Money Talks: Supplementary Financiers and International Monetary Fund Conditionality (2003) PDF

Money Talks: Supplementary Financiers and International Monetary Fund Conditionality Author(s): Erica R. Gould Source: International Organization , Summer, 2003, Vol. 57, No. 3 (Summer, 2003), pp. 551-586 Published by: Cambridge University Press on behalf of the International Organization Foundation Stable URL: https://www.jstor.org/stable/3594837 JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms , The MIT Press , Cambridge University Press and University of Wisconsin Press are collaborating with JSTOR to digitize, preserve and extend access to International Organization This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms Money Talks: Supplementary Financiers and International Monetary Fund Conditionality Erica R. Gould One reason why the program was so severe... perhaps lay in the inability o the Fund to find enough resources on its own to finance the entire adjust- ment, including the payment of arrears and other debt. Thus, the Fund wa also faced with trying to design stand-by programs that would attract addi tional sources of finance that would enhance such programs' chances of suc cess. -British Alternative Executive Director Pendarell Kent at IMF's Executive Board meeting discussing Ghana's 1979 stand-by arrangement.' Introduction The International Monetary Fund (IMF or Fund) was originally created to mon tor and maintain the Bretton Woods par value exchange-rate system. Accordin this original design, the IMF would loan resources on a revolving basis fo narrow purpose of helping members offset their short-term payments imbal and thus defend their exchange rates. In 1952, the Fund first attached condit to its loans, and since then Fund conditionality has changed dramatically. The n ber of conditions that a borrowing member must meet in order to receive tim installments of a Fund loan has increased. The types of conditions have evolve from broad macroeconomic targets in the 1950s and 1960s, to the "microc Many thanks to Judy Goldstein, Steve Krasner, and Tom Willett for reading multiple versions o article and providing incisive, constructive comments each time. I am also grateful to David An Timothy Bei, Stephen Haber, Peter Henry, Simon Jackman, Jeff Legro, Lisa Martin, John Owen, Pauly, Herman Schwartz, Jim Vreeland, and two external reviewers for helpful comments on drafts. Errors are entirely my own. Many thanks also to the staff of the International Monetary archives who generously assisted me in my research. I also gratefully acknowledge support fro University of Virginia and the following Stanford University sources: the Graduate School of ness, the Graduate Research Opportunity program, the Admiral and Mrs. John E. Lee Fund o Social Science History Institute, and the O'Bie Schultz Fellowship in International Studies from Institute for International Studies. 1. IMF Executive Board meeting 79/7, 10 January 1979, 8. International Organization 57, Summer 2003, pp. 551-586 @ 2003 by The IO Foundation. DOI: 10.1017/S0020818303573039 This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 552 International Organization tionality" today, which specifies conditions pertaining to policy implementation in great detail. The Fund's loans are now generally larger, longer-term, and designed to tackle new problems. Today the Fund offers advice and sets conditions not only on policies from areas of long-standing focus such as exchange rates and credit expansion, but also on new areas of concentration, including governance and en- terprise reform. These changes in the terms of Fund conditional loan agreements influence the policies and the political and economic trajectories of numerous bor- rowing states. In the 2000/2001 fiscal year alone, eighty countries participated in Fund conditional loan agreements.2 In the wake of the Asian financial crisis, IMF "conditionality"-or the terms of these conditional loan programs-has again become the subject of international scrutiny. Critics initially focused on the conditional loan programs for South Ko- rea and Indonesia, arguing that these programs required the two countries to meet too many-and perhaps the wrong-conditions in return for disbursements of the Fund loan. Over time, the critics diversified, and the scope of their criticism broad- ened. Now, everyone from economists to activists, from politicians to the Fund's staff, and from the left and the right seems to agree that Fund conditionality has expanded beyond the Fund's original mandate and that, for various reasons, this expansion is bad.3 These critics make strange bedfellows. Their overwhelming con- sensus about the inappropriateness of Fund conditionality raises the question: Why are Fund conditional loan arrangements designed this way? Which factors, or ac- tors, influence Fund conditionality and have contributed to its change over time? In this article, I offer an alternative to the conventional approaches that point to powerful states or bureaucratic interests alone in explaining international organi- zatioqal activity, including Fund conditionality. I argue that Fund conditionality is influenced by the private and official financiers who supplement the Fund's loan to borrowers. These supplementary financiers are able to influence the terms of Fund conditional loan arrangements because their financing is necessary for the success of Fund-designed programs. Thus they appeal to the interests of the Fund staff and management who actually design these programs. Supplementary finan- ciers may be creditor states, private financial institutions, or multilateral organiza- tions, but this article limits its scope to the influence of one type of supplementary financier on IMF conditionality: private financial institutions (PFIs). This article will proceed as follows. In the first section, I introduce the general supplementary financier argument in more detail, including the logic of why, how, and when supplementary financiers are able to exercise leverage over the Fund. I give special attention to PFIs, because their influence on Fund conditionality pro- grams is the focus of the two empirical sections. Almost exclusively, the evidence used to test if, and illustrate how, supplementary financiers are able to influence Fund conditionality arrangements was gathered directly from the Fund's archives in Wash- 2. IMF 2001, 110-13. 3. Willett 2001. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 553 ington, D.C. Two types of Fund archival evidence are employed. The second sec- tion uses the Conditionality Data Set, an original data set of 249 conditional loan arrangements from 1952 to 1995 coded according to their terms. This section pro- vides descriptive statistics and statistical tests, which suggest that PFIs have influ- enced the terms of Fund conditional loan arrangements in ways the supplementary financier argument predicts. The third section discusses the mechanisms of PFI in- fluence in more depth, employing memos and documents from the individual country files and program files within the Fund archives. In this section, I analyze two cases of Fund conditional loan arrangements. Finally, the article concludes with a discus- sion of the implications of this argument and these findings, both for the debates on Fund conditionality and for current understandings of international organizations. Theory I argue that IMF conditionality is influenced by supplementary financiers. The Fund often provides only a fraction of the amount of money that a country needs to balance its payments and to implement the Fund's recommended program. Sup- plementary financiers provide financing that supplements the Fund's loans to bor- rowing member states. The Fund relies on this supplementary, external financing to ensure the success of its programs. This gives the supplementary financiers some leverage over the design of Fund programs. The financiers are able to make de- mands on the Fund, stipulating which conditions must be included in a particular Fund program for their financing to be forthcoming. Supplementary financiers include three types of actors: creditor states, PFIs, and multilateral organizations. Each type has different reasons for providing financing to borrowing states, and therefore different preferences about how Fund programs should be designed. Creditor states, PFIs, and multilateral organizations thus try to influence the terms of Fund conditionality in systematically different ways. Many of the changes over the years in Fund conditionality and cross-sectional variation between Fund programs have been caused by the shifting mix of supplementary financiers. In 1952, when Fund conditionality began, nearly all of the supplemen- tary financing came from creditor states, mainly from the United States. Now, IMF borrowers receive supplementary financing from a diverse set of creditor states, PFIs, and multilateral organizations. This shift in supplementary financing-for instance, as PFIs came to play more of a role in the provision of supplementary financing through commercial bank lending from the late 1960s through early 1980s, through loan restructurings in the 1980s, and through the bond markets in the 1990s--has led to new demands on the Fund, and has subsequently contributed to changes in the design of Fund conditionality agreements.4 4. This article concerns some of the changes driven by PFIs and the PFIs' influence on the Fund. Elsewhere, I have discussed more comprehensively how the changes in supplementary financing have contributed to changes in Fund conditionality. See Gould 2001. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 554 International Organization Theoretical Antecedents I build my argument on the central insights of two strands of liberal theory: first, that nonstate actors may influence international outcomes, and second, that inter- national institutions (IIs) and international organizations (IOs) help facilitate mu- tually beneficial exchange between international actors." In other words, I am trying to harness the powerful insights of the neoliberal institutionalist turn, without ac- cepting its state-centric ontology. This section focuses on the neoliberal institu- tionalist (hereafter neoliberal) insights and the reasons for broadening our analysis of the Fund to include nonstate actors. The trademark neoliberal insight about IIs and IOs, including the IMF, is that they are Pareto-improving. Absent cooperation, state interaction often results in Pareto-suboptimal outcome. IIs and IOs help states overcome barriers to cooper ation and reach mutually beneficial outcomes by restructuring their incentives.6 IIs and IOs, such as the Fund, thereby serve the collective interests of states. For example, George von Furstenberg has argued that the Fund promotes efficien exchange-namely financing-between debtor and creditor states and thus helps them achieve a more efficient outcome.7 For neoliberals, the key actors are states, and therefore IIs and IOs help facil- itate exchange between states. Although this simplifying assumption may be an- alytically useful and even accurate in the case of some IIs and IOs, it is misleading in the case of the IMF. The Fund's main activities-promoting exchange-rate stability, helping countries resolve payments imbalances, and so on-are no longer exclusively the domain of states.8 For instance, creditor states are no longer the main source of balance-of-payments financing, and are therefore not the only actors that might benefit from the Fund's capacity to make borrowers' commitments more credible, monitor their policies, and provide signals about bor rower creditworthiness. Consequently, previous studies of the Fund have relaxed the state-as-actor assumption, for instance focusing on the Fund's role in promoting efficient exchange-again, financing-between state and nonstate actors. Both Benjamin Cohen and Charles Lipson have argued that the Fund, in reaction to the changes in balance-of-payments financing in the 1970s and 1980s, evolved from an orga- nization focused on providing financing from its own coffers or facilitating the flow from creditor states, to one focused on facilitating the flow of balance-of- payments financing from private sources.9 Cohen and Lipson separately identified 5. For the first, see Keohane and Nye 1972 and 1977. For the second, see Keohane 1984. Scholar- ship on the influence of transnational actors has exploded since the end of the Cold War; see Risse 2002. 6. Keohane 1984, 91 and chap. 6. 7. Von Furstenberg 1987, 122. 8. For the Fund's purposes as laid out in the Articles of Agreement, see Horsefield 1969, 188-89. 9. See Cohen 1983; and Lipson 1981. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 555 an important relationship between the IMF, borrowing states, and financiers- both official and private. The argument presented here draws heavily on their insights and extends their implications. It not only acknowledges the role of the Fund in facilitating supple- mentary financing to borrowers, but also the supplementary financiers' leverage over the Fund and their influence on its activities. The Fund is not simply a neu- tral arbiter, stamping programs it deems acceptable, monitoring country adher- ence to these programs, and thereby helping financiers and borrowers overcome their credibility problem. The Fund itself has a vested interest in the success of its programs, and as a result it is susceptible to influence from the financiers. Why Supplementary Financiers Influence the Fund Supplementary financiers and the IMF are locked in a mutually dependent rela- tionship. The Fund depends on supplementary financiers to help ensure the suc- cess of its loan programs and its future bargaining leverage with borrowers. In turn, supplementary financiers depend on the Fund to help facilitate their financ- ing transactions and make borrowers' commitments more credible. As a result, supplementary financiers are both able and willing to influence the Fund's activities. First consider why supplementary financiers are able to influence the IMF. The Fund is an actor with interests, and supplementary financiers help the Fund max- imize those interests. The Fund's international staff of economists were mostly trained at a few select U.S. and Western European universities.10 Despite their diverse national backgrounds, new staff and management join the Fund with re- markably similar shared assumptions and principles influenced by their education. Both the Fund's staff and its management have been trained as economists and want to be successful economists, influencing the direction of the international economy at large and the economies of individual borrowers by applying theoret- ical principles." The failure of an implemented Fund program damages not only the reputations of the individual staff members who designed it, but also the orga- nization's reputation and the credibility of the principles that have been applied. Therefore, individually and collectively, the staff want Fund programs to succeed in measurably improving the economies in which they intervene.12 Supplemen- tary financiers are able to exercise leverage over the Fund and its activities be- cause their financing affects both the success of Fund programs and the Fund's future bargaining leverage with borrowers. Supplementary financing is often crucial for the short-run success of individual Fund programs, because the Fund provides only a fraction of the amount of money necessary for a borrowing country to balance its payments and implement the Fund- 10. Clark 1996, 182, cited in Kapur 2001, 33. 11. Interestingly, the managing director has not always been credentialed. 12. IMF 2000, 259. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 556 International Organization designed program successfully.'3 These financing gaps were well-publicized dur- ing the 1980s debt crisis, as were the Fund's efforts to line up supplementary financing. Gaps between borrower need and Fund loans have been commonplace throughout the history of Fund conditionality. For instance, between 1954 and 1960, in 77 percent of the cases of Fund stabilization programs with Latin Amer- ican countries, 50 percent or more of the country's external financing came from supplementary financiers, not from the Fund.14 In 64 percent of the cases from the 1952-95 Conditionality Data Set, the country's current account deficit was less than the amount of the entire Fund loan agreement, indicating a likely fi- nancing gap.'5 This comparison is admittedly flawed, not least because it under- estimates the frequency of the financing gap. Fund loans are generally not delivered in full when the agreement is signed, but instead in segments over several months or years. For the 36 percent whose Fund loan was larger than their current ac- count deficit that year, the Fund loan was delivered, on average, in five segments over nineteen months. Because the loan was not delivered in full the first year, there is a strong chance that, even for these 36 percent, the country's financing needs exceeded the Fund loan disbursements. Thus in most, if not all, cases, the Fund provided only a fraction of the financing needed to balance the country's payments that year. Consequently, Fund programs are designed with an assumption of a certain amount of supplementary financing. Countries come to the Fund when they face payments imbalances. The Fund programs are designed to bring countries back into balance through a combination of adjustment, demand contraction measures that are intended to reduce the existing current account deficit, and financing of the remaining deficits with Fund loans and supplementary financing.'6 Supplemen- tary financing has been factored into these programs since the 1950s, when Fund conditionality began. For example, Venezuela's 1960 stand-by arrangement stated that their deficit would be "covered" by loans from PFIs. The stand-by "proposed to finance this deficit by credits now being negotiated with foreign commercial banks." 17 Fund agreements not only stated that supplementary financing was be- ing sought and was necessary for the country to balance, but sometimes required a specific amount of supplementary financing as a condition of the agreement. An early, and at that time rare, example of this was Argentina's 1958 stand-by arrange- ment, which required Argentina "to request financial assistance from sources other 13. These financing gaps are both because of objective limits in the amount the Fund can lend to individual countries and a Fund philosophy that they should not provide all of the financing a country needs to balance its payments. The Fund's financing is supposed to "supplement" financing from pri- vate and official lenders. See Masson and Mussa 1995, 23. 14. Memo from Robicheck, 17 February 1960. 15. Current account data is from World Bank 2000. This is the percentage of cases in the condition- ality data set for which current account data was available. 16. The Fund also advises countries to implement supply-side measures. 17. IMF Executive Board, EBS/60/32, 29 March 1960. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 557 than the Fund" and to borrow from the Fund and those "other credit facilities" in a "proportion of 1 to at least 2."'18 In order for a country to balance its payments and implement the Fund's pro- gram, supplementary financing was almost always needed and expected. Fund pro grams explicitly mentioned supplementary financing, factored it in, and eve required borrowers to secure it as a condition of the program. Without the addi- tional financing, the countries would not have been able to balance their pay ments, and would have been forced to abandon Fund programs designed with an assumption of incoming supplementary financing.19 Supplementary financing is key not only to the short-run success of Fund pro- grams, but also to the Fund's future bargaining leverage with borrowers, and thu the perceived future success of Fund programs.20 Borrowing countries enter into Fund programs not only for Fund financing, but also for the supplementary financ ing that often accompanies it. Fund staffers have consistently articulated this poin For instance, Jorge Del Canto, then head of the Fund's Western Hemisphere divi- sion, emphasized how stand-by agreements should help borrowing countries se- cure supplementary financing. He wrote that: In some cases it is the establishment of confidence rather than the use of Fund resources that is the prime objective of a stand-by arrangement... [and that] the confidence... is registered directly through a flow of supporting assis- tance from other sources, the availability and volume of which is tied to ob- servance of conditions in the Fund stand-by arrangement.21 In Del Canto's words, borrowers often enter Fund programs for the "flow of sup- porting assistance from other sources," or supplementary financing. As a result, if a borrowing country signs a Fund agreement and the supplementary financing is not forthcoming, future borrowing member states may be less likely to agree to the Fund's conditions or even turn to the Fund at all. Without the inflow of sup- plementary financing, Fund programs may be a much less attractive prospect for many Fund borrowers. Supplementary financing impacts both the success of Fund programs and the Fund's future bargaining leverage with borrowers. As a result, the Fund has an incentive to help secure supplementary financing, particularly since many of the other factors that influence the success of its programs-including inter alia natural calamities, contraction of international demand for primary product ex- 18. IMF Executive Board, EBS/58/76, Supplement 2, 18 December 1958. This was a binding condition. 19. Capital inflow is both a stated goal of the Fund program and an internal measure of the success of Fund programs, which further compounds its reliance on supplementary financiers. See Schadler et al. 1995. 20. Lipson 1986, 232, makes a similar point. 21. Memo from Del Canto, 2 December 1963, 3. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 558 International Organization ports, and regional political instability-are outside of the Fund's control. The inflow of supplementary financing, on the other hand, is neither random nor automatic. Earlier scholarship argued that the inflow of supplementary financing was more or less automatic. According to the standard "catalytic effect" argument, a Fund loan program often serves as a "good housekeeping seal of approval," increasing the creditworthiness of debtor countries and provoking an automatic inflow of out- side financing.22 Recent empirical work has challenged that argument, demonstrat- ing that Fund programs have not been followed by an automatic inflow of private capital.23 The way the inflow of supplementary financing works is different from the spontaneous reaction to the signing of a Fund program that is suggested by the "catalytic effect" argument and disputed by recent empirical literature on cataly- sis. Instead, much of the supplementary financing, the so-called "catalytic" fi- nance, is explicitly negotiated and controlled.24 Supplementary financing almost always accompanies Fund programs.25 Sometimes it comes mainly from PFIs, other times from creditor states or other multilateral organizations. The Fund plays an integral role in securing these fresh funds and coordinating lenders to restructure existing debt.26 Supplementary financing packages are often negotiated concur- rently with Fund program negotiations. The Fund often acts as a mediator be- tween financier and borrower, and helps the borrower secure necessary financing. Supplementary financiers are not only able, but also willing to influence the terms of Fund conditionality agreements. These financiers often want to influence the content of the Fund's conditionality arrangements to increase the likelihood that the borrowing country will use its financing in ways the financier deems ap- propriate. Supplementary financiers and borrowers often face a credibility prob- lem. A supplementary financier wants to provide financing as long as it is used in certain ways (for example, invested rather than consumed), and the borrowing country often pledges to use the financing just as the financier prefers. However, the borrower's pledge may not be credible for two reasons. First, because of in- formational asymmetries, the supplementary financier may not know a borrower's "type" or their true preferences regarding the use of this financing (e.g., their will- ingness to invest rather than consume). The Fund program can serve as a signal of borrower creditworthiness and thereby help financiers and borrowers overcome this impediment to mutually beneficial financing. Scholars have argued that the Fund agreement serves as a signal-either the borrower's costly signal of its com- 22. See McCauley 1986; and Goreux 1989. See Marchesi and Thomas 1999 for a recent formaliza- tion of this argument where the Fund program signals country type. 23. For instance Edwards 2000; Bird and Rowlands 1997; and Faini et al. 1991. 24. See Einhorn 1979; Polak 1991, 58; and Schadler et al. 1995, 14. 25. Much of the empirical literature considers only private catalysis. Rowlands 2001 also includes official. 26. Lipson 1986. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 559 mitment to reform, or the Fund's costly signal of its assessment of borrower "type" based on its own expertise and access to private information.27 Second, and more importantly for this article, is the so-called time-consistency problem.28 Even if the borrower is earnest in pledging to use the financing as the financier prefers, the supplementary financier knows that the borrower's incen- tives may change once this financing is disbursed. The Fund can help financiers overcome this problem by influencing the borrower's ex post incentives through its conditionality agreements. Despite notoriously uneven compliance, IMF con- ditionality agreements include different mechanisms that shift states' incentives and allow them to make more credible commitments.29 First, IMF financing and supplementary financing-including loans from PFIs-are often tied to the coun- try meeting its binding conditions. The loans are often split into separate seg- ments, and each segment is conditioned on borrower compliance with certain conditions. Thus borrowers' "hands are tied," in that costs will be suffered ex post if they defect from the agreed policy program.30 Second, IMF conditionality pro- grams allow the Fund to monitor borrowing country policies in detail and to pub- licize transgressions, thereby 'reviving the reputation mechanism.' 31 The IMF, through its conditionality, facilitates cooperation between creditors and borrowers by vouching for a borrower's reputation and enabling it to more credibly commit to a particular course of action. The financiers often want to influence borrower incentives and the content of this Fund conditionality program to better serve their interests. In sum, supplementary financiers are both willing and able to exercise leverage over the design of Fund conditionality agreements. The Fund is vulnerable to sup- plementary financier influence since their financing is necessary for the short-run success and feasibility of Fund programs and for the Fund's future bargaining le- verage with borrowers, and is not automatic. Supplementary financiers want to influence Fund conditionality because they want to control how their financing is utilized, and Fund conditionality arrangements help them do that. What Kind of Influence? As previously discussed, there are three types of supplementary financiers: credi- tor states, PFIs, and multilateral organizations.32 This article focuses on PFIs, which 27. See Marchesi and Thomas 1999 for the first; Masson and Mussa 1995, 25, for the second. 28. See Sachs 1989, 259; Diwan and Rodrik 1992; Dhonte 1997; and Crawford 1987. 29. Rodrik 1995 argues that the Fund may be more likely to influence borrowers because of the advantage of being "less politicized." 30. See Fearon 1997; Kahler 1992, 111; North and Weingast 1989; and Root 1989. 31. Milgrom, North, and Weingast 1991, 808. 32. It is useful to distinguish between the three because each has a different interest in providing financing, and hence different preferences over the design of Fund conditionality programs. As a re- sult, states, PFIs, and multilateral organizations try to influence the Fund's activities in systematically different ways. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 560 International Organization are of particular interest because they lack the institutionalized mechanisms of influence that states and other multilateral organizations have at their disposal. Scholars often consider PFIs' interests to be subservient to, or subsumed by, state interests, rather than in competition with them.33 As a result, PFIs are a "least- likely" case, and provide a good test of the supplementary financier argument.34 PFIs provide financing to Fund borrowers. They extend loans to, and make in- vestments in, countries when they expect a positive return; and they want Fund programs to help ensure their profitable return.35 For most of the period in this study, the main PFI supplementary financiers were commercial banks, and they wanted Fund loan agreements to increase the probability that their loans would be paid back. This interest may manifest itself in different preferences regarding the terms of Fund agreements. The empirical section focuses on one element of the design of Fund programs that best isolates the influence of PFIs: a certain class of binding conditions, labeled "bank-friendly" conditions, which specify that the coun- try must pay back a commercial bank creditor as a condition of its Fund loan. While the focus of this article is on PFIs, the influence of creditor states is also considered, mainly because the realist and supplementary financier arguments have opposing predictions about the nature of that influence on conditionality agree- ments. The realist model, discussed further in the section on testing, predicts that powerful (creditor) states prefer more stringent agreements. According to the sup- plementary financier argument, creditor states provide financing for political ends. States are less concerned with being paid back than PFIs. Aid and bilateral loans are political, not financial, investments. Aid is often given to allies, and therefore, creditor states are often interested in preserving political stability.36 In practice, this means that states generally prefer Fund conditional loan arrangements to be relatively less stringent than do PFIs.37 While creditor states want borrowers to agree to certain conditions, they prefer Fund arrangements to allow borrowers to maintain some political room for maneuver. Different types of supplementary financiers-such as creditor states and PFIs- may try to influence Fund loan arrangements in systematically different ways. When 33. Wellons 1987. 34. See Eckstein 1975; and King, Keohane, and Verba 1994, 209-10. 35. For a concurrent perspective from someone who worked at the Fund, Citibank, and Fir Corporation, see Friedman 1983, 120-21. Although this profit motive may seem obvious, oth argued that PFIs' loans and investments reflect their country's political interests, rather tha motive. See Feis 1974; Krasner 1999; and Wellons 1987. 36. Scholars are mainly divided between those who view foreign aid as motivated by hum concerns (for example, Lumsdaine 1993) and those who view foreign aid as motivated by sta ical interests (for example, Schraeder, Hook, and Taylor 1998). The dominant approaches to standing states' foreign policy in international relations are interest-based and conceive of those as political, and I side with that interpretation. For example, Waltz 1986, 85; and Keohane pecially chaps. 5-6. 37. Or than other multilateral organizations for that matter. When states get involved in inf the terms of Fund conditionality arrangements, they also usually push for weaker condition the staff. This is a prediction of the argument and also borne out by evidence. See Finch 198 Gregorio et al. 1999. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 561 does this influence result in changes in Fund programs, and how much change can one observe? Supplementary financiers and the Fund are engaged in a bargaining relationship. The Fund is not entirely beholden to supplementary financiers. Fin- anciers do not simply communicate an ideal program design, and then the Fund falls in line with those preferences. When supplementary financiers influence Fund programs, the influence is often at the margins. Financiers try to add certain re- quirements that are particularly important to them, or remove other conditions that they find particularly onerous. Creditor states and multilateral organizations have legitimate mechanisms to co- ordinate their demands and influence the Fund. For instance, they can work through the Executive Board or joint Fund-Bank missions, respectively. As a result, their influence on Fund programs should be directly proportional to their relative con- tribution of supplementary financing. PFIs, by contrast, do not have legitimate, established mechanisms of influence. Officially, they are not supposed to influ- ence the content of Fund programs at all. As a result, PFIs' influence should not be directly proportional to their relative contribution of supplementary financing. In- stead, PFIs' influence hinges on their ability to generate a credible threat that sub- stantial financing will be lost if Fund activities do not conform to their preferences. Often, however, PFIs cannot credibly generate this threat for two related rea- sons. First, when there are multiple PFIs involved in negotiations with a potential Fund borrower, they face a collective-action problem. The PFIs may all benefit from a Fund conditionality agreement with "bank-friendly" conditions, but indi- vidually they may not want to commit to withhold financing if the bank-friendly condition is omitted and provide financing if the condition is included in the bor- rower's Fund agreement. These constraints and commitments are themselves costly. PFIs also may not want to engage in costly negotiations with the Fund, and they may not agree on how much financing should be provided or withheld if the con- ditions are included or omitted, respectively.38 PFIs will be able to overcome this collective-action problem when a single financier dominates the group or-more often-when they get organized.39 Previous scholars have studied when PFI orga- nization is more or less likely, and what forms it is likely to take. For instance, Charles Lipson has studied how and when private creditors organize themselves, for instance through syndicate lending and during debt rescheduling negotia- tions.40 For the purposes of this paper, PFI organization of some sort is necessary so that PFIs can coordinate their demands on the Fund and generate the threat in the first place. Second and relatedly, in order for this generated threat to be credible, the PFIs' ex post incentives must support enforcement of the threat. As North and Weingast have argued, "while parties may have strong incentives to strike a bargain, their 38. See Lipson 1985 on the different incentives of small and large banks. 39. Olson 1971. 40. Lipson 1981 and 1985; see also Aggarwal 1987. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 562 International Organization incentives after the fact are not always compatible with maintaining the agree- ment."41 Under certain circumstances, PFIs may prefer the Fund to include a bank- friendly condition in its agreement, but the inclusion or exclusion of this condition will not change the PFIs' incentives enough to induce them to provide or withhold the necessary supplementary financing, respectively. Given that PFIs are less likely to expend the energy to lobby the Fund in the first instance, I am more concerned with the second instance: when PFIs would be willing to provide supplementary financing even if the Fund agreement did not include a bank-friendly condition. The threat to withhold financing must be ex post incentive-compatible in order to be credible. Unless PFIs are disinterested enough to walk away from a potential financing opportunity, their threat will not be credible, and the Fund has no incen- tive to change the terms of its agreement. In order to operationalize PFI influence, I use a variable that captures both the idea of PFI organization and the willingness to withhold supplementary financing: whether or not PFIs are engaged in private debt renegotiations around the time of the Fund loan negotiations. Further discus- sion of why this is an appropriate proxy, and of its potential biases, is provided in the section on testing that follows. In short, the supplementary financier suggests that PFIs will be able to influ- ence the terms of Fund conditionality arrangements when they can generate a cred- ible threat to withhold necessary supplementary financing if their demands are not met. The PFIs' threat will only be credible under certain conditions: if they are organized and if the threat is ex post incentive-compatible. The supplementary financier argument thus generates the following testable hypotheses: 1. If PFIs are organized and can credibly threaten to withhold/provide financ- ing from/for a particular country, then that country's Fund program should be systematically more likely to include "bank-friendly" conditions, hold- ing other variables constant. 2. If a borrower receives relatively more supplementary financing from credi- tor states, then its Fund program should be relatively less stringent, holding other variables constant. Testing Conditionality Data Set This section tests whether PFIs have influenced Fund conditionality in systematic ways by using a data set of 249 IMF conditional loan arrangements-stand-by arrangements, Extended Fund Facility (EFF), Structural Adjustment Facility (SAF), and Enhanced Structural Adjustment Facility (ESAF)-from twenty countries be- tween 1952 and 1995. An observation is a unique conditional loan arrangement, in other words a unique country-loan-year. True random sampling, while method- 41. North and Weingast 1989, 806. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 563 ologically preferable, was not viable given the organization and resources of the Fund archives. The Fund archives organize documents by country; staff time-to pull, vet, and declassify documents-is minimized by requesting multiple agree- ments from a single country, rather than single agreements from multiple coun- tries. Consequently, I selected representative countries and then, data and access permitting, included all relevant agreements for that country between 1952 (when conditionality began) and 1995 (after which many arrangements remained classi- fied at the time of data gathering). The 249 cases came from the following twenty countries: Argentina, Bangladesh, Bolivia, Brazil, Central African Republic, COte d'Ivoire, El Salvador, Ghana, Haiti, Korea, Mali, Mexico, Morocco, Niger, Phil- ippines, Romania, South Africa, Turkey, United Kingdom, and Yugoslavia. Despite this atypical case selection method, the 249 cases are generally repre- sentative, both by region and arrangement type. Tables 1 and 2 in the Appendix compare the data set with the entire population of 759 stand-by EFF, SAF, and ESAF loan agreements between 1952 and 1991. The Conditionality Data Set sam- ple very closely approximates (within three percentage points) the proportion of cases from all regions except Africa, which is underrepresented, and Europe, which is overrepresented in comparison to the 1952-91 universe. The sample is also gen- erally representative with respect to arrangement type. The European overrepre- sentation is warranted because the "universe" data set is only composed of cases between 1952 and 1991, while the sample is composed of cases between 1952 and 1995. Since 1991, the Fund has seen an absolute and proportional increase in Eu- ropean agreements, particularly from the former Soviet Union and Eastern Europe. The Conditionality Data Set codes each loan agreement according to its terms as stated in the original loan agreement, including the letter of intent, attachments, and resulting press release. A typical Fund loan agreement includes a letter from the borrowing country's finance minister requesting a loan and detailing an exten- sive policy program concerning many different sectors of the economy and gov- ernment. The arrangement itself, often a second document, generally outlines more policy proposals and the program's schedule of reviews, and often in the penulti- mate paragraph specifies which conditions are binding. Binding conditions trigger the suspension of the Fund loan if they are violated. Most arrangements have nu- merous other conditions that are also listed in the policy program but are not bind- ing; in other words, there are no specified consequences if they are violated.42 Each case was coded according to thirty-one separate criteria questions and fifty-two different binding conditions. The data set also contains information on a variety of characteristics of the original program other than binding conditions, including the provisions for phasing, reviews, and consultations. 42. The data set does not code preconditions, which are required before the program goes into ef- fect. Preconditions are often agreed upon by the Fund staff and borrowing countries, and are often a key element of conditionality, but preconditions are difficult to code because they are not consistently mentioned in the actual agreement. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 564 International Organization TABLE 1. Examples of bank-friendly conditions 1. The borrowing country is required to set aside certain fiscal revenues to match or "complement" international loans with fiscal revenues. 2. A percentage of the Fund loan must be set aside for debt-reduction payments or replenishment o reserves. 3. The country must make debt-service payments, as agreed with commer creditors. 4. The country must limit financial intermediation by national banks and/or move financial inter- mediation to the private sector. 5. The government must meet a target for reducing government's external payments arrears. The Dependent Variable PFIs provide supplementary financing to borrowing member states because they hope to make a profit from that loan or investment. For PFIs, Fund conditionality agreements are useful because they may increase the probability of a profitable return. This study focuses on the one change in the terms of Fund conditional loan arrangements that seems to best isolate the influence of PFIs: the inclusion of a certain class of conditions that seem to clearly serve the interests of PFIs. These conditions, labeled bank-friendly conditions, provide PFIs with more direct assurances that their commercial bank loans will be repaid. Bank-friendly condi- tions specify that the borrowing country has to pay back a commercial bank cred- itor as a condition of its Fund loan. As a result, these conditions make it more costly for a borrower to default on a bank loan, thereby increasing the likelihood of repayment. Table 1 lists the five types of bank-friendly conditions from the sampled Fund conditional loan arrangements. One example is from Ghana's 1983 stand-by ar- rangement. The arrangement included "irrevocable instructions" that the stand-by loan be deposited directly into a Bank of Ghana account at the Bank of England; the Bank of England would then follow irrevocable instructions that these depos- its be directly transferred to the Standard Chartered Bank to repay a short-term bridging loan. In other words, Fund financing was being directly funneled to a commercial bank creditor, rather than to Ghana itself.43 Argentina's 1992 Ex- tended Fund Facility included "set-asides to support future debt-reduction opera- tions with Argentina's commercial bank creditor," and if Argentina "incurs [sic] any new external payments arrears after June 30, 1992," then its loan would be suspended.44 Sixty-one arrangements in the sample (or 25 percent) include a bank- 43. Letter from Mohammed, 2 April 1983; IMF Interfund message from Zulu, 3 May 1983; IMF official cable from Rahman, 1 July 1983; IMF official Interfund message from Zulu, 1 July 1983. 44. IMF press release No. 92/27, 31 March 1992; IMF Executive Board EBS/92/46 Supplement 1, 13 April 1992. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 565 friendly binding condition. Interestingly, all sixty-one include only one bank- friendly condition as binding. As a result, the dependent variable is binary: whether or not a given conditionality agreement includes a bank-friendly binding condition. The use of bank-friendly conditions increased dramatically during the 1952 to 1995 period. Before the 1973 oil crisis, when private commercial bank lending to middle- and low-income countries was still relatively rare, only 3 percent of sam- pled Fund conditional loan arrangements (or two agreements) required that a bank- friendly condition be met. Between the oil crisis and the debt crisis (from about 1974 until 1982), when commercial bank lending to developing countries surged, twenty percent of sampled Fund loan agreements included at least one bank- friendly condition. After the debt crisis, when private supplementary financing was scarce and discriminating, more than 70 percent of Fund loan agreements in- cluded a bank-friendly condition. 79 percent of sampled arrangements between 1983 and 1990 required a bank-friendly condition, and 73 percent of sampled ar- rangements between 1991 and 1995 required a bank-friendly condition. The in- crease in bank-friendly conditions during the 1952 to 1995 period under study is one facet of the broader changes in Fund conditionality, including the increase in the total number of binding conditions and the changes in the types of binding conditions. Figure 1 provides a portrait of the increase in the use of bank-friendly 1.0- 16 CS0. 0.9--- Proportion of arrangements with bank- -14 friendly condition S0.8 o 0 --- C: cn C Total number of binding conditions 12 0 >% 0.7- v C " -10 0.A 0.6- 0 -:-0.5- 8 -6 c 0.3- o 0.2- z 00.1 - 1955 1960 1965 1970 1975 1980 1985 1990 1995 Year Source: Conditionality Data Set. FIGURE 1. Change in the number of binding conditions and use of bank-friendly conditions This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 566 International Organization conditions, as compared to the overall increase in the number of binding condi- tions, over the 1952 to 1995 period for 230 cases for which data was available from the Conditionality Data Set. The measure of bank-friendly conditions is a three-year moving average of the proportion of the sampled arrangements in a given year that required a bank-friendly condition as binding; it varies between 0 and 1. The measure of the number of binding conditions is the average number of binding conditions required by all sampled arrangements started in a given year; it varies between 0 and 13.5. The Independent Variables According to the supplementary financier argument, PFIs prefer Fund condition loan arrangements to include bank-friendly conditions. One should expect PFIs t exercise leverage over the Fund when they are an important source of suppleme tary financing for the borrowing country and are organized enough to articulat their preferences and credibly threaten to withhold financing. The amount of private financing or proportion of external financing that come from private sources may appear to be the most obvious proxy for private influ ence; however, it does not capture the logic of the supplementary financier argu ment.45 One could imagine PFIs providing (relatively and absolutely) abunda financing to borrowers and yet exercising little or no leverage over the Fund, f instance during most of the "petrodollar recycling" period, when PFIs were less organized (despite syndicated lending) and could certainly not credibly threaten withhold financing, since the sovereign loans were considered so lucrative. In othe words, the supplementary financier argument does not predict a stable over-tim relationship between the amount of private financing and leverage over the Fund. To test the supplementary financier argument, I instead used a proxy for priva influence that captures the idea that PFIs would be able to exercise leverage whe they are organized and can credibly threaten to withhold financing: a binary va able (PRIVATE INFLUENCE) that is coded "1" when the borrowing country restru tured their private debt in that or the previous year.47 Private debt restructuring a key moment when PFIs may be able to organize themselves, develop a coherent bargaining strategy, and articulate their preferences to Fund representatives. Sch arly attention has turned to private debt restructuring as an important form of co mercial bank cooperation before.48 Admittedly, this is only one of the possi ways that PFIs could organize themselves and credibly threaten to withhold bor 45. In addition, data problems make this an unwieldy metric. Financing data is generally not av able before 1970. Post-1970 private financing data continues to be spotty. 46. In fact, there is basically no relationship between the two. The presence of bank-friendly co ditions and the proportion of aggregate net flows that come from private sources (portfolio flows plu debt flows) is only correlated at 0.02. 47. See Hardy 1982, 4-5; OECD 1981, tabs. 12-13; World Bank 1997, 72-78; and Frank 1970, 2 48. See Lipson 1985; and Aggarwal 1987. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 567 rower financing if their preferred terms are not included in the Fund program. PFIs may be able to influence Fund conditionality in other situations not captured by this proxy that may result in a negative bias (against the hypothesized relation- ship). The supplementary financier argument predicts that the coefficient on the PRIVATE INFLUENCE variable should be positive and significant. A plausible alternative hypothesis is that Fund activity-including the design of Fund conditionality agreements-is driven externally by powerful states. Real- ist scholars have argued that powerful states, most often the United States, use international organizations such as the Fund as tools to achieve their foreign pol- icy goals. For realists, IIs and IOs are themselves epiphenomenal, reflecting and acting directly according to the interests and preferences of powerful states.49 For instance, Strom Thacker argues that the political preferences of the United States and the international balance of power are the "underlying causes of the IMF's behavior."50 This seems particularly plausible in the case of the IMF, whose weighted voting system institutionalizes the greater influence of powerful states, particularly the United States. To test this argument and control for the influence of powerful states, the u.s. INFLUENCE variable is included as a proxy for U.S. influence. It is the total amount of U.S. loans and grants to the given borrowing country in the year of the Fund arrangement, divided by (and normalized by) the amount of the IMF loan agree- ment; it varies between 0 and 33.49.51 The logic behind this proxy is that the United States contributes more resources to those countries in which it is interested, and in turn should have more influence over their Fund conditional loan arrange- ments.52 If one expects, as realists do, that changes in Fund conditionality, includ- ing the introduction of new conditions (like bank-friendly conditions), have been driven by powerful states, then the coefficient on this variable should be positive. If one believes powerful states have driven the observed changes in Fund condi- tionality, then one should see powerful state influence positively related to these changes. The supplementary financier argument also considers the potential influence of powerful creditor states. However, it contends that the United States and other powerful states have not been the driving force behind the introduction of new 49. See Krasner 1993; and Mearsheimer 1994. 50. Thacker 1999. Kapur 2001 offers a more nuanced version of this argument. 51. USAID 1998. This variable equals U.S. military aid plus U.S. economic aid plus the amount pledged from the Exchange Stabilization Fund plus the larger of the quantity of Export-Import Bank loans or loans listed under "Other Loans" in the above-mentioned publication, divided by the amount of the Fund loan agreement in that year. All numbers are in current U.S. dollars (millions) but are normalized by the division. The source for the Exchange Stabilization Fund (ESF) is Henning 1999. The ESF and the Fund loan amounts were not necessarily drawn on or fully drawn down. 52. Kapur 2001, 27 offers an opposing interpretation that the "less the size of foreign aid programs of major shareholders, the less the agency of the IMF" and the more the influence of powerful states over the Fund. He views foreign aid and multilateral financing as substitutes. My argument and evi- dence suggests they are complements. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 568 International Organization conditions and the increases in Fund conditionality, but have instead actually pushed for reductions in Fund conditionality and worked against many of the observed changes in Fund conditionality. The supplementary financier argument therefore predicts that the coefficient on the U.S. INFLUENCE variable should be negative, while the realist argument predicts it should be positive. Another plausible alternative hypothesis is that Fund conditionality and the changes in Fund conditionality have been driven by the Fund's bureaucracy. Schol- ars argue that the IMF should be understood as an actor unto itself-not just a conduit for state preferences-with autonomy to pursue its own interest or goals. Those from the rationalist school tend to argue that IOs achieve a degree of au- tonomy due to principal-agent issues of informational asymmetry and incomplete monitoring.53 IOs use their autonomy to pursue "power, prestige and amenities." For instance, in a series of articles, Roland Vaubel focuses on the Fund bureaucra- cy's efforts to "maximize their budget, their staff and their independence." Vaubel views Fund conditionality as a mechanism to pursue those interests.54 He uses staff size and average salaries as proxies for bureaucratic power and autonomy. To test this argument, I included the SALARY INCREASE variable.55 This is the propor- tional increase in the average staff salary since the previous year; it varies be- tween -0.016 and 0.192.56 The logic is that as Fund bureaucratic power and autonomy increase (indicated by an increase in average salaries that year), the Fund is more likely to insert "discretionary" conditions-such as bank-friendly conditions-that serve to further "increase its power.""' The coefficient on this variable should therefore be positive and significant. The Fund may also interact with borrowers differently based on borrower attributes. Scholars have considered the influence of borrower attributes on bor- rower demand for Fund loans.58 Less work has been done on the supply side (how borrower attributes may influence Fund activity, including the design of Fund pro- grams) despite the fact that the Fund often claims that programs are tailored to th specific needs and demands of borrowers, or to borrower attributes. It certainly seems plausible that Fund conditionality agreements would vary systematically based on borrower attributes. Three variables are included to test the general premise that Fund conditionality is responsive to the changing needs or demands of borrowers. Fund lending was originally intended to help countries offset temporary payments imbalances. Over 53. See Moe 1984; and Niskanen 1971. Martin 2002 argues that states strategically delegate author- ity to the bureaucracy when it serves their interests. Finnemore 2000 offers an analysis of the Fund from the sociological organizations school. 54. Quotes from Vaubel 1996, 195; see also Vaubel 1991 and 1986. 55. Vaubel 1996 and 1991. Staff and year are almost perfectly correlated (at 0.99), suggesting this is a flawed proxy. 56. Data from 1952 to 1970 are derived from Vaubel 1991, 223. Data from 1971 and 1995 are presented in Boughton 2001, 1051, and were obtained via correspondence with the author. 57. See Vaubel 1996, 195. 58. See Vreeland 2001; and Conway 1994. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 569 time, the Fund has increasingly lent to countries facing "protracted balance of pay- ments problems" and impediments to growth.59 The Fund has argued that Fund program design has changed to meet the objective needs of borrowers facing in- creasingly severe payments imbalances and economic crises.60 To control for the severity of the borrower's balance-of-payments problem, I include the RESERVES variable, which is the ratio of foreign reserves to imports in the year that the coun- try began its Fund conditional loan agreement. This measure should be negatively related to the dependent variable.61 Second, the Fund has also argued that less-developed countries require different Fund conditionality-including more or different binding conditions-than more developed countries.62 As a result, the Fund has created new lending facilities for less-developed countries, such as the SAF, ESAF, and recently the Poverty Reduc- tion and Growth Facility, that require more detailed conditionality.63 A constant gross national product variable, GNP PER CAPITA, is included in the analysis to control for this effect.64 The predicted coefficient should also be negative for this variable. Third, democracies may interact differently with the Fund. Democracies may tend to have systematically higher conditionality programs because they demand increased conditionality to tie their own hands.65 Alternatively, democracies may have systematically lower conditionality programs because they resist tougher con- ditions out of fear of voter retribution. A REGIME variable that ranges from -10 (full autocracy) to +10 (full democracy) is included to capture this effect.66 The seventh independent variable tests the general Fund's policy on loans: that larger loans (in relation to the country's quota) require more "justification" or stricter conditionality.67 The TRANCHE variable tests whether the Fund actually follows this policy. It is the amount of the Fund loan, divided by the amount of the coun- try's Fund quota. The predicted relationship between this variable and the pres- ence of bank-friendly conditions is positive. 59. This is language describing the Fund's ESAF, revamped in 1999 to be the Poverty Reduction and Growth Facility. 60. See Polak 1991; and Guitiain 1981, 24. 61. World Bank 2000. 62. For instance, Polak 1994, 8, contends that the Fund's changing "clientele" led "the Fund i 1970s [to begin] to tailor its credit facilities to the specific needs of developing countries." Kapur argues that the shift in clientele reduced the risk to creditor countries of pushing for incre conditionality. 63. See, for instance, IMF 1999a. 64. World Bank 2000. GNP per capita is constant in 1995 U.S. dollars. 65. Vreeland 2001 is concerned with borrower demand for Fund programs. He argues that g ments with more veto players (which also tend to be more democratic by his measure) are mor to enter Fund programs because they need conditionality to help them overcome domestic opp and enact their preferred policies. If one accepts that Fund conditionality is variable, an exten this argument is that democracies may demand higher conditionality programs than authoritarian ernments with fewer veto players. 66. The Polity IV score for the borrowing countries in the first year of their Fund loan arrange See Marshall and Jaggers 2000. 67. IMF document, SM/66/14, 24 January 1966, 1-2. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 570 International Organization The eighth independent variable tests whether the borrower's size influences the terms of its Fund conditional loan agreement. Some have argued that certain countries are "too big to fail" and have therefore received special, perhaps easier treatment from the Fund.68 As a result, I have included the borrower's GNP at market prices in billions of constant 1995 U.S. dollars (CONSTANT GNP).69 The coefficient on this variable should be negative if larger countries receive easier terms. Given that this data set has time-series properties-in other words it includes multiple over-time observations-there may be an over-time effect that is not be- ing absorbed by the model. The terms of the Fund's EFF with Mexico in 198 may have influenced the Fund's stand-by arrangement with Mexico in 1986 or the Fund's EFF with Brazil in 1983. One of the key assumptions in typical regression models is that all of the observations are independent. If a model is based on that assumption, but the observations are actually dependent on each other, the result is inefficient parameters and biased standard errors. 70 In Gary King's words, the model should capture "the underlying process by which the random observations vary and covary over time. In a sense, the task of time-series analysis is to model how history repeats itself or how it influences future events."71 The explanatory variables previously discussed suggest different reasons for change over time. The last independent variable-a simple linear time trend-is included to represent alternative theories of change over time. The YEAR is coded 0 in 1952 and 43 in 1995. If this variable is significant, then clearly there is an aspect of the "underly- ing process" which is not being captured by the explanatory variables in the model.72 The Results Do private financial institutions systematically influence the terms of Fund condi- tional loan arrangements? The private independent variable and bank-friendly con- dition dependent variable are positively correlated; the simple pairwise correlation is 0.359 with a p-value of 0.0000. This positive and significant relationship lends initial support to the argument that PFIs have influenced the terms of Fund condi- tional loan arrangements. The multivariate results offer stronger confirmation. Table 2 provides estimations of three logit models that test whether or not or- ganized PFIs increase the likelihood of the inclusion of bank-friendly conditions 68. For instance, Meltzer 1998. 69. World Bank 2000. 70. King 1989, 163. 71. Ibid., 163. 72. I also ran these models using a variable representing an alternative theory of change ov the lagged dependent variable. The result holds, although the magnitude of the coefficients The model fit is generally better using the linear time trend than the lagged dependent variable This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 571 TABLE 2. Change in the inclusion of bank-friendly conditions (Logit) Variables Model 1 Model 2 Model 3 % missing PRIVATE INFLUENCE 1.57 (0.70)** 5.89 (2.35)** 6.00 (2.14)** 0 U.S. INFLUENCE -0.04 (0.09) -0.47 (0.28)* -0.06 (0.14) 13 SALARY INCREASE -8.56 (6.36) -11.46 (8.75) -8.62 (8.08) 8 RESERVES 0.16 (0.24) 53 GNP PER CAPITA -0.0001 (0.0004) 21 REGIME 0.03 (0.04) 0.07 (0.08) 0.05 (0.06) 2 TRANCHE -0.26 (0.26) -0.35 (0.38) -0.24 (0.34) 3 CONSTANT GNP -0.02 (0.01) -0.02 (0.01)** 19 YEAR 0.23 (0.04)** 0.18 (0.08)** 0.21 (0.04)** 0 Constant -6.15 (1.26)** -3.31 (3.08) -4.73 (1.33)** N 201 76 154 Log-likelihood -55.17 -29.49 -41.01 Mean L-L -0.275 -0.388 -0.266 Pseudo R2 0.4777 0.4400 0.5405 Null model (modal outcome) 78.1% 51.3% 73.4% (157 when y = 0) (39 when y = 1) (113 when y = 0 PCP 89.6% 86.8% 90.3% Note: PCP = percent correctly p **p <.05. *p --.10. in Fund loan agreements.73 There are some severe missing data problems with three of the economic independent variables: RESERVES-to-imports ratio, the con- stant GNP PER CAPITA, and the CONSTANT GNP.74 As a result, Model (1) omits those independent variables plagued by the highest rates of missingness to estab- lish whether the predicted relationship between the PRIVATE INFLUENCE variable and the presence of bank-friendly conditions exists for the bulk of the sample. In Model (1), the PRIVATE INFLUENCE variable is positive and significant, as is the year tracking variable. None of the other variables are significant. The impact of private financier influence on the probability of having a bank-friendly condition is strong. Holding other variables in the model at their means, an increase in the PRIVATE INFLUENCE variable from 0 (its minimum) to 1 (its maximum) results in an increase in the likelihood that the Fund conditional loan arrangement will re- quire a bank-friendly condition (Y = 1) from 7 percent to 25 percent.75 Model (2) includes the three economic variables mentioned above, and the num- ber of cases drops to 76. The coefficients on constant GNP PER CAPITA and the 73. The data set is not a traditional "rectangular" cross-sectional, time-series panel data set, which includes observations for each cross-sectional unit during each unit of time; therefore, the analysis does not use typical panel data techniques. For example, Beck and Katz 1996. 74. Efforts to impute the missing data (for example, via the computer program Amelia)-the pre- ferred way to deal with missing data problems-have been unsuccessful. 75. Long 1997, 49. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 572 International Organization RESERVES-to-imports ratio are not significant. The coefficient on CONSTANT GNP is negative, and nearly meets the significance criteria with a p-value of 0.102. In other words, larger countries (measured by GNP) are less likely to be required to meet a bank-friendly condition, holding other variables constant. Most of the co- efficients on the other independent variables change in magnitude, but not sign or significance, from Model (1). One exception is the U.S. INFLUENCE variable, which is significant in this specification. As U.S. influence (measured by U.S. relative financing) increases, the likelihood of a country being required to meet a bank- friendly condition decreases. This negative coefficient conflicts with the pre- dictions of the realist argument, and is consistent with the predictions of the supplementary financier argument that powerful states push for weaker condition- ality.76 When the United States exercises its influence on a particular Fund pro- gram, the probability of a bank-friendly condition being included decreases. This suggests that the impetus for this expansion of Fund conditionality might not have originated from the United States, as realists would contend. Model (3) omits only the RESERVES-to-imports ratio and GNP PER CAPITA, the two variables that have the highest rates of missingness but are not significantly related to the dependent variable, and retains the CONSTANT GNP.77 Model (3) ap- pears to have the best model fit, with the highest mean log-likelihood (Mean L-L) ratio, percent correctly predicted (PCP), and pseudo R2. The PCP is the percent of predicted outcomes that equal the actual outcomes, when predicted probabilities greater than 0.5 are rounded to 1, and those less than or equal to 0.5 are rounded to 0.78 The PCP (90.3 percent) in Model (3) is usefully compared to the null mod- el's PCP (73.4 percent). The results from Model (3) support the conclusion that PFIs have been success- ful in influencing the terms of Fund conditional loan arrangements. The influence of PFIs is even more striking in Models (2) and (3) than it is in Model (1). Com- parative statics elucidate this. For a hypothetical loan agreement with a hypothet- ical country, where all other independent variables in the model are held at their means, if one increases the value of the private influence variable from 0 (its min- imum) to 1 (its maximum), the probability that the Fund loan agreement requires a bank-friendly binding condition increases from 30 percent to 99 percent in Model (2) and from only 5 percent to 96 percent in Model (3). Model (3) also casts doubt on some of the alternative arguments, which focus on powerful states and bureaucratic actors. Neither the U.S. influence nor the 76. Stone 2002 reports similar results-that powerful states push for weaker Fund treatment of borrowers. 77. I also tried a specification with only the reserves-to-imports ratio omitted, but the specification of Model (3) was a better fit by all three metrics. 78. Jackman 2001, 15. The null model predicts that 100 percent of the cases are equal to 1 if more than 50 percent of the cases are equal to 1, and predicts 100 percent of the cases are equal to 0 if less than 50 percent of the cases are equal to 1. As a result, it correctly predicts the largest of the actual distribution of Y. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 573 bureaucratic influence variables-measured by U.S. relative financing and the increase in average Fund salaries, respectively-are significant, or in the direc- tion predicted by these alternative arguments. The TRANCHE variable is also not in the predicted direction and also not significant. The significant variables in Model (3) are the CONSTANT GNP, which suggests that larger countries do re- ceive less stringent arrangements from the Fund, and the year tracking variable, which suggests that some other over-time change process is not captured by the model. In short, these results lend support to the supplementary financier argument, and cast doubt on the realist and bureaucratic alternative arguments. There is a strong relationship between the PRIVATE INFLUENCE variable and the bank-friendly dependent variable. The next section clarifies how that relationship works. Mechanisms The previous section suggests that private financial institutions systematic fluence the terms of Fund conditional loan arrangements. It identifies a re ship between variables. This result provides some support for the suppleme financier argument, which predicts that PFIs should be able to influence Fun ditionality agreements when they are organized and can therefore articulat interests and threaten to withhold financing. PFIs do not have access to the legitimate channels of influence that other plementary financiers (creditor states and multilateral organizations) often do fore, it is not obvious how they exercise their influence. To clarify h influence Fund loan agreements, I first discuss the mechanism highlighted previous section-how PFIs influence Fund arrangements during privat restructuring-and one case when a country's debt was restructured and its tionality program included a bank-friendly condition. I then discuss one ca a country's private debt was not restructured, but a bank-friendly binding tion was included in the country's Fund program. Influence During Private Debt Restructuring When PFIs are organized during debt restructuring, they are able to exerci verage over the Fund. Of the twenty-nine cases that had their private debt r tured in that or the previous year, 69 percent included a bank-friendly con as compared to 27 percent of the total cases from the Conditionality Data S This finding seems to contradict received wisdom, which points instead t Fund's influence over the banks during these meetings. During debt restru negotiations, the Fund could threaten to "sabotage any agreement between tors and the debtor" and thereby "provide residual coordination for the ba This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 574 International Organization to provide new credits to the impoverished debtor." 79 The accepted interpretation has thus been that the Fund is often the strongman in debt renegotiations, demand- ing new credits from, and exercising leverage over, the banks. The underlying reasoning behind this interpretation has been that default-or no restructuring agreement-would be the most costly option for banks, but presumably not for the Fund. The Fund could therefore more credibly threaten to walk away from an agreement than could the banks. This assumption is curious. How credible would a Fund threat to "sabotage any agreement between creditors and debtor" really be? The Fund has certainly been able to exercise leverage over some banks, providing a focal point solution to the "bankers' dilemma" and helping them achieve their collective self-interest. But the banks are also often able to exercise leverage, and they are poised to do so when they are organized via creditor committees that can articulate common pref- erences and a threat to withhold financing from several-often hundreds-of banks. Moreover, the Fund's policy through much of this period-of not lending to coun- tries with external (including private) payments arrears and at times requiring fi- nancing assurances from PFIs-gave these PFIs renegotiating debt in arrears a "de facto veto over Fund lending," according to one Executive Board decision.80 If the banks did not agree to renegotiate outstanding debt or provide financing assurances, the Fund program would either not be approved or would be automat- ically suspended.81 Since 1989, the IMF's Executive Board has revised its poli- cies on external arrears three times in order to loosen PFI control over the approval of Fund programs during these critical junctures.82 Mexico's 1982 Extended Fund Facility Agreement Meetings between the Fund's management or staff and representatives from com- mercial banks provided an opportunity for the Fund to communicate how much financing the banks needed to provide given the design of the program, and for the banks to communicate the terms of the Fund program needed for them to com- mit their supplementary financing. Probably the most famous meeting between 79. Lipson 1985, 202. 80. IMF Executive Board meeting 99/64, 14 June 1999. On the external arrears policy, see De Vries 1976b, 214-215. See also De Vries 1976a, 531-32. This decision was first revised in 1980 (see IMF Executive Board meeting 80/190, reprinted in Boughton 2001, 531-32), and then in 1983 (see IMF Executive Board meeting 83/58, reprinted in Boughton 2001, 532-33). 81. Boughton 2001, 477 and 498-99. See also Polak 1991, 15. 82. In 1989, the policy was first revised to "tolerate" private, not official, arrears. IMF Executive Board meeting 89/61, 23 May 1989, reprinted in Boughton 2001, 533-35. Two more formal revisions of the Fund's arrears policy were passed in 1998 and 1999, both intended to further reduce PFI influ- ence. The 1998 decision extended the 1989 policy of sanctioned lending into private arrears to non- bank private creditors (for example, bondholders) and nonsovereign arrears. The 1999 decision relaxed the criteria when the Fund could lend into private arrears in order again. IMF Executive Board meet- ing 99/64, 14 June 1999, reprinted in IMF 1999b. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 575 the Fund's management and bankers was the November 1982 meeting between the Fund's Managing Director Jacques de Larosiere and international bankers that preceded Mexico's 1982 EFF loan agreement. Mexico faced an enormous external debt burden, reduced export earnings, and pressure on its already-devalued currency, and was on the brink of defaulting on its commercial debts. A complicated rescue package was negotiated. The United States and the Bank for International Settlements offered initial bridging loans to allow time to negotiate a Fund agreement. The Fund program itself was designed with two primary ingredients to ensure a balance: a condition that the fiscal deficit be reduced (from about 16.5 percent of GDP in 1982 to 8.5 percent of GDP in 1983) and an assumption of $2 billion in official supplementary financing and $5 billion in private supplementary financing (new medium-term credits) in 1983.83 The Fund loan itself was $3.75 billion (plus a $220 million unconditional first credit tranche loan). This supplementary financing assumption was critical, allow- ing the Fund and Mexico to agree to (what was thought to be) a politically feasi- ble demand contraction. Many other scholars have discussed the dramatic negotiations preceding thi Fund loan agreement.84 Most have focused on de Larosiere's influence over th commercial banks, or as Kraft put it, the Fund's "imposing a forced loan on major private banks."85 On 16 November 1982, de Larosiere met in New York with a group of representatives from seventeen major commercial banks and explained the dilemmas of the Mexican crisis, including Mexico's need for about $8.25 billion-of which only $1.3 billion could come from the IMF and $2 billion from other official sources.86 Famously, he demanded that the banks increase their fi- nancing to Mexico by $5 billion (that is, in new loans) in 1983, "roll over existing short-term credits," develop an agreement to reschedule Mexico's medium- an long-term debt, and "'clean-up' $1 billion in private-sector interest arrears that would be outstanding by the end of 1982," or else the Fund would not agree to its loan program with Mexico.87 Scholars have focused on the Fund's influence o these banks. As Lipson wrote, "Never before had the Fund intervened so directly in the affairs of commercial lenders." 88 The banks were in a notoriously weak bargaining position, as many U.S. and Japanese banks were heavily exposed in Mexico.89 However, the Fund also had a 83. Boughton 2001, 304. 84. Most notably, Kraft 1984; see also Boughton 2001. 85. Kraft 1984, 1. Both Lipson 1986, 229 and Boughton 2001, 299, discuss these negotiations as a turning point in the Fund's relationship with commercial banks. 86. The banks represented at this meeting included Bank of America, Bank of Montreal, Bank of Tokyo, Bankers Trust, Chase, Chemical, Citibank, Deutsche Bank, Lloyds, Manufacturers Hanover, Morgan, Soci6t6 G6n6rale, and Swiss Bank Corporation. Another meeting on 21 November in London also included Paribas. The Fund's EFF loan was eventually $3.75 billion. Kraft 1984, 48. 87. Boughton 2001, 307. 88. Lipson 1986, 229. 89. See Kraft 1984, 9; and Aggarwal 1987, 336-44. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 576 International Organization lot at stake in resolving the Mexican crisis, which many thought threatened to destabilize the international financial system. The credibility of de Larosiere's No- vember 16 threat is therefore questionable. The Fund not only pressured the banks to provide fresh financing-it also went out of its way to accommodate the banks' concerns, as it would in future negotiations. The commercial bankers, particularly those on the Advisory Committee, did not want Mexico to default, and were there- fore willing to provide financing. However, the bankers wanted the Fund to pro- vide them with more direct assurances that private arrears would be paid down (one of the bank-friendly conditions). At the November 16 meeting, the bankers expressed the concern that, "the authorities could do more to solve the problems of private sector arrears to banks. In some cases, companies that could afford to meet their interest payments were being blocked by regulations prohibiting them from using foreign exchange for that purpose." De Larosibre "was reluctant to put the IMF in the middle of the effort to settle private sector arrears, [but] he prom- ised to speak to the Mexican officials about it."90 The initial Fund loan agreement with Mexico had already been drafted and signed by the Mexican authorities on November 10, before de Larosiere's meeting with the bankers. The letter of intent did discuss Mexico's current external debt, its projected debt servicing requirements, and its need for foreign financing, but its discussion of private-sector arrears to PFIs was vague and brief, indicating only that Mexico hoped to get banks to postpone private external credit repayments. Clearly the original agreement reached between the Fund and the Mexican author- ities had not included provisions for the reduction of private-sector arrears to PFIs that the bankers demanded. Fund staffers returned to Mexico from 13 to 17 De- cember 1982, before the commercial bankers secured the required financing. The discussed additional conditions for the Fund program with the Mexican authori- ties and addressed the bankers' concerns. On December 21, after the Fund staff returned from Mexico, they sent an up date to the Executive Board, notifying them of modifications to the Fund agree ment and indicating that the bankers' demands had been met. It stated that "the Mexican Government established special procedures for the settlement of arrear on interest payments due by Mexican private borrowers to commercial ban abroad."91 These procedures allowed private borrowers to deposit their inter payments in local currency in PFI accounts established with the Bank of Mexico, which began making interest payments to these PFIs in foreign currency startin 31 January 1983. Two days after this memo was sent, the banks raised the "critical mass" of th $5 billion in new money and the Executive Board approved Mexico's EFF agr ment. It included ten binding conditions. The seventh stated that Mexico would not borrow from the Fund if a "counterpart deposit scheme, without exchange- 90. See Boughton 2001, 308; and Aggarwal 1987, 342. 91. IMF Executive Board, EBS/82/208, Supplement 3, 21 December 1982, 2. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 577 rate guarantee, [had not been]... set up to provide for the identification and or- derly reduction of arrears" by 31 December 1983.92 Mexico's 1982 EFF is just one example-and an unlikely one given the re- ceived wisdom about these negotiations-of PFI influence on the terms of Fund conditional loan arrangements. PFIs were able to insert a binding condition in the Fund agreement that was of particular interest to them. In later years, as banks became more reluctant to reschedule and the Fund maintained the policy of requir- ing financing assurances, their leverage over the Fund became even stronger. Alternative Mechanisms of Influence and Turkey's 1978 Stand-by Arrangement Sixty-seven percent of the cases of Fund agreements with bank-friendly binding conditions in the Conditionality Data Set (forty-one cases) did not have their pri- vate debt restructured in that or the previous year. Either another mechanism of PFI influence is at work, or another factor is contributing to the inclusion of this condition. In this section, I discuss one of these forty-one cases-Turkey's 1978 stand-by arrangement-to clarify why the bank-friendly conditions are included, and whether PFIs exercise influence in other ways. Turkey's 1978 stand-by arrangement is a useful case for a few reasons. First, Turkey is a strategically important country, one in which certain powerful credi- tor states also took a keen interest at that time. As a result, one might expect pow- erful states' influence to eclipse PFI influence, particularly for this case. However, Turkey and the Fund were dependent on private sources of supplementary financ- ing for Turkey at that time. By 1978, Turkey already owed private creditors more than $6 billion.93 Turkey received a large (but rapidly decreasing) chunk of its supplementary financing-24.5 percent of Turkey's public or publicly guaranteed debt commitments in 1978-from private sources.94 As a result, there is also a good reason to believe that PFIs might also be successful in exercising leverage, if they could organize themselves. Second, this case is one of the earlier cases (in the group of agreements with bank-friendly binding conditions that did not have their private debt restructured in that or the previous year). One might expect PFI pressure on the Fund to be more overt and transparent in earlier cases, when PFIs may have been communicating their preferences about Fund conditionality agree- ments for the first time. In later cases, Fund staff may have been able to anticipate PFI preferences, and thus their influence may be less observable. Finally, this case 92. IMF Executive Board, EBS/82/208, Supplement 4, 30 December 1982. 93. See Bleakley 1978, 50; and Celasun and Rodrik 1989, 639. 94. World Bank 2000. This is the total amount of private, public, or publicly guaranteed debt com- mitments in that year, divided by the total amount of public or publicly guaranteed debt commitments in that year (private or official). This ratio omits private nonguaranteed debt, because of the lack of availability. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 578 International Organization was selected for practical reasons. The Fund files for this case include documents that helped me recreate the negotiation process, while other case files were rela- tively bare. In the wake of the oil crisis of 1973-74, Turkey's current account swung sharply from a surplus of $534 million in 1973 to a deficit of $3.4 billion in 1977. Most of this deficit, about 81 percent, had been financed by foreign borrowing; much of it, about 54 percent in 1977, by short-term credits.95 In 1977, PFIs began curtailing net lending and Turkey plunged into a debt crisis; arrears began to accumulate, growth dropped sharply from 8.9 to 4.9 percent that year, and inflation climbed from 15.6 to 24.1 percent.96 Turkey approached the IMF for a loan program in 1977, and a Fund mission visited Ankara in September of that year.97 The PFIs were organized in their dealings with Turkey and the Fund, even if they did not successfully renegotiate debt in 1978. In fact, one banker was quoted at that time as stating "The requirements of this situation sparked an effort of coopera- tion I haven't seen before in country lending."98 By December 1977, representa- tives from several exposed commercial banks were meeting on Wednesdays in New York to address the mounting Turkish debt crisis.99 In March and April 1978, eight commercial banks organized as a coordinating committee, representing about 220 PFIs in total, to negotiate new credits and reschedulings of existing short-term debt with Turkey.'l0 These negotiations did not bear fruits until the summer of 1979 (when a different stand-by arrangement was in place), but the PFIs were still quite organized during the negotiations of Turkey's 1978 stand-by arrangement. The PFIs were also directly in contact with the Fund during these negotiations. For instance, executives from Chase Manhattan Bank contacted Lord Alan Whit- tome, the head of the Fund's European division responsible for constructing Tur- key's stand-by arrangement, about the pending Fund program. Whittome kept in contact with official and private supplementary financiers during this negotiation period and considered PFI financing particularly crucial.10' The Chase executives served as representatives for a number of commercial banks and told Whittome that: they have talked to banks in a number of countries and throughout the United States. They are reasonably sure that net new lending totaling $1 billion could be available in four equal tranches over a twelve-month period provided a stand-by arrangement with the Fund was concluded and was thought to be 95. Celsun and Rodrik 1989, 638. 96. Ibid., 630-31. 97. Memo from Woodward, 20 September 1977; and Briefing Paper, September 1977. 98. Bleakley 1978, 48. 99. Ibid., 50. 100. Celasun and Rodrik 1989, 754. Swiss Bank Corporation dropped out of the coordinating com- mittee midway through; thus it ended up being a group of seven banks, see Bleakley 1978, 58. 101. Memo from L. A. Whittome, 16 November 1977. This content downloaded from fff:ffff:ffff:ffff:ffff:ffff on Thu, 01 Jan 1976 12:34:56 UTC All use subject to https://about.jstor.org/terms International Monetary Fund Conditionality 579 adequate. (My informant said that he had met some fears that given our ex- perience in Egypt we might now be content to take a too lenient attitude.)102 The Chase representatives also indicated, through several additional phone calls and contacts, that the PFIs "would not come to any agreement with the Turks prior to a satisfactory arrangement with the Fund." 103 Thus the PFIs organized them- selves and indicated that an "adequate" Fund program was necessary in order to ensure that their financing be forthcoming. From 11 December until 20 December 1977, a Fund mission returned to Tur- key to negotiate the 1978 arrangement. On 16 December, in the middle of that mission visit, "a meeting of the major U.S., German, and Swiss banks to deter- mine the banks' attitudes vis-a-vis Turkey" was held.104 The timing of this meet- ing suggests that it was planned to assess and influence Turkey's 1978 stand-by arrangement; however, details of the meeting are unknown. The resulting two-year stand-by arrangement was ultimately approved in April 1978.105 It required eight binding conditions, including a bank-friendly condition that specified that Turkey must devise a schedule to pay down existing arrears by 1 November 1978 and must not allow any new arrears to "arise." 106 In turn, the commercial banks "made disbursement of any part of the new loan conditional upon a program being prepared for dealing with arrears." 107 However, Turkey had trouble meeting this condition. In September 1978, the Fund waived this and other conditions due to noncompliance.'08 By November 1978, Turkey had not devised a schedule to pay down its arrears, and the Fund considered suspending the next installment of its loan-but the Fund staff did not want to provoke a further with- drawal of private financing. An internal memo discussed the: need to avoid any impression that there has been any break in our discussions with the Turks in order not to give the commercial banks a heaven sent ex- cuse to delay further their agreement both to the rescheduling of $3 billion of bank debt and the provision of a new loan of (hopefully) around $1/2 billion.109 The PFIs continued to drag their feet regarding both reschedulings and new loans, while the Fund and Turkey waited anxiously for the promised infusion of private 102. Italics added. Memo from L. A. Whittome, 9 November 1977. 103. Memo for the files, 10 November 1977; and memo for the files, 16 November 1977 (italics added). 104. Memo from U. Baumgartner, 9 December 1977. 105. IMF Executive Board meeting 78/65, 24 April 1978. 106. IMF Executive Board, EBS/78/154, Supplement 4, 25 April 1978, 7. 107. Memo from L. A. Whittome, 20 November 1977. 108. IMF Executive Board meeting 78/151, 20 September 1978. 109. Memo from L. A. Whittome, 3 November 1978; and memo for the files from L. A. Whittome, 6 December 1978. This content downloaded from 76.175.173.107 on Thu, 22 Apr 2021 14:34:05 UTC All use subject to https://about.jstor.org/terms 580 International Organization financing. In December 1978, Whittome continued to try to convince the PFIs to dispense the promised supplementary financing to Turkey.'10 He wrote that the Fund had "been fairly constantly involved in talks with the banks and I have de- liberately much exceeded the lines laid down by the Board by encouraging indi- vidual banks to think sympathetically." However, Turkey did not establish a schedule for paying down arrears on time, as was required by the 1978 stand-by arrangement and demanded by the PFIs, and their financing was not forthcom- ing."' This stand-by was eventually cancelled in 1979. Turkey's 1978 stand-by arrangement provides an example of an agreement that was not correctly predicted by the private influence proxy alone, but does fit the broader logic of the supplementary financier argument. PFIs organized themselves to coordinate their provision of financing to Turkey and also to coordinate their demands on the Fund. The Fund agreement included a bank-friendly binding con- dition that addressed t

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