From Economic Crisis to Reform

IMF Programs in Latin America and Eastern Europe

Grigore Pop-Eleches

• Publisher: Princeton University Press
• Year: 2008
• ISBN:
  9781400835546
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

The wave of neoliberal economic reforms in the developing world since the 1980s has been regarded as the result of both severe economic crises and policy pressures from global financial institutions such as the International Monetary Fund (IMF). Using comparative evidence from the initiation and implementation of IMF programs in Latin America and Eastern Europe, From Economic Crisis to Reform shows that economic crises do not necessarily persuade governments to adopt IMF-style economic policies. Instead, ideology, interests, and institutions, at both the international and domestic levels, mediate responses to such crises.
Grigore Pop-Eleches explains that the IMF's response to economic crises reflects the changing priorities of large IMF member countries. He argues that the IMF gives greater attention and favorable treatment to economic crises when they occur in economically or politically important countries. The book also shows how during the neoliberal consensus of the 1990s, economic crises triggered IMF-style reforms from governments across the ideological spectrum and how these reforms were broadly compatible with democratic politics. By contrast, during the Latin American debt crisis, the contentious politics of IMF programs reflected the ideological rivalries of the Cold War. Economic crises triggered ideologically divergent domestic policy responses and democracy was often at odds with economic adjustment. The author demonstrates that an economic crisis triggers neoliberal economic reforms only when the government and the IMF agree about the roots and severity of the crisis.

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Introduction

IN THE SUMMER OF 1985, in the midst of the debt crisis, two newly elected Latin American presidents set out to transform the domestic and international political economy trajectories of their respective countries. Despite the shared economic and political challenges facing the neighboring countries of Bolivia and Peru as poor, highly indebted new democracies, the two new leaders moved their countries in opposite directions: in Bolivia Victor Paz Estenssoro ended the country's prolonged economic and political paralysis, and instituted a radical program of orthodox economic reforms, which transformed the country from a regional basket case into an unexpected showcase example of successful neoliberalism and cooperation with the International Monetary Fund. Meanwhile, the newly elected Peruvian president, Alan Garcia, reversed his country's earlier IMF cooperation and initiated a heterodox domestic adjustment program combined with a unilateral debt payment reduction. Even though important elements of Garcia's heterodoxy were also found in Argentina's Austral Plan and Brazil's Cruzado Plan, Peru suffered greater international consequences as its highly publicized break with the IMF ultimately resulted in international economic isolation and high economic costs by the end of the decade.

More than a decade later, newly elected center-right governments in Bulgaria, Romania, and Moldova also set out to redirect their countries’ prior economic reform trajectories. While their ex-communist predecessors had not resisted IMF policy advice to the extent of their Latin American counterparts, the electoral victories of openly pro-market coalitions promised to accelerate the pace of IMF-style reforms. These expectations were fulfilled in Bulgaria, where the government of Ivan Kostov pursued a series of remarkably consistent and successful reforms in close and quasipermanent cooperation with the IMF. Despite their similar goals and starting points, the Romanian and Moldovan reformers were much less successful than their Bulgarian counterparts, as political infighting and lack of bureaucratic expertise contributed to a succession of inconclusive stop-go economic reform efforts. Therefore, the IMF program records of the two countries hardly improved under their pro-market governments, and in Romania the advent of a fully implemented IMF program actually had to wait until after the return to power of the ex-communists in the 2000 elections.

These brief snapshots highlight the tension inherent in the IMF's involvement in developing countries. On the one hand, the IMF's central role in the wave of neoliberal reforms of the last two and a half decades has led some observers to interpret IMF programs as tools for imposing the Western economic agenda on the developing world (Pastor 1989, Stiglitz 2002). On the other hand, these sketches also suggest that the Fund cannot simply impose its agenda on program countries, and that domestic political interests and institutional constraints still matter even in developing countries facing serious economic crises. Therefore, other analysts have suggested that IMF conditionality—the practice of conditioning IMF loans on the implementation of certain economic policies—has played only a modest role in shaping economic reforms (Remmer 1998), serving instead as a political alibi for domestic reformers (Vreeland 2003). These conflicting interpretations, which echo long-standing debates about the nature and implications of IMF conditionality, and about the drivers of neoliberal reforms more broadly, raise a number of important questions: Why and how do economic crises trigger and sustain IMF-backed economic adjustment policies in developing countries? Does the IMF live up to its stated goal of providing impartial policy advice and financial support for troubled developing countries? How do IMF lending patterns reflect the evolving demands of international financial markets and the changing priorities of advanced industrial democracies in the developing world? Under what constellations of domestic interests and institutions are governments more willing to initiate and more capable of implementing IMF-style reforms? How are the pressures of IMF conditionality filtered through the domestic politics of program countries?

More broadly, by focusing on the politics of IMF programs I address a number of central theoretical questions about the increasingly intertwined nature of domestic and international drivers of economic policy making. First, in the tradition of Gourevitch's (1978) “second image reversed” approach, I analyze the influence of the broader trends in the global economy on domestic politics and economic policy choices. In analyzing these international drivers, I emphasize not only the central and continuously evolving role of the IMF in shaping economic policies of developing countries, but also the impact of economic incentives related to international financial markets and the political economy of trade and geopolitical alliances. However, in this book I am equally concerned with how domestic ideology, interests, and institutions in developing countries mediate the powerful economic and political pressures to which these countries are subjected, particularly in economic crisis situations. As such this book builds on earlier analyses of the role of domestic politics in shaping national responses to international crises and pressures (Simmons 1994, Keohane and Milner 1996, Garrett 1998).

Since one of the main arguments of this book is that the interaction between domestic and international political economy is contingent on temporal and geographic context, I address these questions by analyzing evidence from two prominent recent episodes of large-scale economic adjustment under IMF supervision: Latin America during the debt crisis of the 1980s, and Eastern Europe and the former Soviet Union during the post-communist transition of the 1990s. For additional analytical leverage the final part of the book also compares these two episodes to the IMF program patterns in Latin America in the 1990s. This systematic cross-regional and cross-temporal comparison of the politics of IMF programs captures the dramatic geopolitical and economic transformation of the international sphere since the debut of the debt crisis in 1982, and at the same time it highlights the important regional variation in historical and institutional legacies across different parts of the developing world.

At the international level, I show that the IMF's response to economic crises is driven by the changing imperatives of international financial stability and the changing interests of large IMF member countries. Whereas IMF programs during the 1980s debt crisis emphasized austerity measures geared toward the repayment of external debt, IMF conditionality in post-communist Eastern Europe focused more heavily on domestic structural reforms and the international economic and political integration of the former command economies. Moreover, crises in both regions received greater attention from the IMF when they occurred in economically and/or politically important countries. While deviations from technocratic uniformity were driven by both concerns about international financial stability and the narrower political and economic objectives of the Fund's largest shareholders, this book shows that the nature and intensity of such deviations depended on the regional and global crisis context, with systemic concerns playing a greater role during the Latin American debt crisis, and geopolitical considerations being more salient during the post-communist transition.

Domestically, this book shows that economic crisis only triggers economic reforms when international interpretations (such as those of the IMF) of the roots and implications of the crisis resonate with the ideal and material interests of domestic elites and ordinary citizens. The extent of such ideological agreement and the compatibility of democratic politics with IMF-style reforms hinges on the broader regional/global context of a given crisis: during periods of worldwide economic crisis and international ideological contestation—such as the debt crisis of the 1980s in the context of the final decade of the Cold War—IMF interventions are more likely to be regarded as thinly disguised impositions of Western economic interests by significant portions of the elite and the population. In such a political context, economic crises are more likely to trigger divergent partisan policy responses from governments of different orientations, and democracy tends to be at odds with economic adjustment. During periods of global economic expansion and international neoliberal ideological hegemony, the IMF is more likely to be viewed as a technocratic policy adviser. Under such circumstances—as was the case in the ex-communist countries in the 1990s—economic crises trigger nonideological economic adjustment efforts, which are broadly compatible with democratic politics. However, even economic need and ideological agreement do not guarantee the successful implementation of reforms; in addition, governments embarking on IMF-style reforms need to have the bureaucratic capacity necessary to cope with the technical challenges of the reform process and the political capital necessary to weather its political challenges.

The theoretical framework and the empirical tests in this book focus not only on the separate effects of particular factors, such as economic pressures, political interests and institutional constraints but on the interaction between these different elements in shaping the economic reform process.¹ Rather than simply asking whether IMF-style reforms are more likely in countries with financially or ideologically motivated governments or with well-functioning bureaucracies, the book analyzes under what political and institutional circumstances economic crises are more effective triggers of policy change, and, conversely, under what economic circumstances partisanship and bureaucratic capacity matter more for IMF programs.² The empirical patterns revealed by this analysis justify not only the emphasis on such interaction effects but also the crossregional and cross-temporal comparative setup of the book. For example, the analysis shows that economic crises rarely affect developing countries uniformly: Instead, in both regions economic crises were much more likely to trigger IMF programs when they occurred in economically important countries and in countries with well-functioning bureaucracies. Conversely, economic importance and bureaucratic capacity mattered primarily during severe economic crises but were much less important during normal economic environments. The impact of domestic economic crisis intensity also varied as a function of government partisan interests, but in this respect the patterns were context-specific: For Latin America in the 1980s, domestic economic crises accentuated partisan policy differences, whereas in Eastern Europe in the 1990s, similar crises instead triggered partisan policy convergence, as political parties discarded their fairweather policy differences and acquiesced to IMF demands. Partisan crisis responses in Latin America during the 1990s were less clear-cut, but the overall patterns were closer to those of post-communist Eastern Europe, suggesting that the ideological convergence of the 1990s trumped (at least temporarily) the partisan polarization of Latin American politics.

The remainder of this introductory chapter is organized as follows: The next section introduces the analytical framework developed in this book and explains the research design in greater detail. The third section puts the two main crises in comparative perspective, by presenting an overview of the economic and geopolitical background of the Latin American debt crisis and the post-communist transition in both international and domestic terms. The fourth section discusses the theoretical contributions of this book to debates in the international and domestic political economy literatures. The last section lays out the plan of the book and provides a brief chapter summary.

The Analytical Framework

As laid out in more detail in chapter 2, this book analyzes IMF programs as an interaction between the IMF and developing country governments in the context of a number of economic and political constraints at the domestic and international level. Even though IMF programs are negotiated by two primary actors—representatives of the IMF staff and the program country government—the actual dynamics of Fund programs are decisively shaped by the complex web of political and economic constraints under which the two main actors operate. Therefore, to explain the trajectories of IMF programs in the developing world, we must consider a series of analytical steps. First, we have to understand how the nature of IMF conditionality toward a given country is shaped by the competing imperatives of the Fund's multiple agendas. These include ensuring international financial stability, imposing prudent economic policies in program countries, and (occasionally) helping large donor countries pursue their broader economic and geopolitical interests. This international policy environment, combined with the country's financial need and domestic economic imbalances, establishes the broad parameters of what the government needs to do to address the demands of the country's economic situation in the context of an IMF program. The partisan interests of the parties and politicians in power affect their interpretation of the country's economic situation and, therefore, shape what the government would like to do in the absence of domestic constraints. Finally, governments are constrained domestically in what they can do to resolve economic crises. The severity of these constraints depends on the government's ability to overcome potential political resistance from reform opponents, as well as on the capacity and willingness of the state apparatus to implement the government's desired policies.

Research Design

In line with a few recent contributions to the political economy of IMF programs (Stone 2002, Vreeland 2003), this book employs a multimethod approach: The predictions of the theoretical model presented in chapter 2 (and formalized in that chapter's appendix) are tested in subsequent chapters through a combination of cross-country statistical tests (based on twenty-one Latin American/Caribbean³ and twenty-six Eastern European/former Soviet countries⁴) and comparative case studies of four Latin American countries (Argentina, Bolivia, Chile, and Peru) and four Eastern European countries (Moldova, Slovakia, Bulgaria, and Romania).

The basic theoretical claim of the book is that domestic and external economic crises are not uniform drivers of IMF programs (as much of the prior literature has implicitly assumed) but that economic crises are mediated by politics at both the national and the international level. Therefore, this book departs from prior works by comparing two temporally and geographically bounded country clusters: Latin America during the debt crisis of the 1980s, and the transition economies of Eastern Europe and the former Soviet Union in the 1990s. The final chapter of the book places these two reform episodes into additional comparative perspective by discussing the broad political dynamics of Latin American IMF programs in the 1990s. These comparisons show not only that different crisis aspects matter more under certain circumstances (e.g., debt payments during the 1980s in Latin America versus reserves in post-communist Eastern Europe) but that economic crises are interpreted and treated differently depending on the broader regional and international climate (e.g., inflation leads to partisan policy divergence in Latin America but to partisan policy convergence in Eastern Europe).

The comparison of three episodes of IMF programs (in broadly comparable countries) under varying crisis types and crisis “logics” allows me to trace the changing interaction between economic crisis and political interests/constraints as drivers of IMF programs and economic reforms. From this perspective, this book builds on the theoretical insights of earlier studies (Gourevitch 1986, Rogowski 1989), which showed that domestic alliances and policy choices were greatly affected by temporally specific changes in global markets. Somewhat surprisingly, the more recent literature dealing with IMF programs and the neoliberal reforms of the last twenty-five years has largely ignored the role of changing temporal dynamics due to systemic transformations. Similarly, despite the ongoing theoretical debates about the importance of regions for political science (Bunce 1995, Schmitter and Karl 1994, Mainwaring and Perez-Linan 2007) and a number of insightful cross-regional comparisons (Greskovits 1998, Haggard and Kaufman 1995, 2007), regional differences have been generally ignored in the study of IMF programs.⁵

While the specific choice of episodes will be discussed in greater detail below, I will first lay out the methodological justification for using systematic cross-regional and cross-temporal comparisons, and the potential advantages of this approach over the two most common alternatives: the single-region approach (Pastor 1987, Stone 2002, 2004) and the multiregion and multiperiod sample of IMF programs (Reichmann and Stillson 1978, Thacker 1999, Barro and Lee 2003, Vreeland 2003). To understand the advantages of this research design, it is useful to consider the implications of having used one of the alternative approaches for the findings mentioned above. Had the argument been developed by studying only post-communist Eastern Europe, the book would have concluded that foreign reserve levels are the crucial driver and higher inflation leads to ideological convergence. By contrast, the same approach in Latin America in the 1980s would have yielded very different conclusions, emphasizing the role of external ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Illustrations and Tables
• List of Abbreviations
• Preface
• 1. Introduction
• 2. A Theoretical Approach to IMF Program Initiation and Implementation
• 3. Changing Crisis “Recipes”: The International Drivers of IMF Programs
• 4. Navigating External Crises: Case Study Evidence
• 5. Domestic Political Responses to Economic Crises
• 6. Domestic Crisis Politics: Case Study Evidence
• 7. The Great Reconciliation?—Latin America and the IMF in the 1990s
• 8. Theoretical Conclusions and Policy Implications
• Appendix—A Formal Model of IMF Program Initiation and Implementation
• Bibliography
• Index