An Inconvenient Truth?

Give me a pile of cash and I will lift the world

Ask Venezuela’s Hugo Chávez about the IMF and you are likely to get a harangue on the wicked tools of the imperialistic United States: he suspects that monetary institution behind the failed coup that attempted to oust him a couple of years ago. To show the way things should be done, Chávez has lately turned himself into a sort of “tropical IMF”, dispensing his wads of petrodollars to those countries he considers really worthy. He wants to do things his way. All those multilateral institutions are not for him.

And then he turns around and goes out of his way to get elected to one of the non-permanent seats in the UN Security Council. Do we detect a contradiction there?

Not really. It might rather be that he read the latest CESifo Working Paper by Alex Dreher and Jan-Egbert Sturm (both at ETH Zurich), and James Raymond Vreeland (Yale University): they found a robust positive relationship between temporary Security Council membership and favourable treatment by the IMF.

Of the Bretton Woods institutions, the IMF is the one people most love to hate. Its detractors claim that it ignores the plight of the poor in its ruthless insistence on macroeconomic reform. The IMF’s rebuttal to this accusation is that without macroeconomic discipline, there is no prospect for long-term growth and absent such growth, any talk of sustainable poverty alleviation is meaningless.

A more damning accusation levied by activist is that the IMF is a tool used to further the interests not only of the US, but of the G7 countries as a whole. A cheap shot, perhaps, difficult to substantiate and reeking of conspiracy theory. But, at some level, it would be surprising if the IMF’s major stakeholders —the US, Japan, Germany, France and the UK—  did not utilize the IMF to promote their strategic interests. They do, after all, control 40 per cent of the Fund’s vote share and it is not a closely guarded secret that foreign aid is an important foreign policy tool.

What is surprising, though, is the extent to which these countries leverage their positions of power in the IMF to influence not only the national policy of recipient countries, but global policy as well. One forum in which major strategic global policy decisions are made is the UN Security Council (UNSC). It consists of five permanent members —China, France, Russia, the UK, and the US—  plus ten temporary ones. The temporary seats are held for two-year terms with member states voted in by the UN General Assembly on a regional basis. Although the five permanent members have veto power, decisions on substantive matters are adopted by majority. This means that the major IMF stakeholders have a clear strategic interest in influencing the voting behaviour of the temporary members.

How do they accomplish this? By giving temporary UNSC members favourable treatment at the IMF. The findings of the CESifo researchers in this respect are not trivial: temporary membership makes a country 20% more likely to be granted IMF assistance. Moreover, UNSC membership reduces the number of conditions attached to IMF programmes. A previous paper by two of these authors found similar correlations between the World Bank and UN General Assembly voting.

Corruption or Realpolitik? That’s a matter of interpretation. What is amply evident is that IMF programme participation and design are not nearly as aseptic as idealists would like to believe, and those who accuse the IMF of catering to special interests cannot be dismissed offhand.

And Chávez? Well, he lost his bid for the temporary seat. But he still sits on a gargantuan pile of cash. Count on him to continue playing his “little IMF” game for a while yet, in order to advance his own geopolitical designs.

Axel Dreher, Jan-Egbert Sturm and James Raymond Vreeland: Does Membership on the UN Security Council Influence IMF Decisions? Evidence from Panel Data, CESifo Working Paper No.1808

Axel Dreher and Jan-Egbert Sturm: Do IMF and World Bank Influence Voting in the UN General Assembly?, CESifo Working Paper No.1724

• Other CESifo Working Papers dealing with the IMF
• Other CESifo Working Papers by Jan-Egber Sturm
• CESifo Working Papers published in the past three months