Cooperation & Change

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COMPARATIVE INSTITUTIONAL ANALYSIS:The Politics of International Finance

James Raymond Vreeland

School of Foreign Service

Georgetown University

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The Political Economy of theUN Security Council

Presentation byJames Raymond Vreeland

Georgetown UniversityCo-authors: Axel Dreher & Jan-Egbert Sturm (ETH)

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UNSC

IMF World Bank

IMF/WB project in Ghana

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The question:

• To gain leverage over one international institution can a country use its power in another international institution?

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Yes.

Why?

• The US and other powerful countries, who virtually control the IMF & World Bank, care about how the UNSC votes.

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Plan

• What is the UN Security Council?

• What are the IMF & World Bank?

• Why are they used to influence the UNSC & how?

• Evidence– Anecdotes– Large-n

• So what?

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What is the UNSC(United Nations Security Council)?

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What is the UNSC?

• 5 permanent members with veto power

• 10 elected members (2 year term - limited)– Nominated by regional caucus, elected by GA– Africa (3), Asia (2), Latin America (2), Eastern Europe (1),

Western Europe+ (2)

• Decisions (open ballot) require 9 votes (5+4)

• UNSC votes on – UN military action against aggressors– Economic sanctions & arms embargoes

• Elected members of the UNSC potentially will vote on matters of extreme international importance. 9

Why bribe/reward votes?

• Voting power?

• Legitimacy

– There is a premium for getting (near) unanimous votes to win domestic public support (Voeten).

– UNSC support increases the “rally behind the president” by as many as 9 points in presidential approval.

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Enter the IMF & the World Bank

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What are the International Monetary Fund (IMF)

and the World Bank?

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Two Key points about the IMF & World Bank

• Involved with developing countries through “programs”: loans + conditions.

• Influence over decisions pegged to economic size.

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Why use the IMF and the World Bank to influence the UNSC?

– Political benefits (for both actors)

• “DIRTY WORK” (Vaubel)

– Leverage benefits

• Conditionality & loan disbursements

– Cost benefits

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• The goal of the major shareholders of the IMF:

– Get countries under a program – in case important votes come up.

• Godfather-esque: “Some day, and that day may never come, I'll call upon you to do a service for me. But uh, until that day, accept this justice as a gift on my daughter’s wedding day.”

• http://www.youtube.com/watch?v=8Bz9iXernY4&feature=fvw

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Evidence

• Some anecdotes***

• Systematic evidence

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Gulf War Examples

• Zimbabwe – UNSC member 1991-92

– 1992 – 1st IMF arrangement in a decade

– Votes for 2 resolutions against Iraq

– Then abstains…

– And Zimbabwe was threatened with new IMF conditions

– Subsequently votes for 11 resolutions condemning Iraq.

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Counter examples?

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Gulf War Examples

• Cuba – UNSC member 1990-1

– Consistently opposed Iraq resolutions

– IMF arrangement?

– Left the IMF in 1964 – not an IMF member

– (Why? Claimed the IMF was a tool of the US)

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Cuba before & after 1961

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Non-member Member Non-member Member

n=11 n=4 n=29 n=1

Cuba pre-1961 Cuba post-1961

IMF

par

tici

pat

ion

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Repùblica de Nicaragua, América Central

0.00

0.25

0.50

0.75

1.00

Non-member Member Non-member Member

n=27 n=2 n=9 n=2

Nicaragua 1951-1979 Nicaragua 1980-1990

IMF

par

tici

pat

ion

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0.000.100.200.300.400.500.600.700.800.901.00

Non-member UNSC Member

n=27 n=7

Brazil 1970-2004

IMF

Par

tici

pat

ion

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Gulf War Examples

• Yemen – UNSC member 1990-1

– Voted against Desert Storm – a U.S. representative was overheard declaring to the Yemeni ambassador that it was

“the most expensive vote you have ever cast.”

– The US cut hundreds of millions of dollars in aid

– (No IMF arrangement)

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A more historical example?

• Tanzania: 1961-1974 no IMF, no UNSC

– 1975

• UNSC member

• First IMF arrangement – exceedingly weak conditionality (credit ceiling)

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IMF reply in the Washington Post (November 1, 2006):

• An IMF spokesman said “the [Tanzania] evidence is anecdotal and circumstantial.”

• To convince people, we need

– many more anecdotes

– statistical evidence (it’s not just luck)

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Figure 3: Participation in IMF programsby UN Security Council Membership and Region

0.00

0.10

0.20

0.30

0.40

0.50

0.60N

on-

mem

ber

Mem

ber

Non

-m

embe

r

Mem

ber

Non

-m

embe

r

Mem

ber

Non

-m

embe

r

Mem

ber

Non

-m

embe

r

Mem

ber

Non

-m

embe

r

Mem

ber

n=1669 n=95 n=1119 n=47 n=1254 n=100 n=591 n=36 n=814 n=51 n=998 n=108

Africa Asia & S.Pacific

LA & Carib. E. Europe Middle East &N. Africa

IndustrializedCountries

UN Security Council Membership Status and Region

% o

f obs

. par

ticip

atin

g in

IMF

pro

gram

s

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Table 3: Controlling for Additional Predictors of IMF Participation

  Pooled LogitCountry Fixed

EffectsRegional Fixed

EffectsYear Fixed

EffectsTemporal Splines

UNSC 0.59** 0.83** 0.56** 0.51** 0.64**

(Robust std error) (0.24) (0.29) (0.26) (0.22) (0.29)

Foreign Reserves -0.15** -0.005 -0.13** -0.13** -0.04

(Robust std error) (0.03) (0.07) (0.03) (0.03) (0.08)

Debt Service 0.02** 0.02 0.03** 0.03** 0.02**

(Robust std error) (0.01) (0.01) (0.01) (0.01) (0.01)

Investment -0.06** -0.08* -0.05** -0.04** -0.05

(Robust std error) (0.01) (0.05) (0.01) (0.01) (0.04)

Past Participation 2.47** 2.42** 2.45** 2.27** 2.00*

(Robust std error) (0.26) (0.45) (0.27) (0.34) (1.13)

Lagged Election -0.02 -0.06 -0.07 -0.11 -0.11

(Robust std error) (0.16) (0.18) (0.16) (0.17) (0.21)

Budget Surplus 0.01 0.06** 0.01 -0.003 0.06**

(Robust std error) (0.02) (0.03) (0.02) (0.02) (0.03)

Inflation -0.0002** -0.0003 -0.0002* -0.0003** -0.0001

(Robust std error) (0.0001) (0.0002) (0.0001) (0.0001) (0.0002)

Current Account -0.01 -0.001 0.01 0.01 -0.002

(Robust std error) (0.01) (0.02) (0.01) (0.01) (0.02)

BOP -3.89* 0.19 -2.89 -2.09 0.05

(Robust std error) (2.07) (3.17) (2.09) (2.07) (3.22)

GDP/capita (1995 PPP) -0.00003 -0.001** -0.0001* -0.0001** -0.001**

(Robust std error) (0.00003) (0.0002) (0.00004) (0.00004) (0.0002)

Growth -0.001 -0.003 -0.003 -0.002 -0.004

(Robust std error) (0.005) (0.02) (0.004) (0.004) (0.02)

Regime 0.04 0.32 0.18 0.18 0.26

(Robust std error) (0.19) (0.39) (0.20) (0.18) (0.41)

log(checks) 0.08 0.13 0.16 0.07 0.06

(Robust std error) (0.14) (0.25) (0.14) (0.10) (0.24)

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With 95% confidence, we can sayUNSC membership increases

rates of IMF participation between 7% and 52%.

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Figure 1: Participation in IMF programs by non-permanent UN Security Council Membership over time

0%

10%

20%

30%

40%

50%

Non-members

Members Other years 4 yearsbefore

3 yearsbefore

2 yearsbefore

1 year before 1st yearmember

2nd yearmember

1 year after 2 years after

mean=0.28 mean=0.34 mean=0.28 mean=0.28 mean=0.31 mean=0.33 mean=0.32 mean=0.35 mean=0.34 mean=0.30 mean=0.28

st.dev.=0.45 st.dev.=0.48 st.dev.=0.45 st.dev.=0.45 st.dev.=0.46 st.dev.=0.47 st.dev.=0.47 st.dev.=0.48 st.dev.=0.48 st.dev.=0.46 st.dev.=0.45

(n=6684) (n=462) (n=5405) (n=178) (n=196) (n=215) (n=236) (n=236) (n=225) (n=234) (n=221)

UN Security Council Membership Status

% o

f ob

s. p

arti

cipa

ting

in I

MF

pro

gram

s

The horizontal line shows the average IMF participation rate across our entire sample. The dots reflect the results where only low and lower-middle income countries are included.29

Conditionality?

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World Bank evidence

“It is true that during the Cold War years aid was politically motivated.”

“Now however, aid is being delivered to countries most in need and to those who show they are determined to use it well.”

(World Bank, FAQ, www.worldbank.org)32

Average # of World Bank projects by UNSC membership

0.0

0.5

1.0

1.5

2.0

2.5

avg=1.29

std=1.95

avg=2.13

std=2.93

avg=1.28 avg=1.30

std=1.96 std=1.93

avg=2.15 avg=2.10

std=2.96 std=2.92

avg=2.06 avg=2.19

std=2.75 std=3.11

n=176 n=181

Non-

n=5333 n=357

member Member

Total sample

avg=1.29

std=1.95

n=5333

Non-member

1st.yearmember

2nd yearmember

Over time

n=2638 n=183 n=2695 n=174

Non-member

Member Non-member

Member

During the cold war After the cold war

If politics mattered during the Cold War, but not after, this bar should be above the line,and this one should be at/below the line…

UNSC members continue to get more World Bank programs

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Observation by Russian Student

• Bribes – no surprise– Trade money for votes

• But the US bribes…– with a loan – must be repaid!

• Impressive!

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Is this a US-thing?

• Regional Organizations

• Regional Hegemons

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Allocation of ADB lending by UNSC membership over time

Daniel Yew Mao Lim, Class of 2011

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Summary

• International institutions do represent the interests of their most powerful members

• UN Security Council members are about 20% more likely to receive IMF programs than non-members

• We find similar results with respect to the World Bank and the Asian Development Bank

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How can we tell which countries are important to the IMF?

• US foreign aid

• Voting at the UN General Assembly

• US Bank Exposure

• Important to other important shareholders?– (Japan, Germany, France, UK)

• Strategic geo-political position

• International position– United Nations Security Council

• Others?

***THIS SLIDE IS USEFUL FOR YOUR ASSIGNMENT*** 38

Cooperation & Change

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Putting the domestic and international stories together…

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The International Relations Problem:

• Veto players story requires a credible commitment

• The IMF must punish noncompliance.

• We have seen from the IR literature that this commitment is not always credible.

• So the effect of veto players should depend on country-US relations.

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Favorable US interest in the country

Eff

ect

of

do

me

stic

ins

titu

tio

ns

Entering into IMF Programs:The effect of domestic politics depends on international politics

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Thank youWE ARE GLOBAL GEORGETOWN!

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So what?• Q # 1: Is this a bad thing?

• Q # 2: Is it in the US interest to change things?

• Perhaps not – Short-run political gains.

• Long-run economic development?

• Elected to the UNSC 6 timesElected to the UNSC 6 times

• 15 IMF arrangements since 195815 IMF arrangements since 1958

• 32 out of 48 years (66% of the time)32 out of 48 years (66% of the time) 44

Going Multipolar?

• Political power & international institutions

• No one at the global level?– Politics go to regional level

• By granting China more say @ the IMF, keeps their government focused @ the international level

• US & China counterbalance @ the IMF

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