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The IMF and ‘conditionality’

Structural conditions imposed on developing countries by the International Monetary Fund undermine their ‘state capacity’ for economic development, finds study led at Cambridge Judge Business School.

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Structural conditions imposed on developing countries by the International Monetary Fund (IMF) reduce their “state capacity” for economic development by undermining local institutions, according to a new study led at Cambridge Judge Business School, University of Cambridge.

The study, published in the American Journal of Sociology, finds that conditions on privatisation, price deregulation and (to a lesser extent) public sector employment flexibility “have a significantly negative effect on bureaucratic quality” – increasing the risk of bureaucrats falling prey to special interests and narrowing available policy instruments.

In addition, companies in developing countries experience more bribery by public officials when they face more structural conditions under IMF programmes, says the study, which is based on data from 141 developing countries over a 30-year period.

“Our study offers important lessons for all international organisations to consider,” says the study. “We now know which elements of IMF programmes are counterproductive and misguided” – those structural conditions that seek to “rapidly overhaul” domestic institutions, reducing the ability to recruit, train and retain qualified staff.

The article was co-authored by Dr Bernhard Reinsberg of the University of Cambridge; Dr Alexander Kentikelenis of Bocconi University; Dr Thomas Stubbs of Royal Holloway, University of London; and Professor Lawrence King of the University of Massachusetts. Lead author Dr Bernhard Reinsberg is now a Lecturer at the University of Glasgow and Research Associate at the Centre for Business Research at Cambridge Judge Business School, and conducted his research on the paper at the Centre for Business Research.

“Much previous research on the socioeconomic impact of IMF programmes has focused on economic growth, but it did not examine how such programmes transform state institutions,” says Dr Reinsberg. “This is surprising, given the importance of able states to economic development.”

The article says the IMF has an important role in helping countries overcome balance-of-payment problems, but it needs “fundamental reforms” to avoid undermining local institutions. The IMF contends that its practice of mandating far-reaching policy changes as a condition of loans is necessary to secure macroeconomic stability, improve the business climate, foster job creation and support medium-term growth, the study says.

While previous studies had examined domestic forces that undermine state capacity for economic development, the authors focus instead on outside Western-dominated international organisations – and concentrate on “structural” rather than less intrusive “stabilisation” conditions imposed by the IMF. “To our knowledge, we present the first systematic inquiry into the effects of IMF conditionality on state capacity,” the article says.

The study breaks down data into three-year periods between 1985 and 2014 to compare how bureaucratic quality evolves in the medium term in countries under an IMF programme under different conditionality profiles. The research uses the International Country Risk Guide to measure bureaucratic quality and the Business Environment and Enterprise Performance Surveys to assess bribery-related issues.

The article in the American Journal of Sociology, which is based at the University of Chicago, is entitled “The world system and hollowing out of state capacity: how structural adjustment programs affect bureaucratic quality in developing countries”.