The International Monetary Fund (IMF) is an international organisation tasked with assisting countries with restoring the viability of their balance of payments through loans and policy reforms. Since the 1980’s, many developing countries found themselves in a position where, due to overwhelming foreign debt, they had to seek IMF’s support and accept policy conditions attached to it. Exogenous shocks, rising prices, and scarcity of external funding make countries in crisis desperate for the IMF’s financial relief. This worsens already asymmetrical power relations between the developing countries and international institutions, making them more likely to accept external influence in their domestic policy. This raises doubts about the extent of national sovereignty in the globalised world with the increasing influence of international institutions. This article investigates several strategies that developing countries adopt to increase their bargaining power over the IMF.
Source: Reuters
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Negotiating with Goliath: Bargaining Power of Developing Countries over International Monetary Fund
To fully immerse yourself within the problem, imagine that you are the Minister of Finance of San Escobar: a relatively small, developing, democratic coastal state, whose economy heavily relies on the export of mackerel. Since the beginning of your political career, you have been a member of the centre-left party People’s San Escobar. The party has been in power for several years capitalising off the support of the labour unions and gaining popularity thanks to wide-range social investments. The main opposition party is the Communist Party of San Escobar, which accuses the ruling party of not doing enough to secure the interests of the San Escobar population on the international stage. The past few years have been really good for San Escobar’s economy. Mackerel prices were on the rise, which brought a lot of additional funds to the budget and enabled large-scale government investments.
Unfortunately, recently the sharp fall in mackerel prices coincided with a significant and prolonged hike in the price of imported oil, which led to a significant deficit in the balance of payments. Coupled with generous public spending practised by People’s San Escobar, the situation got out of control and the government has resorted to borrowing to endure a temporary economic turmoil. Unfortunately, the situation in the market turned out to be persistent long-term and now San Escobar found itself with a significant balance of payments deficit, mounting debt and fleeting foreign investment. To prevent the approaching crisis and revive the San Escobarian economy the government decided to reach out to the IMF and request financial support. The Fund’s staff came back to you with a tailored blueprint of the potential agreement. It proposes a loan of the amount sufficient to restore the balance of payments, however, it includes several policy conditions that the People’s San Escobar party deems unacceptable.
The International Monetary Fund is famous for its neoliberal policy recommendations which are not in line with your party’s interventionist doctrine. Particularly problematic conditions include currency devaluation and austerity. The IMF argues that currency devaluation will make San Esco- barian exports cheaper and hence more competitive, while austerity will reduce the government’s spending. Those two measures will increase the net inflows of funds to your economy and, together with borrowed money, it will restore San Escobar’s balance of payments. Nevertheless, from the perspective of your government, you are concerned that currency devaluation will lead to a sharp increase in prices as weak currency makes imports more expensive. This will translate into a fall in the real wage and hence the living standard in San Escobar. You are confident that such development will meet with the labour unions’ disapproval. These social movements are very powerful in the coastal state, and they can significantly influence the political support for the ruling party. Moreover, you know that People’s San Escobar’s support is largely credited to the party’s public investment program. A sudden shift to austerity will mean the betrayal of electoral promises and voters’ trust. Lastly, allowing an international organisation to assert extensive economic reforms will play to the opposition’s advantage and strengthen the Communist Party’s argument about giving up sovereignty. This is not only a matter of the economic recovery of your country but also of the political survival of you and your party. Your task is to negotiate the loan conditions with the IMF to secure the proposed loan amount, remove currency devaluation requirements and soften the austerity measures proposed by the Fund. The negotiation will not be easy given your country’s desperate situation, limited alternatives and progressing economic decline. Thankfully your advisors prepared a range of strategies which you can use to increase your bargaining power.
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Patrycja Jasiurska
Trust the System
There are several mechanisms embedded in the IMF system which prevent the Fund from going all the way and applying its full bargaining power on the borrowers.
First of all, the iterated nature of the IMF program allows room for flexibility, adjustments and revisions (Kahler 1993, p. 364; Mussa & Savastano 1999, p. 86). In principle, the loan is divided into disbursements that are transferred if the performance targets outlined in the loan agreement are met (Mussa & Savastano 1999, p. 81). Oftentimes, however, when the targets are not met the Fund prefers to return to the negotiating table and revise the agreed targets rather than punish defection and enforce the original agreement (Kahler 1993, p. 364). This approach is motivated by the IMF’s interest in being the agent of development and the guardian of global financial stability (Dash 1999, p. 904). The institution realises that to fulfil this role it must adopt a more reward-based approach and be sensitive to the needs of its borrowers (Ibid., p. 904). Over time it has proven to be more successful in preventing defection and non-implementation of the agreements (Ibid., p. 904).
Secondly, the Fund is incentivized to accommodate the demands of the borrowing countries because of its organisational structure and staff motivation (Kahler 1993, p. 366). The decision-making process gives substantial discretion to the IMF staff responsible for negotiating the agreement (Ibid., p. 366). Moreover, an ambitious staff member who wants to progress in the organisation is incentivized to successfully negotiate and oversee programs in developing countries (Ibid., p. 366). This makes them more likely to pursue mutually beneficial and accommodating negotiations and less likely to use forcing strategies which bear a higher risk of non-agreement (Ibid., p. 366).
There is tension between the interests of the Fund’s negotiators and their superiors. While negotiators tend to be more flexible for the sake of reaching an agreement, they are subordinate to the Executive Board (Ibid., p. 366). The Board consists of the member states whose votes are weighted propor- tionally to the size of their economy (Ibid., p. 367). Their main concern is guarding the principle of uniformity, which prevents some countries to be treated more favourably than others (Ibid. P. 368). They can also exert pressure on the IMF regarding the direction of the loan amount to policy reform extent ratio (Ibid., p. 368). Despite this limitation, however, the Board rarely rejects the programs negotiated by the IMF staff, rather their feedback signals the future directions they envision for the Fund (Ibid., p. 368).
In summary, you can hope that your concerns regarding the extent of the policy conditions attached to the loan will be considered and accommodated by the IMF staff because of their personal motivations and the Fund’s reward-based approach. Their leniency, however, may be constrained by the prefer- ences of the Executive Board. Additionally, the cyclical nature of the IMF process may allow you to renegotiate initially adverse conditions. However, you may prefer to maximise your chances of a favourable initial agreement and consider other strategies outlined below, which are progressively riskier but have been proven successful for some countries in the past.
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Negotiating with Goliath: Bargaining Power of Developing Countries over International Monetary Fund
Capitalise on influential allies and linkages
The IMF often acts as a part of a creditor coalition alongside the World Bank and the majorindus- trialised countries acting as both aid donors and creditors and the commercial banks (Ibid., 369). Although a coalition of many powerful actors may increase their bargaining power, it can also act to their disadvantage as the borrower may try to exploit the internal divisions of the coalition. It may be enough to persuade one powerful member of the coalition to weaken its position and get a more accommodating agreement. The borrowing country can capitalise on influential allies in several ways. Firstly, it can use its membership in international organisations to trade favours and increase its leverage on the deal with the IMF. It is difficult to point towards a particular case study of this strat- egy because such deals usually happen behind closed doors. However, there is a correlation between holding a temporary seat in the Security Council and experiencing fewer negotiating missions, which is associated with obtaining a favourable deal quicker (Ferry 2021, p. 22). Hence, as the Minister of Finance, you may review the position of San Escobar in influential international organisations and try to play it to your advantage in the negotiations with the IMF.
Secondly, San Escobar can use its favourable relationship with a wealthy country to secure alternative sources of financing and improve its best alternative to the negotiated agreement (BATNA). At the moment one of the reasons your negotiating position is weak is that you have few alternatives and securing the IMF loan is your last resort. If you work to improve your BATNA you can assume a firmer stance in the negotiation and you are less pressed to accept a suboptimal agreement. One of the ways to improve your BATNA is through the financial aid of a wealthy ally. It gives you more influx of funds to your economy and helps mitigate the balance of payment deficit without the loan from the IMF, at least temporarily. This happened to Jamaica in 1981 when they received financial aid from the US, which indirectly helped them secure a more favourable agreement with the IMF (Kahler 1993., p. 385).
Strategically delay
If the above strategies fail, you can attempt to delay the negotiation process either to signal your high cost of cooperation and the need for more accommodating terms (Ferry 2021, p. 18) or in hopes of a more favourable negotiating environment in the future. It is a very risky strategy for a developing country because postponing the agreement may escalate the financial crisis and make it harder to return to international financial markets (Ibid., p. 3). Nevertheless, if there are no prospects for a favourable deal, the delay may be an option worth considering. As time passes the situation in the international markets may improve. For example, the drop in the oil prices in 1986 helped Jamaica to improve their balance of payments and therefore achieve a stronger bargaining position with the IMF (Kahler 1993, p. 388).
Another improvement that may come with time is the change in the political cycle, either in the IMF or San Escobar. For example, the end of the term for the Managing Director at the IMF may encourage them to tie up the loose ends quickly instead of leaving them to their successor (Ibid., p. 387). This may lead to more accommodating negotiations. Another political cycle advantage may come when the elections in San Escobar are approaching. Once the IMF sees that prolonging the economic crisis increases the chances of the Communist party taking over, the Fund may be more motivated to negotiate more favourably with the ruling party as they are more inclined to international cooperation compared to the opposition.
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Patrycja Jasiurska
Play high-risk high reward
The last resort is to adopt the politically and economically risky strategy, which is the threat of economic collapse. This can push the IMF to agree on more accommodating terms out of fear of spillover and losing existing financial commitments (Kahler 1993, 338). When the developing country’s economy is well connected with global markets, especially those of the key IMF shareholders, then the risk of the spillover of the economic crisis mobilises the Fund to do more compromise on the loan conditions to improve the balance of payments quicker (Ferry 2021, 17). Secondly, when the IMF shareholders have already invested money in the borrower’s economy and they see that it is on the way to default, they are incentivized to prevent it from happening because it would mean losing the funds they already lent (Kahler 1993, 392).
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