Flush with Resources, the IMF Relaxes Conditionality

Flush with Resources, the IMF Relaxes Conditionality

The International Monetary Fund has been reinvigorated by the global economic crisis. While the added resources it has been given has attracted attention, the IMF has also responded to the challenge of the crisis by overhauling conditionality. So far, reforms have been announced to meet the needs of middle-income developing countries, with those designed for lower-income countries slated to be adopted this summer. But a review of the reforms to date suggests that low-income countries can expect to enjoy unprecedented bargaining leverage over the fund in coming years.

At the London G-20 summit in April, the leaders of the world's biggest economies agreed to dramatically increase the IMF's capitalization, to the tune of $750 billion. (See Daniel McDowell's WPR Briefing.) Just as banks lower interest rates when they have lots of capital to lend, IMF conditionality historically decreases when the fund has lots of resources at its disposal. In addition, the G-20 gave the IMF a new writ of authority to address the global economic crisis, and the fund will respond by making loans quickly. In such circumstances, it will be less likely to impose extensive conditions likely to slow down negotiations. This, too, puts the low-income countries in a better bargaining position.

Nowhere is this relaxation of conditions more evident than in the area of fiscal policy. Developed countries are responding to the economic crisis with traditional, Keynesian fiscal stimulus packages. It will be difficult, then, for the IMF to argue that similar solutions are not appropriate in developing countries. Indeed, the fund's Regional Economic Outlook for Sub-Saharan Africa, published in April, already made the case for fiscal stimulus for some countries, while counseling others to keep spending levels unchanged, even though tax revenues are likely to fall off. This is a marked departure from an IMF that counseled fiscal austerity even for countries running budget surpluses during the East Asian Crisis. Developing countries seeking IMF assistance will certainly take note of its change in tune, which gives them more freedom of action.

Keep reading for free!

Get instant access to the rest of this article by submitting your email address below. You'll also get access to three articles of your choice each month and our free newsletter:

Or, Subscribe now to get full access.

Already a subscriber? Log in here .

What you’ll get with an All-Access subscription to World Politics Review:

A WPR subscription is like no other resource — it’s like having a personal curator and expert analyst of global affairs news. Subscribe now, and you’ll get:

  • Immediate and instant access to the full searchable library of tens of thousands of articles.
  • Daily articles with original analysis, written by leading topic experts, delivered to you every weekday.
  • Regular in-depth articles with deep dives into important issues and countries.
  • The Daily Review email, with our take on the day’s most important news, the latest WPR analysis, what’s on our radar, and more.
  • The Weekly Review email, with quick summaries of the week’s most important coverage, and what’s to come.
  • Completely ad-free reading.

And all of this is available to you when you subscribe today.

More World Politics Review