IMF Conditionality and Its Effect on Growth in Developing Countries

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Brent Hamilton
IPEC 4302.001
Professor Bunte
30 November 2014
IMF Conditionality and Its Effect on Growth in Developing Countries
Naturally, the vast majority of nations that are applying for loans through the
International Monetary Fund (IMF) are currently going through an economic crisis of
some kind; usually, we are able to observe an ominous equation that is similar to a
reoccuring nightmare out of a Stephen King novel. This vicious cycle, though, is not a
fictional narrative, for the people living in developing nations, but rather the reality of
their daily lives. Underdevelopment creates an environment that is more easily
accessible to people, corporations, politicians, government, etc. that wish to exploit the
nightmarish situation. So, how do these states overcome their circumstances? One
avenue that is arguably the most travelled, is applying for a loan through the IMF. But,
the process for receiving loans from the IMF is one that often receives lots of criticism
internationally. Often, there are conditions attached to these funds that can stifle an
economy that is already buckling under the weight of its inefficiencies and failures. How
does the IMF, if they wish to support future prosperity of a struggling nation, justify
attaching conditions that can be harmful for short-term goals of development? Further,
to understand the logic behind these conditions and the endogenous relationship that
exists we will analyze, with the help of Caraway et. al (2012), “International Negotiations
and Domestic Politics: The Case of IMF Labor Market Conditionality” and Nooruddin
and Simmons (2006) “The Politics of Hard Choices: IMF Programs and Government

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Spending”, policy implications and their effect on the working class in developing
nations.
According to Caraway et al., conditions that may be attached to a loan from the
International Monetary Fund may be more favorable to labor in democratic nations that
have a strong and unified labor force. The causal mechanism can be organized quite
easily and helps to logically explain the reason the IMF chose not to wield-a-big-stick
and show flexibility. First, South Korean politicians made sure the largest labor unions at
the time were represented and present at negotiations on labor reform, after all
reelection is obviously important to legislators and the labor force are the voters. Thus it
was mutually beneficial for both parties to be represented. If labor, when they represent
the winning majority domestically for politicians, are able to organize themselves and
show solidarity, their corporate representatives are able to loudly boast their agenda
and maintain a fair level of clout in negotiations with policy-makers. Thus, labor as an
entity, is better suited at protecting itself from unfavorable conditions, that would
otherwise threaten jobs or the livelihoods of thousands, than a less-organized less-
influential sector, if that nation in particular meets the conditions I listed above. It is also
important to realize that the IMF wants these programs to succeed as they have an
interest, financially, for these nations to grow so that they are able to repay these funds
and to appear responsive and understanding to circumstances surrounding a crisis.
Supporting this, Caraway et al state, “Because the IMF is interested in maximizing the
success/implementation of its programs, the organization is unlikely to require highly
intrusive labor market reforms in the face of powerful domestic labor.” (Caraway 36)
Caraway looks at South Korea and Bolivia as contrasting examples of this concept. For

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this argument, I will draw upon their Korean example. South Korea, devastated by the
Asian Financial Crisis, made an agreement in late 1997, and had to initiate policy to
receive the purposed funds from the IMF after successful reviewing. “Among other
things, the rescue plan called for restructuring of the financial sector and the chaebol
(large family-controlled conglomerates), which entailed closing companies, privatizing
state banks, and forcing the chaebol and state enterprises to compete on the market
without state subsidies”. (Caraway 37) If implemented, this program would result in
massive large-scale layoffs for thousands of Koreans which until new legislation was
approved was illegal and not permitted by law. Even though the IMF would support
legislation limiting severance pay and expediting immediate layoffs, we could see that
they treaded lightly and cautiously. Internally, a council was formed to hash-out the
details of new labor legislation.These reviews contained a considerable number of
performance criteria; however, there were few labor-related conditions. (Caraway 37)
So we are able to see that because of the influence the labor unions had on politicians,
via voting power at the next elections, legislators forced the IMF to maintain some
flexibility and limit their conditions on the pillar of the Korean economy, labor.
Nooruddin and Simmons devise a causal mechanism in which the poor are
protected in negotiations with the IMF as a reflection of the principles that are at the root
of democracy. Incumbents are concerned with getting re-elected, plain and simple.
They often can suffice a huge proportion of their constituency by protecting public goods
and social services, like healthcare and education. Unlike in non democracies, where
you could argue that the governing actors or autocrats protect private entities and
selectorate that will help maintain their authority over the rest of the population,

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democracies are likely to have favorable policies for the larger majority, again, to
maintain their authority. Nooruddin and Simmons argue that even in times of economic
crisis, these principles are maintained and thus would, in theory, flow into negotiations
with international organization, particularly the IMF. Nooruddin and Simmons elaborate
on another variable that we must consider though, organization. Democracies
characterized by more political competition and larger winning coalitions than autocratic
regimes should allocate more of their budget to public services such as education and
health.Similar to our previous mechanism by Caraway et al., they argue that “ In short,
during austerity, office-seeking incumbents have incentives to place an even greater
premium on appealing to the relatively more organized interests than what they might
absent such constraints on the fiscal budget”. (Nooruddin 1011) Further, “While the
critics suggest that IMF programs hurt the poor, it seems as if democratic countries
have both the motivation (that is, the institutional incentives) and opportunity to protect
pro-poor services, thus at the very least, establishing a policy regime that hurts the poor
less than in non-democracies. On the other hand, as Vreeland notes, "political will" is
needed to protect the poor during austerity, and there is reason to suspect that leaders
in democracies often lack such will even given democratic institutions. Instead, when
forced to make reductions, leaders in democracies choose just these pro-poor
categories to cut because the groups that benefit from them are relatively weak
politically.” (Nooruddin 1012) Therefore, democracies that receive loans from the IMF
are harmful because there are more “powerful vested interests”. (Nooruddin 1012) On
the contrast, non democracies, who would in theory be spending less on public goods
or collective action goods, actually implement policy when cutting government

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expenditures that are more favorable to the poor than democracies. “Because public
services are associated with relatively less organized interests, cutting these programs
may be preferable in democracies where political tests are frequent and the barriers to
entry into the political arena are relatively low”. (Nooruddin 1029)
Both theoretical analyses are logical. Caraway et al. explain that when labor is
well organized, it is likely to have its voice heard and be protected when that nation’s
legislators are negotiating the conditions with the IMF, who want to look flexible and
responsive to the international community. Nooruddin and Simmons state that the poor
are protected in non-democracies as democracies are more political with their choices
and depending on the poor’s ability to organize (which is usually lackluster) the
democratic government applies a see no evil, hear no evil approach as equating the
inability to organize to protest unfavorable conditions to agreement with or acceptance
of conditions is mere fallacy. I believe that ultimately, citizens play the most important
role in negotiations between national governments and international organizations,
particularly the International Monetary Fund (IMF). The citizen’s weapon for change is
there voice. Theoretically, the citizens are represented by their dollars and their votes
and thus it is not surprising to see that in democracies, politicians pay attention to the
largest and most well organized interest groups, as they represent the largest proportion
of the electorate. Thus poorer people are unable to organize effectively when compared
to wealthier parties and therefore tend to suffer consequences when the IMF negotiates
conditions, which almost always require reducing government expenditure.
Unfortunately, this is the reality of this issue and a reason the IMF has received harsh
criticism. Thus I would argue that even though both mechanisms help to paint the

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picture as to the randomness that surrounds the conditionality of the IMF loans, I
believe Caraway et al.’s argument is the most logical at explaining how it affects
workers. I drew from an article uploaded by Larry Liu on academia.edu titled, “The
Zambian Economy and the IMF”. Liu states that “A weak economy coupled with IMF
programs have likely contributed to a lower standard of living in Zambia. The lower
Zambian living standards were based on two structural adjustment policies: the
currency devaluation and the wage cuts.” (Liu 2012) The currency devaluation is
“directly linked to the IMF policy of currency devaluation, which was intended to raise
exports and thereby improve Zambia's economy.” (Liu 2012) In the process of
implementing the structural adjustment program [to increase capital for investments for
production of export goods] not only were wages reduced, but unemployment also
increased, which reduced consumption expenditure. Social, health and education
expenditures were also reduced, affecting mostly working people. It was the working-
class that bore almost all the costs of these IMF reforms” (Liu 2012) Lastly, Liu states
that, “the IMF structural adjustment program has made no significant contribution to
spur the Zambian export economy.” This example is one of many IMF failures that are
directly linked to conditionality and the recipient government’s inability to negotiate due
to inefficiencies in organizing and unifying opposition to unfavorable legislative
measures toward the working class.

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Works Cited
Caraway, Teri L, Stephanie J Rickard and Mark S Anner. 2012. “International
Negotiations and Domestic Politics: The case of IMF labor market conditionality.”
International Organization 66(01):27–61.
Nooruddin, Irfan and Joel W Simmons. 2006. “The Politics of Hard Choices: IMF
Programs and Government Spending.” International Organization 60(04):1001–1033.
Liu, L. Larry. 2012. “ The Zambian Economy and the IMF.”
http://www.academia.edu/2351950/The_Zambian_Economy_and_the_IMF. Accessed 1
Dec. 2014. Web.

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