Who Is Credible? Government Popularity and the Catalytic Effect of IMF Lending
Author | Sujeong Shim |
DOI | http://doi.org/10.1177/00104140211060280 |
Published date | 01 November 2022 |
Date | 01 November 2022 |
Subject Matter | Articles |
Article
Comparative Political Studies
2022, Vol. 55(13) 2147–2177
© The Author(s) 2022
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DOI: 10.1177/00104140211060280
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Who Is Credible?
Government Popularity
and the Catalytic Effect
of IMF Lending
Sujeong Shim
1
Abstract
In this paper, I explain variations in international investors’reactions to In-
ternational Monetary Fund (IMF) programs. Investors react favorably if a
borrowing government is credibly committed to implementing essential IMF
conditionality. Instead of engaging complex information processing about
economic reform, however, investors rely on a heuristic device to assess the
borrower’s domestic political conditions. I argue that a borrowing govern-
ment’s popularity is an important cue for investors to assess the prospect of
an IMF program. Investors associate higher government popularity with
better implementation of the program and react more favorably to more
popular borrowers. Using annual data from up to 52 emerging market
economies from 1998 to 2017, I find robust statistical evidence supporting
these claims: an IMF program alone does not restore investor confidence.
Rather, an IMF program carried out by a strong government does. My findings
have important implications for the study of global financial governance and
credible commitment.
Keywords
iInternational Monetary Fund, public opinion, government popularity,
international financial market, political economy
1
University of Zurich, Zurich, Switzerland
Corresponding Author:
Sujeong Shim, Department of Political Science, University of Zurich, Affolternstrasse 56, Zurich
8057, Switzerland.
Email: shim@ipz.uzh.ch
When does an International Monetary Fund (IMF) program work? In May
2010, the Greek government agreed to implementextensive austerity measures
and structuralreforms in exchange for a 3-year, €110 billionloan from the IMF,
the European Commission, and the European Central Bank. Combining the
largestloan in the IMF’s history with an “ambitious”policy package,the bailout
program was supposed to “restore market confidence”(IMF, 2010). The
outcome was, however, disappointing. Throughout the 22 months of the
program duration, investors became increasingly reluctant to lend to Greece.
They asked the Greekgovernment for an interest rate of 7% at thebeginning of
the program, and it spiked to a whopping 29% in February 2012 when the
program was eventually canceled and replaced with a new program.
Why did the Greek bailout program fail to restore investor confidence
despite the unprecedentedly large loan, coordinated support from the IMF and
the European Union, and the government’s overt commitment to extensive
economic reforms? To use an IMF term, the Greek program failed to trigger
“catalytic effects”: it did not catalyze private financing. When private fi-
nancing does not follow an IMF program, a borrower economy falls into a
lengthened economic crisis, as was the case for Greece. Under what con-
ditions can an IMF-participating government successfully attract international
private financing?
A substantial body of literature explores this question, with many studies
focusing on political and economic structural factors such as a borrower’s
macroeconomic fundamentals and political institutions. However, because
structural factors tend to remain constant over a short period of time, they provide
limited explanations for within-country variations, including the exacerbated
investor reaction for Greece during 2010–2012. In this paper, I suggest that
explaining investors’reaction requires much more than an examination of a
borrower’s macroeconomic or political institutions. International investors reward
borrowing governments that are credibly committed to implementing IMF
conditionality. Investor reaction therefore depends on the domestic politics within
which the government carries out the IMF-mandated reform.
Instead of processing all the information associated with complex austerity
measures and economic reforms, however, investors rely on simple cues
readily available for them. Specifically, I argue that a borrower’s political
popularity plays a critical role in shaping investors’perceptions about the
credibility of IMF participants. Investors expect governments with lower
levels of public support to have greater difficulty fully implementing IMF
conditionality. Consequently, investors react favorably if a borrowing gov-
ernment gains public support.
My theoretical framework suggests that the terms of IMF programs as well
as investors’reaction could depend on a borrower’s popularity. IMF officials,
for example, can grant more lenient programs to more popular borrowers
because they appear more credible and thus more likely to make a program a
2148 Comparative Political Studies 55(13)
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