the most, they are entitled to the most voting shares within the IMF. Consequently, “mission push” theories argue, policies favored by these wealthy countries become the policies of the IMF. “Mission push” theorists often refer to the “Baker initiative,” when U.S. Treasury Secretary James Baker called upon the IMF and other international financial institutions to promote the liberalizing of markets and private sector investments. The 160px-naomi_klein_c3a0_mouans-sartoux2c_france_2008Shock Doctrine (2007) by the activist Naomi Klein offers perhaps the most extreme variation of this argument, as it presents the dramatic structural reforms of IMF loans as intentional “shock therapy” designed to destroy existing economies (as well as societies) so a union of neoliberal economists and neoconservative imperialists could construct free market systems among the ruins. Whereas “mission creep” theories stress the role of internal decision-makers within the IMF in the progression of the institution over time, “mission push” theories concentrate on the influence of the U.S. (and sometimes other wealthy shareholder countries).

There are problems with both these approaches. The “mission creep” approach reduces IMF economists to doctrinaire “fundamentalists” or rent-seeking opportunists who all act according to a neoliberal hive mind or to appease their base selfishness. While there is sometimes a theoretical necessity to generalize, it seems dubious that the entire IMF staff might be uniformly motivated. Secondly, “mission creep” theories fail to describe under what conditions these “fundamentalists” or “opportunists” are able to carry out their “creep.” Shareholder countries, from the wealthiest to the poorest, are unlikely to approve of IMF thinking or behavior that wastes their resources or undermines their interests. Surely an official in the treasury of a shareholder country would notice and report repeated rent-seeking activity designed to bolster IMF resources at the expense of shareholders. The IMF does not operate in a vacuum; indeed, as it has no economic resources of its own, it is highly reliant on its relations with its member countries. By failing to factor the identity and interests of member countries into its formulations, “mission creep” theories tend to omit a critical element from their frameworks.

“Mission push” theories usually commit the same sin, but inverted: the U.S. and other wealthy countries are assigned sole agency over what the IMF does, while IMF economists are rendered impotent as Washington, D.C. and Wall Street dictate policy. If “mission creep” theories reduce the IMF staff to free market fanatics or freebooters, “mission push” theories depict them as unwitting henchmen taking orders from pseudo-fascists 320px-calling_card3fthat micromanage every decision that the IMF (and all other international financial institutions) make. Institutional change in the IMF, therefore, comes down solely to external pressures, without any deliberation on the part of the internal staff. This is rather unconvincing, as IMF economists have been called many things the world over, but “unwitting” is usually not one of them. It is entirely possible that major decision-makers within the IMF (if not rank-and-file members) might find themselves at odds with market liberals in shareholder countries. Indeed, recent events have shown direct evidence of this. In April 2013, the IMF criticized the strict austerity measures employed by George Osborne, the Conservative Chancellor of the United Kingdom, as harmful for future growth. Not only did the IMF single out one of the G7 nations for reproach, it condemned the tight fiscal adjustment policies most commonly associated with neoliberal economics.

What is needed is a balanced approach to institutional change in the IMF that pulls together the identity, ideologies and interests of all relevant parties, from the economists who make up the institution to the shareholders that provide it with the stature and the assets it requires to perform its function. Instead of making a normative assessment on what the IMF does today and then inferring whose interests its behavior serves, it would be useful to chart the historical development of the IMF and search for an instance or instances of change, with consideration given to precise contexts and forms of contestation occurring at the time. To do this, a theoretical framework for understanding and explaining institutional change is useful.

Regrettably, such theories are sparse in comparative politics. For many years, scholars only analyzed how institutions differed across countries and how these differences impacted various outcomes, such as economic growth, inflation and unemployment. These scholars argued that conflicting national outcomes could be traced back to national institutions (Katzenstein 1978, Gourevitch 1986), and eventually the field was consumed in Cold War debates about which institutions would lead to the “best” outcomes. Modernization theorists such as Rostow (1960) proposed that the adoption of capitalist institutions in the Western mold would lead to “take-off” for developing countries hoping to catch up with their more advanced counterparts, while neo-Marxists like Poulantzas (1974) argued that such institutions primarily served to protect the interests of the dominating capitalist classes, presenting the illusion of class equality while in fact splintering the working class into disorganization and squabbling. Despite the scrutiny given to institutional disparity and alteration between various political systems, very little was said about those phenomena within those political systems.

The 1980s brought about a major change in this regard. It had become apparent that, even in countries with similar political processes and economic structures, the preponderance of stagnant economic growth, high inflation and the rise of neoliberalism had forced capitalismlogoinstitutions to change. It was clear that institutions varied according to changing historical conditions and scholars started to investigate what these conditions were and what changes they produced (Campbell et al. 1991, Thelen and Steinmo 1992). Meanwhile, sociologists were also beginning to study what they considered an international political culture that had led to almost identical institutional behavior across countries (for example, the resemblance of democratic institutions and educational systems) and how institutions adapted to shared cultural values (Thomas et al. 1987). Social scientists turned their attention from institutional outcomes to institutional change.

The early contributions to the institutional change literature argued that such change was infrequent and that transformations only occurred according to the principles of “path dependence.” In other words, contingent decisions or events placed institutions on set “paths,” moving them in one direction and limiting the choices offered to future institutional actors. Institutional change or attempts to create such change are therefore highly dependent on decisions and actions in the past (Nelson 1994, North 1990). These scholars drew on the work of economists like W. Brian Arthur (1994) who argue that patterns of economic development hinge on a variety of factors, such as familiarity with an institutional arrangement and the incentive of beneficiaries of that arrangement to defend continued institutional behavior that favors them. Additionally, some scholars have argued that, since institutions usually exist alongside other related institutions, change must be rare in order the preserve the complementarity of these corresponding institutions (Aoki 2001). The common theme throughout this approach is that institutional change should be intermittent and incremental when and if it occurs.

The clear problem with the path dependence approach, however, is that it only focuses on the incentives and forces centered on blocking institutional change; it does not explain the320px-zugunglc3bcck_bei_ummendorf2c_landesarchiv_bawc3bc_n_1-68_nr-_1596 means or motivations by institutions that “go off the rails,” so to speak, finally deviating from their paths. Path dependence scholars tended to fall back on major exogenous shocks or “critical junctures,” such as wars or natural disasters, which overturned the traditional situation and necessitated reforms or revolutions to institutions (Thelen 1999). Critical junctures, however, say nothing about how flaws within the pre-existing institutional status quo might trigger movements for change or how actors within and external to institutions arrive at the reforms or revolutionary ideas that are appropriate to replace the old order. The critical juncture explanation for institutional change does not solve the stability bias inherent in the path dependence approach.

There are alternatives to the path dependence approach that discuss the driving impetuses for institutional change. These approaches can be classified according to arguments of efficiency, fitness and power relations. The efficiency approach also drew from the work of economists, specifically that of Ronald Coase (1960) and Oliver Williamson (1985), who argued that the reasons economies featured organized firms rather than individuals using contractors was because hierarchies minimized transaction costs as they better manage the numerous inputs and outputs required to operate efficiently. Essentially, institutions respond to their environment and alter their behavior according to what makes the most economic sense. The shortcoming of this approach is that it assumes institutional actors operate with efficiency first in their mind or are at least immune from other considerations; social norms and beliefs affect such considerations as well. Since institutions are “embedded” in the societies with which they operate, an actor in a society that emphasizes trust and reputation may be more engaged in contracting behavior than an actor from a relatively more cynical, individual-oriented society (Granovetter 1985). If we accept that ideologies and values matter in motivating, the efficiency approach is too limited.

The second approach as to why institutional change occurs is the fitness approach. According to this perspective, institutional change emerges from a need for institutions to “fit” the prevalent norms and ideas in a society. Institutions either discern what their 232px-organizational-unit-svgideal practices should be and strive toward them or, through a process of learning, study similar institutions that have proven successful and imitate them (DiMaggio and Powell 1983). The flaw here is that it puts a premium on the similarity between institutions and measuring the degree of such similarity without fully delving into how the process of how institutional actors learn what the ideal practices of their institution should be or how to imitate other institutions. Additionally, it is evident that, even when there is a predominant normative stance toward institutional operation, there will be variation among institutional actors. For example, the United States government has made no move to ratify the tenets of the Kyoto Protocol, despite the pervasive normative strength afforded to reducing emissions of greenhouse gases and combating climate change. In addition, the fitness approach does not engage with how actors external to an institution might influence or pressure an institution to conform to certain principles or practices rather than the institution arriving at those determinations independently. Due to these oversights, the fitness approach also has substantial limitations in seeking to explain institutional change.

For scholars grouped into the third approach, institutional change depends on power relations. In short, individuals and groups that hold political power in an institutional context dictate what sort of institutional change occurs. For example, Mark Roe (2003) demonstrated that interest groups wary of financial monopolies used political allies to implement laws in the U.S. that prevented insurance companies and investment banks from possessing large portions of stock in a business, benefiting corporate managers who are not accountable to large, powerful shareholders. In countries where there was no similar political alliance, no such laws emerged and managers tend to be less independent in controlling their business operations. Other scholars have stated that contestation over resource distribution is also what makes and shapes institutional change (Knight 1992). Like the other approaches, however, the power relations approach leaves out meaningful considerations. First, it robs agency from regular institutional actors who may lack official power capabilities but can unofficially be quite important in clamoring for change by utilizing mobilization and communication strategies. Second, like the efficiency approach, it assumes power-holders act only according toward instrumental goals that align with their material interests. While the power relations approach tells us that power-holders create the institutions they want, it does not elaborate on their motivations for doing so.

Seeking to chart and understand historical change in the IMF requires a theoretical approach that combines the complexity and nuance that the above approaches neglect. Such research necessitates an analysis that transcends deterministic conclusions that trace all institutional change from one source or consider all forms of change to be the same. Mahoney and Thelen (2010) have thankfully developed an approach that stresses the relevance of conditions to institutional change and distinguishes between different modes of change. This approach poses two general questions: Does the political setting allow actors preserving the status quo strong or weak veto possibilities? Does the institution enable actors the freedom to debate and interpret the implementation and enforcement of institutional rules?

1460471507301

 

In a slight deviation from the power relations approach, Mahoney and Thelen consider power-holders in the extent to which they seek to uphold the institutional status quo. Rather than constantly crafting and modifying institutions to their whim, power-holders in Mahoney and Thelen are important to the extent that they will intervene to hinder agents of institutional change. In instances where power-holders protecting the status quo are strong, they will preserve the old rules and their current interpretation and enforcement, but may allow new rules to be added to the institutional mission (layering) or permit there to be some argument within the institution as how the present patterns of institutional behavior should be tweaked (drift). In instances where status quo defenders lack the power to stop institutional change, the institution might be terminated or replaced (displacement) or have its mission changed in full (conversion).

What decides the difference between the two outcomes in each case? The sort of change that transpires is contingent on the degree of discretion granted to institutional actors in construing and imposing the purpose and procedures of the institution. When the discretion level is low, strong status quo defenders will permit layering while weak status quo defenders will be unable to stop outright displacement. When the discretion level is high, strong status quo defenders can block formal change but, unofficially, drift creates a large amount of latitude in how the rules are applied. If the status quo defenders cannot stop formal change, then high discretion will facilitate the institution being converted to a new task with new processes. Of course, simply because the conditions exist for a particular type of change to occur does not mean it will; the interaction between veto possibilities and rule discretion only set the boundaries for the sort of change we would expect to see. This model is not a deterministic one.

Whereas previous treatments of the IMF in the existing literature have considered only the 184px-international_monetary_fund_buildinginternal dynamics of the organization or the influence of its power-holders separately, this paper utilizes the Mahoney and Thelen model to navigate the history of the IMF, searching for the conditions Mahoney and Thelen argue are most conducive to the modes of change listed in their framework. Obviously, since the IMF continues to exist and does not seem likely to be supplanted anytime soon, we should not expect to see displacement as a form of change the IMF has undergone. However, if the “mission creep” theorists are correct, we should anticipate encountering examples of layering or drift in the IMF’s history, with the IMF adding layers of additional power onto its original mission or drifting toward emphasizing its interventionist, crisis manager powers over others. If the “mission push” theorists are correct, however, we should expect to see conditions for conversion, with the IMF being pushed to abandon its initial duty as nonaligned, technocratic economic supervisor to a political tool of the United States.

Before proceeding with the analysis proper, the institutional actors of interest in this paper should be properly defined and their place in the analytical model clarified. The shareholders who subsidize the IMF make up one group, with those shareholder nations that allocate the most (and therefore have the most voting shares within the group) being especially noteworthy. While we should expect these countries to be involved in every facet of every decision that has been made regarding the IMF, it is appropriate to appreciate that such shareholders have extraordinary authority within the IMF, as the institution cannot operate without their contributions. Nevertheless, it is reasonable to assume that the IMF staff members are not automatons. From the high-ranking directors and managers to the lower level economists in the organization, IMF staff members should be expected to have much involvement in the IMF’s regular activities and how the institution sees itself and its part in the global economy.

It should noted that, among these actors, all of them are relevant in terms of veto possibilities as well as rule interpretation and enforcement. Shareholder countries can use their funds and their votes to permit or prevent potential institutional change, but representatives of those shareholder countries can also argue for or against the IMF acting in certain ways. Similarly, the internal IMF staff can debate the details of what they do and agitate internally for reform, but they can also push back against pressure, from within or without, to adjust their attitudes or behavior. All the actors listed above can be strong or weak veto players as well as prospective reformers operating with high or low levels of discretion. The historical analysis that follows will explicitly state which roles these actors play in the historical stages of the IMF.

The IMF had its intellectual origins with the United States and the United Kingdom, the two countries that were taking the lead in determining what the post-World War II world would look like. As previously stated, the IMF was designed in such a way as that those countries with the most significant financial commitments were also granted the greatest share of votes in the institution, with the U.S., as the IMF’s largest shareholder, receiving the largest bloc of votes in addition to a veto in policy-making (Dell 1981, Mikesell 1994). While the balance of influence over policy decisions was unevenly distributed, the initial IMF polices themselves were benign. Member countries were expected to peg their currencies to the U.S. dollar and permit those currencies to be traded freely. This arrangement, however, would only last for half a decade.

In the 1950s, the U.S. government began pushing for the adoption of monetary conditions as a prerequisite for access to the IMF’s resources based on the belief that domestic credit expansion would always lead to currency crises. According to the reasoning, if the government of a member country were permitted to enlarge its credit in order to procure imports or to make debt repayments, a balance of payments deficit would soon occur, with the member country unable to meet its financial obligations. Not only would this mean the devaluation of the member country’s currency, but also the devaluation of the currency of the country’s trading partners, as they do would also experience a balance of payments crisis (de Vries 1987). To prevent this from happening, the U.S. government used its disproportionate influence in the IMF to impose lending conditions necessitating borrowing countries restrict their money supply. It did this by using its veto power to block loans until the IMF agreed to do so (James 1996). In light of this enormous pressure, it was unsurprising that the IMF had little choice but to abide by U.S. demands.

By the end of the decade, the conditions sought by the U.S. were in full effect. Countries wanting to borrow from the IMF had to sign Standby Agreements that ensured their governments kept government spending below certain targets. If a country violated the agreement and went over the limit, lending disbursements would be ceased and access to IMF resources ended (Babb 2007). The rules of the IMF had indisputably changed. In less than five years after its inception, the IMF had been transformed from an institution keeping international trade smooth to an institution that preemptively extinguished crises by intervening in the policies of borrowers.

Operating from the Mahoney and Thelen framework, I argue that this was an instance of institutional change that serves as an example of the conversion change type. This might seem counterintuitive operating on the conditions outlined in the theoretical model, given that the U.S. clearly had strong veto power in the early development of the IMF. Yet the model holds that conversion is unlikely when a status quo defender can veto institutional change. The U.S. was no such defender, having fought ardently against proposals like 190px-whiteandkeynesthose of John Maynard Keynes, who had represented the United Kingdom at Bretton Woods. Keynes hoped the IMF would first and foremost be used to facilitate economic growth around the globe, and if balance of payments crises did occur in a borrowing country, other countries would come to the rescue by increasing imports from the afflicted country, providing it with the capital needed to pay its debt. The U.S. representatives, on the other hand, wanted the burden to be entirely on countries running deficits to slash their spending and control inflation (Mikesell 1994, Boughton 2002). Since it was essential to compromise at the conference, the U.S. did not build conditionality into the IMF at its foundation, but through the quota system and its special veto, safeguarded the chance for it to change the mission of the IMF as soon as possible. The U.S. government, therefore, acted as a powerful change agent virtually at the outset, seizing the opportunity to convert the IMF so as to conform to the plans it had had for the institution from the very beginning. Given that they were not anticipating dependence on IMF loans given the abundance of private capital available to them, the other wealthy industrialized countries did not step in to play the role of status quo defender, and besides, they had more to gain by remaining steadfast allies of the U.S., the sole superpower of the capitalist “free world,” than by alienating it by trying to thwart it.

The other institutional condition amenable to conversion is a high level of discretion in rules interpretation and enforcement. As the IMF had just been created and its staff was still deciding how to put into practice the responsibilities it had been charged with, it is relatively safe to believe that such a high level of discretion existed in the IMF’s early years. The institution had been tasked with accelerating the flow of free trade, and as securing price stability through macroeconomic policy prescriptions was a means to that end, it was an easy fit for that monetary approach to be grafted onto the IMF’s operating procedures. Additionally, such conditions were familiar to Western economists at the time, having been employed by bankers and the League of Nations in the time of the gold standard (Eichengreen 1996). The government spending limits that made up the lending conditions provided the nascent IMF with a regular set of rules to guide their processes going forward, putting at least a temporary stop to confusion about how to perform its function. Of course, the fact that its largest shareholder and powerbroker was demanding their adoption must not be forgotten either.

The consequences of this early conversion were threefold. First, the IMF now had a very powerful veto player guarding the status quo, as the U.S. had established it would be the final authorizing force in IMF policy. This was the beginning of what has been called an “outer structural constraint” to the IMF (Woods 2006), in which staff members are bounded to pursuing polices the U.S. and other major shareholders are willing to support. Second, on an internal level, the conversion also changed the degree of discretion in regards to the IMF and its rules, as conditionality entailed precise spending thresholds, exact deficit figures, and set price levels – leaving very little room for exceptions or special treatment for borrowing countries. The IMF staff was on its way to becoming a proper bureaucracy, with established protocols and practices that would become routine. Lastly, conditionality meant that the IMF would cater almost entirely to developing countries, as countries with advanced economies could secure private investors with no conditions. Developing countries, by contrast, tended to feature persistent balance of payments crises, high inflation and intricate capital controls that repelled private capital. By the 1960s, the IMF was doing less than 10% of its lending with countries with advanced economies, and from the 1980s to the 2008 financial crisis, no wealthy industrialized country sought an IMF lending agreement (Chorev and Babb 2009). During this period, the IMF exclusively catered its services to the developing world, although this had not been the original intent of the institution.

In August 1971, the United States effectively terminated the Bretton Woods system of fixed 203px-richard_m-_nixon2c_ca-_1935_-_1982_-_nara_-_530679exchange rates in response to the worldwide economic stagnation that characterized the decade. This meant the IMF was no longer responsible for maintaining the par value system, removing one of the reasons that it had been brought into existence. In response, the IMF added greater emphasis toward its lending and conditionality operations, deepening its ties to private banks. By the end of the 1970s, lending agreements bound borrowing countries to paying off their private creditors and set limits on the amount of additional external debt they could take on. These new conditions, combined with the overall moribund state of the global economy, helped to usher in a major debt crisis in the developing world in the early 1980s (Polak 1991). This event would become the first instance of the IMF acting as a true crisis manager and would also result in the next significant institutional change that the organization would be subjected to.

As the developing world debt crisis progressed, the IMF became the principal director of claims on the part of private banks, negotiating on their behalf with the developing 182px-jamesbakercountries that had borrowed from them. In so doing, the IMF found itself acting not just as the caretaker of its own resources but also as the gatekeeper to privately held resources too. Additionally, in 1985 the U.S. Treasury Secretary James Baker launched the “Baker Plan,” which dramatically altered international finance institutions like the IMF so that access to resources became contingent on agreeing to neoliberal policy reforms aimed at privatizing public enterprises, the removal of capital controls, and steps toward attracting and maintaining foreign investment (Chorev and Babb 2009). This was the start of “structural reforms” in IMF conditions that surpassed the short-term macroeconomic changes of past decades; borrowing countries were now expected to change their economies to abide by a policy paradigm based on neoliberal economics.

In the meantime, the decline of the post-war Keynesianism in the economics field also played an important role in the internal processes of the IMF. Since its beginnings, the IMF has recruited economists from Anglo-American institutions, and as such, developments within the economist profession led to a “battle of ideas” within the IMF as well. Throughout the 1970s, there emerged internal debates about whether controls on capital were ideal or if removing the fetters from capital mobility would be a better tactic. By the 1980s, neoliberalism had replaced Keynesianism as the dominant economic ideology of the Western world, and the major decision-makers in the IMF had also come to embrace the norm of capital freedom (Chwieroth 2008). Internally as well as externally, the IMF evolved so as to take on the mantle of debt enforcer and free market reformer in addition to a promoter and sponsor of fiscal austerity measures.

I argue that through the 1970s and the 1980s the IMF underwent a layering change according to the Mahoney and Thelen framework. Due to the outer structural constraint now surrounding the IMF and limiting the avenues of change that were possible, the U.S. and its allies (but the U.S. especially) were in a position to reject any changes to the IMF mission that would set it against the conditionality status quo the U.S. had helped orchestrate. Internally, the IMF staff no longer had the high discretion in regards to institutional rules it had once enjoyed, shackled as it were to the setting of targets, limits and standards for borrowing countries to follow. The institutional environment of the IMF, then, was simply not conducive to renovations of the rules already in place. The window for new rules to be applied, however, was open, and there was an alignment in this period both in what the U.S. wanted the IMF to do in reaction to the developing world’s debt crisis and the ideological shift taking place among economists.

This alignment is essential to note as it overturns the theoretical position that the IMF was forcefully “pushed” into adding structural reforms to its conditions. This was not an overnight sea change in which the IMF suddenly took up the banner of neoliberalism, be it because of U.S. intimidation or through a sudden epiphany. Rather, it was a combination of pressure from outside and the neoliberal revolution that had been building through the 1970s and that reached a crescendo in the 1980s in politics as well as economics. To be sure, there had been an “old guard” within the IMF that had sought to preserve the original Articles of Agreement and had actively resisted the layering of a neoliberal agenda onto the institution (Babb and Buira 2005). A particularly thorny issue had been the neoliberal proposal to make the stripping of capital controls a part of structural adjustment packages given that the Articles of Agreement clearly advised the use of such controls by governments to stultify speculative capital flows into and out of countries (Boughton 1997). It cannot therefore be credibly claimed that the IMF staff had no part in the turn toward neoliberalism that characterized the IMF in this era, nor can it also be argued that this was an abrupt change brought on by a nebulous neoliberal conspiracy.

The 1990s saw a continuation of this trend. The landmark event of this decade in reference to the IMF was the 1997 Asian financial crisis, in which foreign capital flowed into an array 320px-jakarta_riot_14_may_1998of so-called Asian tigers – Thailand, Indonesia, South Korea, Malaysia, the Philippines – and then just as quickly absconded. As it had during the 1980s debt crisis, the U.S. directed the IMF to intervene, but as these countries had obeyed the neoliberal formulas for sustained economic performance, this time conditions were focused on “governance reforms.” Nepotism, corruption and “crony capitalism” were blamed for the crisis. Instead of another institutional change, this purely represented another degree of layering as the IMF became even more involved in generating deep, long-lasting changes in national economic structures, departing even further from the more fleeting, temporary conditions of previous arrangements (Kapur and Webb 2000). Unfortunately for the IMF, this persistent layering meant that soon the institution would be sunk by its seemingly ever-increasing license to directly add the ingredients of growth.

The 1980s debt crisis and the 1997 Asian financial crisis were soon followed by the 1998 Russian ruble crisis and the 1999 Argentine economic crisis. By the turn of the 21st century, countries seeking arrangements with the IMFs started to seriously question if the politically detrimental and social fabric-straining structural reforms it promoted really did lead to the promised long-term economic growth – or to boom and bust. The so-called “Washington Consensus,” the term applied to the neoliberal model endorsed by the U.S. in this period, seemed to be being disconfirmed around the world (Stiglitz 2008). Exasperated with the intractable and arduous lender that the IMF had become, a growing number of developing countries began to wash their hands of involvement with the organization in the 2000s. These countries, primarily of middle-income status in the political economy, took up their reserves and bilateral credit as alternatives to dependency on institutions like the IMF and paid off any outstanding loans they had remaining. The level of its credit left unpaid fell so low that the IMF had to sell some of its gold reserves in 2012, and then invest the proceeds to support its substantial operating costs (T. Jones 2012). Reviews were also undertaken to assess whether the conditions attached to loans had become overly broad and needlessly harsh, and while initial reports suggested that this had been the case and recommended more parsimonious approaches to lending practices, this did not lead to any actual changes in the use of these conditions. Among the IMF member countries, opinion remained divided, with upper-income countries tending to support further use of the structural reforms while middle- and lower-income countries demanded reform. The IMF staff, for their part, took advantage of this disagreement to preserve the degree of conditionality it felt was necessary (Martin 2006). These factors led the IMF into a state of stagnation as it risked irrelevance in an age of relative stability and hostility from regular borrowers, scholars and the media. At a time when the IMF most needed to change, the powerful veto players that made up the outer structural constraint ensured that no such change would be forthcoming.

With the onset of the 2008 financial crisis, however, the IMF received a much-need shot in the arm that brought it once more to the fore on the global stage. While the institution had failed to predict the crisis, having kept its surveillance on vulnerabilities in emerging countries (the “weak links” of international finance), it rapidly resumed its position as a crisis manager and “lender of last resort” (Joyce 2013). It quickly deployed large amounts of credit to European nations affected by the fallout of the “Great Recession” and when the 2010 Eurozone crisis followed soon thereafter, Ireland, Portugal and Greece found 392px-long-term_interest_rates_28eurozone29themselves borrowing funds from the IMF (with Spain currently attempting to avoid the same by slashing spending). Although the momentous amount of credit offered in these cases might be justified on the grounds of the capital flow reversals that would be caused if these countries were allowed to go bankrupt, it is hard to dispute that the IMF showed favorability in the speed and size of the loans it was prepared to offer those nations that could argued to be some of its historical benefactors. Indeed, some observers were quick to point out these facts in the wake of the crises and refer to the IMF once more as the “handmaiden of advanced economies” (C. Jones 2012). Yet it soon became plain that, again, the IMF would be more than just a plaything for its powerful shareholders.

In a series of very public positions taken since the most recent crises, the IMF staff has made it clear that it questions the neoliberal orthodoxy it once so vigorously championed. In 2010, it admitted that capital controls had sheltered some countries from financial weakness and admitted that the use of such controls in certain conditions was advisable, a “stunning reversal” from decades of supporting unregulated capital flows (Rodrik 2010). Even more recently, the director of the IMF, Christine Lagarde, has come to censure the 206px-lagarde2c_christine_28official_portrait_201129_28cropped29United Kingdom for its severe deficit reduction strategy (a strategy she had once supported) and, in April 2013, she lambasted the U.S. for “abrupt” budget cuts that would “lower the U.S. economy’s growth rate” (Sterling 2013). This led to the IMF, once considered the West’s caretaker of choice for financial implosions, being raked across the coals in the financial press of the industrialized nations for its “dangerous” deviation from the pieties of neoliberal dogma. The old “Washington Consensus” model had given way to a new epoch of “Washington Confusion.”

I argue that these last several years find the IMF going through a third institutional change, this time characterized by drift. The outer structural constraint established by the institution’s most influential shareholders remains in place, so just as during the layering era, the U.S. and its allies stand ready to strike down any drastic divergence that threatens their interests. Indeed, in practice the IMF has acted with partial generosity toward the Western nations it has had to rescue recently, without the profound, durable structural reforms developing nations have had to endure. In thought and words, however, the IMF staff has noticeably departed from towing the line in accordance with what its mightiest shareholders want to hear. This is no doubt because the internal staff cannot ignore how the “Washington Consensus” failed to live up to its assurances and that the experiments the IMF had been so involved in around the world did not go according to plan. By no means is the IMF stepping away from neoliberal economics entirely; its economists are, however, engaged in the process of “adaptation,” where the ends they were trained to work toward remain the same but the means they believe will get them there need to be modified. After all, it is atypical for people in a profession to abandon a worldview they have been indoctrinated to accept, even when it is shown repeatedly to be wrong (Chwieroth 2008). As scholars, this gravitation toward revision in the face of incorrect predictions puts them at odds with politicians, who for reasons both ideological and practical, cannot afford to make turnarounds on policy the way the unelected technocrats of the IMF can and do. The IMF’s imperfect record and this “adaptation” tendency among the staff has meant growing discretion on the part of staff members, and this combined with the strong veto power of shareholders made this drift toward criticizing rather than cheerleading neoliberal austerity possible.

What is next for the IMF? It does not seem likely that the U.S.-supported outer structural constraint that has characterized the institution since the will dissipate anytime soon. Despite heeding clamor for reforms to its quota system and distribution of vote shares, the IMF remains lopsided in favor of advanced economies. After the most recent round of reforms, the G7 countries (the U.S., U.K., France, Germany, Italy, Canada and Japan) still make up 43% of the voting shares in the IMF, with 17% belonging to the United States alone. Developing middle-income countries, by contrast, only make up 34% of the voting shares (IMF 2012). While a coalition of these countries, the BRICS (comprised of Brazil, Russia, India, China and South Africa), has advertised itself as something of a challenger to Western hegemony over institutions like the IMF, the failure of the BRICS to put aside national interests and coalesce around a joint candidate in 2011 to replace outgoing IMF director Dominique Strauss-Kahn (Laïdi 2012), for example, suggests that pinning hopes on a BRICS-led repositioning of the traditional world finance organizations may be somewhat dim (although the BRICS did set up their own development bank in April 2013, although whether it will end up truly challenging the IMF remains to be seen). For the time being, it seems like that the U.S. and the other leading shareholders at the IMF – and the strong veto power they wield – are not going anywhere.

If there is hope for change, it lies with the IMF staff, which continues to retain a fair amount of discretion in how they construe and act on their present directive as crisis manager extraordinaire. If they are to be change agents once more, however, they must not merely pursue drift in the form of further adaption and navel-gazing examinations of their policies and practices. Change in this very limited form produces the war of words one sees in blogs and news articles, but other than conferring a degree of legitimacy on countries that have, for example, used capital controls to a limited extent in the past, there is not much potential for change there. IMF decision-makers can and should use their positions to push for quicker, more intensive reforms to the IMF power structure so as to give greater voice to developing countries and thus enfeeble the outer structural constraint that has been such a check on possibilities for change. Doing so could likely lead to the IMF becoming not just relevant to the interests of the West but also becoming once more regarded as a useful international institution to interact with by developing countries that have, as of late, made it a rule to spurn IMF involvement.

As we have seen, the Mahoney and Thelen approach to gradual institutional change sheds important light on the historical progress of the IMF and its route from the Bretton Woods Conference to the modern day. As a multidimensional model that considers both actors operating within as well as setting limits for an institution, the framework reveals that the IMF is neither a simple hostage to its prime patrons or just another bloated bureaucracy gone out of control. Looking at its history through this lens, it is evident that the IMF has been defined by the interplay between shareholders and staff, the financial interests of the former and the intellectual evolution of the latter. Though these factors have changed at a slow pace through the decades, the impact they have had on the IMF and the progression of its mission and powers has been considerable. Hopefully this paper has shown that there is high value in using this approach.

Still, there are a number of issues that should give us pause. First, the Mahoney and Thelen framework may seem overly robust due to case selection. As Mahoney and Thelen stress the importance of veto players and internal debate and discussion, it fits nicely with a study of the IMF precisely because its veto players (shareholders) and internal decision-makers (IMF staff) are so well-defined. If applied to cases where these actors and their roles are less spelled out, it is probable that the framework may not be as useful. Second, it is clear from the above analysis that ideas are a vital element in institutional change, and this is missing from the framework. It is likely no coincidence that the 1970s and 1980s saw neoliberalism surge in the realm of economics as well as political platforms, begging the question of why this happened and whose interests did it served. While the “level of discretion” aspect of the Mahoney and Thelen model leaves room for exploration of internal debates, it does not really equip us with how to investigate how such debates shaped, bounded and ultimately decided. This is unfortunate, considering how instrumental neoliberalism as an ideology was in both driving one of the change periods of the IMF as well as posing a status quo barrier it is in the process of overcoming.

The IMF is more complex than the popular imagination often gives it credit for. It is easy to dismiss it as a cog in a global machine, just another apparatus by which advanced nations control developing ones. This monolithic view obscures the intense negotiation going on inside the institution as well as the emergence and variations in its outer limits. In its history, the IMF has seen major conversion from lending without real limits to the creation of conditionality, the layering of a neoliberal agenda and penetrating powers of structural reform, and currently finds itself drifting away from and even into opposition with its historical supporters and resource suppliers. As displacement for the IMF does not seem to be approaching on the horizon, it seems more decades lie ahead for this eminent, somewhat notorious international institution.

Works Cited

Aoki, Masahiko. 2001. Toward a Comparative Institutional Analysis. Cambridge, MA: MIT Press.

Arthur, W. Brian. 1994. Increasing Returns and Path Dependence in the Economy. Ann Arbor, MI: University of Michigan Press.

Babb, Sarah. 2007. “Embeddedness, Inflation, and International Regimes: The IMF in the Early Postwar Period.” American Journal of Sociology 113(1): 128-164.

Babb, Sarah and Ariel Buira. 2005. “Mission Creep, Mission Push and Discretion: The Case of IMF Conditionality.” In Ariel Buira (ed.), The IMF and the World Bank at Sixty, London: Anthem Press.

Boughton, James. 1997. “From Suez to Tequila: The IMF as Crisis Manager.” IMF Working Paper 97/70.

Boughton, James. 2002. “Why White, Not Keynes? Inventing the Postwar International Monetary System.” IMF Working Paper 02/52.

Campbell, John, J. Rogers Hollingsworth and Leon Lindberg, eds. 1991. Governance of the American Economy. New York: Cambridge University Press.

Chorev, Nitsan and Sarah Babb. 2009. “The Crisis of Neoliberalism and the Future of International Institutions: A Comparison of the IMF and the WTO.” Theory and Society 38(5): 459-484.

Chwieroth, Jeffrey. 2008. “Normative Change from Within: The International Monetary Fund’s Approach to Capital Account Liberalization.” International Studies Quarterly 52: 129-158.

Coase, Ronald H. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3: 1-44.

De Vries, Margaret. 1987. Balance of Payments Adjustment, 1945 to 1986: The IMF Experience. London: Trade Policy Centre.

Dell, Sidney. 1981. On Being Grandmotherly: The Evolution of IMF Conditionality. Princeton: Princeton University Press.

DiMaggio, Paul and Walter Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review 48: 147-160.

Eichengreen, Barry. 1996. Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press.

Gourevitch, Peter. 1986. Politics in Hard Times: Comparative Responses to International Economic Crises. Ithaca, NY: Cornell University Press.

Granovetter, Mark. 1985. “Economic Action and Social Structure: The Problem of Embeddedness.” American Journal of Sociology 91: 485-510.

IMF. 2012. “Quota and Voting Shares Before and After Implementation of Reforms Agreed in 2008 and 2010.” July 25, 2012. Available at http://www.imf.org/external/np/sec/pr/2011/pdfs/quota_tbl.pdf (Accessed May 9, 2013).

James, Harold. 1996. International Monetary Cooperation Since Bretton Woods. New York: Oxford University Press.

Jones, Claire. 2012. “IMF Focus on Europe Irks Emerging Markets.” The Financial Times, October 14, 2012. Available at http://www.ft.com/intl/cms/s/0/a17f7c32-15f0-11e2-b6f1-00144feabdc0.html#axzz2SrAZOqXz (Accessed May 9, 2013).

Jones, Tim. 2012. “IMF Gold Windfall Helps Poor Countries Now But Won’t Break Cycle of Debt.” The Guardian, October 17, 2012. Available at http://www.guardian.co.uk/global-development/poverty-matters/2012/oct/17/imf-gold-windfall-poor-countries-debt (Accessed May 9, 2013).

Joyce, Joseph. 2013. The IMF and Global Financial Crises: Phoenix Rising? New York: Cambridge University Press.

Kapur, Devesh and Richard Webb. 2000. “Governance-Related Conditionalities of the International Finance Institutions.” G-24 Discussion Paper 6.

Katzenstein, Peter, ed. 1978. Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States. Madison, WI: University of Wisconsin Press.

Klein, Naomi. 2007. The Shock Doctrine: The Rise of Disaster Capitalism. New York: Metropolitan Books.

Knight, Jack. 1992. Institutions and Social Conflict. New York: Cambridge University Press.

Laïdi, Zaki. 2012. “BRICS: Sovereignty Power and Weakness.” International Politics 49: 614-632.

Mahoney, James and Kathleen Thelen. 2010. “A Gradual Theory of Institutional Change.” In Explaining Institutional Change: Ambiguity, Agency, and Power, eds. James Mahoney and Kathleen Thelen. Cambridge: Cambridge University Press.

Martin, Lisa. 2006. “Distribution, Information, and Delegation to International Organizations: The Case of IMF Conditionality.” In Delegation and Agency in International Organizations, eds. Darren Hawkins, David Lake, Daniel Nielson and Michael Tierney. Cambridge and New York: Cambridge University Press.

Mikesell, Raymond. 1994. The Bretton Woods Debates: A Memoir. Princeton: International Finance Section, Department of Economics, Princeton University.

Nelson, Richard. 1994. “Evolutionary Theorizing About Economic Change.” In The Handbook of Economic Sociology, eds. Neil Smelser and Richard Swedberg. Princeton: Princeton University Press.

North, Douglass. 1990. Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press.

Polak, Jacques. 1991. The Changing Nature of IMF Conditionality. Princeton: International Finance Section, Department of Economics, Princeton University.

Poulantzas, Nicos. 1974. Political Power and Social Class. London: New Left Books.

Rodrik, Dani. 2010. “The End of an Era in Finance.” Project Syndicate, March 11, 2010. Available at http://www.project-syndicate.org/commentary/the-end-of-an-era-in-finance (Accessed May 9, 2013).

Roe, Mark. 2003. Political Determinants of Corporate Governance. New York: Oxford University Press.

Rostow, W.W. 1960. The Stages of Economic Growth: A Non-Communist Manifesto. New York: Cambridge University Press.

Skidelsky, Robert. 2010. Keynes: The Return of the Master. New York: PublicAffairs.

Sterling, Toby. 2013. “IMF’s Lagarde Criticizes US Spending Cuts.” The Associated Press, May 7, 2013. Available at http://abcnews.go.com/Business/wireStory/imfs-lagarde-interrupted-student-protest-19123290#.UYxwDZVRnzI (Accessed May 9, 2013).

Stiglitz, Joseph. 2002. Globalization and Its Discontents. New York: W.W. Norton.

Stiglitz, Joseph. 2008. “Is There a Post-Washington Consensus Consensus?” in Narcis Serra and Joseph Stiglitz (eds.), The Washington Consensus Reconsidered: Towards a New Global Governance, New York: Oxford University Press.

Stone, Randall. 2004. “The Political Economy of IMF Lending in Africa.” American Political Science Review 98(4): 577-591.

Thelen, Kathleen. 1999. “Historical Institutionalism in Comparative Politics.” Annual Review of Political Science 2: 369-404.

Thelen, Kathleen and Sven Steinmo. 1992. “Historical Institutionalism in Comparative Politics.” In Structural Politics: Historical Institutionalism in Comparative Analysis, eds. Sven Steinmo, Kathleen Thelen and Frank Longstreth. New York: Cambridge University Press.

Vaubel, Roland. 1994. “The Political Economy of the International Monetary Fund: A Public Choice Analysis.” In Doug Bandow and Ian Vasquez (eds.), Perpetuating Poverty: The World Bank, the IMF, and the Developing World. Washington, DC: Cato Institute.

Vreeland, James. 2003. The IMF and Economic Development. New York: Cambridge University Press.

Williamson, Oliver. 1985. The Economic Institutions of Capitalism. New York: Free Press.

Woods, Ngaire. 2006. The Globalizers: The IMF, the World Bank and Their Borrowers. Ithaca, NY: Cornell University Press.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s