The IMF and AGOA: A Comparative Analysis of Conditionality

Fuhr, David, Klughaupt, Zachary, Duke Journal of Comparative & International Law

INTRODUCTION

The International Monetary Fund (IMF or the Fund) and the Africa Growth and Opportunity Act (AGOA) are fundamentally dissimilar regimes with different purposes and goals. The mission of the IMF is to monitor and stabilize the global economic currency system. (1) It is a member-based organization of nation-states that provides loans to countries in financial difficulties. AGOA, on the other hand, is a unilateral trade preference regime offered by the U.S. government to benefit countries in sub-Saharan Africa. Its purpose is to provide increased trade opportunities as an incentive for countries to undertake political and economic reforms. (2)

A common feature of the IMF and AGOA is, however, that both institutions impose conditions on their beneficiaries. "Conditionality" in relations between developed and developing countries, specifically with regard to financial assistance and trade benefits, has long been a highly controversial topic. Condemnation of IMF conditionality has become something of an ethos among critics of the Fund. (3) Along those lines, there have also been numerous complaints regarding the conditionality engrained in AGOA. (4)

This note analyzes the manner in which conditions are applied in the IMF and AGOA regimes. While the substance of the conditions is naturally dissimilar, we explicitly accept the premise that conditions have the potential to be an important tool in effecting positive change by influencing recipient country policies. Thus, affirming the theoretical legitimacy of conditionality, the paper undertakes an analysis of how the IMF and AGOA use the conditions at their disposal, and whether such use is consistent with their missions and purposes.

I. DECONSTRUCTING ARGENTINA'S FAILURE

If success has a thousand fathers, then Argentina has lately been an orphan. Merely six years ago, Argentina was the darling of the IMF, (5) and the country's leaders bragged of the macroeconomic "miracle" that had transpired following the "lost decade" of the 1980s. (6) Since its default in December of 2001, the struggling nation has seen massive capital flight, followed by an inevitable influx of critics . (7)

Given its history of providing significant financial and political support for Argentina's economic policies during the 1990s, the IMF has unsurprisingly found itself to be the object of much of the criticism. Left-wing commentators assail the IMF for focusing on neoliberal economics while ignoring the increasingly stratified distribution of wealth between rich and poor. (8) Predictably, conservatives take the opposite approach, blaming the IMF for allowing Argentina's leaders to delay the implementation of "sound money, low tax rates and freer trade policy." (9) Critics on both sides of the political spectrum have called for the IMF to "shut down." (10)

Of course, the collapse of an entire economy is unlikely to stem from a single factor, meaning that all of the above commentators are at least partially correct. But much of the literature emerging over the past two years has overemphasized Argentina's fiscal, monetary, and exchange policy instead of addressing the fundamental problems that have led Argentina from one financial crisis to another for decades. In particular, we believe that Argentina will never achieve long-term growth and financial stability until it effectively reduces its rampant and infamous corruption. Furthermore, we assert that IMF conditionality can be used as an effective tool in aiding Argentina in its struggle to clean up its government.

A. Why Should Corruption Be Important to the IMF?

It may seem odd to call for greater use of conditionality at the IMF, given the flood of criticism that IMF conditions, especially those that touch on "structural" considerations, have already received." Some bemoan the fact that IMF conditions unduly infringe on the borrower-nation's sovereignty, and urge the Fund to avoid conditionality wherever possible. (12) Others would abandon conditionality for the simple reason that it is ineffective in imposing any financial discipline. (13) On the other hand, some argue that the IMF's biggest mistake has not been its use of conditions, but its unwillingness to insist that the conditions be strictly followed. (14)

Without endorsing any specific conditions, we find that conditionality is particularly appropriate when a borrower's primary problem is not a short-term liquidity crisis, but a deep-rooted flaw in the fundamentals of its economy. (15) It can be argued that the IMF is not designed to treat such structural societal illnesses. (16) But as long as the Fund chooses to remain at Argentina's bedside, it would be foolish for it to perform cosmetic surgery on macroeconomic indicators while ignoring the underlying cancer of corruption.

Corruption should be important to the IMF because it wastes the resources of borrower countries, thereby endangering their fiscal position and decreasing their ability to repay their external debts. The IMF is required to conserve its resources responsibly, (17) and therefore can only extend funding to countries that are reasonably likely to service their loans. When a substantial portion of revenue is wasted on graft, it becomes more difficult for a government to fulfill all of its domestic obligations while simultaneously keeping the deficit under control. In addition, when corruption is uncontrolled, government officials will steal money that had been destined for development, thus hampering a country's growth and reducing the future revenue available to service its loans. (18)

The second justification for IMF involvement in the fight against corruption stems from the Fund's duty to monitor its borrowers' monetary policy. (19) Corruption is relevant to monetary policy because central banks are unlikely to retain autonomy and independence from the political influence of corrupt regimes. A politicized central bank will be pressured to lower interest rates in anticipation of elections, thereby subjecting the economy to overheating and reducing currency stability. Furthermore, central bankers beholden to political considerations will be tempted to monetize the fiscal deficit, a solution that inevitably leads to hyperinflation and financial disaster. (20)

Some countries, including Argentina, seek to maintain the independence of central banks by enacting laws that forbid the dismissal of the Central Bank's governor without cause. (21) But when corruption pervades an entire government, the authorities of the Central Bank will often be influenced by either outfight bribes or more subtle political manipulation. Even if the Central Bank somehow maintains its integrity, the political leaders who disagree with its policies can easily find "cause" to effect the governor's removal.

This is exactly what happened to Pedro Pou, the widely respected former governor of Argentina's Central Bank. When Pou refused to adopt the policy recommendations of Argentina's economy minister, the government conveniently discovered a link between Pou and certain money-laundering operations and dismissed him. (22) The scandal compromised investors' already shaky confidence in Argentina's monetary system. (23) It thus demonstrated that corruption is not just a "political consideration," but also a key determinant of a country's monetary stability, and therefore a legitimate concern for the IMF. The illicit flow of government funds to the well-connected is often considered the "underlying cause of Argentina's financial catastrophe." (24) But despite an overwhelming consensus of corruption's impact on development, the IMF has afforded little more than lip service to the problem. (25)

For example, in a postmortem analysis of what went wrong, the former director of the Department of Research at the IMF writes extensively about Argentina's macroeconomic conditions but hardly mentions corruption. (26) In other words, when the chief researcher for Argentina's largest lender evaluates the reasons for his former client's collapse, he focuses on the country's congenital habit of spending beyond its means, but completely ignores where the money ended up. (27) Such negligence would be unthinkable for a private lender, (28) and should not be tolerated in an organization charged with promoting "development of the productive resources of all members." (29)

Of course, it is one thing for the IMF to make the fight against corruption a priority, and quite another for it to be effective at reducing it. Indeed, we know of no silver bullet for this longstanding and pervasive problem. (30) Nonetheless, we argue that the IMF could effectively reduce corruption in certain circumstances by adopting the proposals described below.

B. How Can the IMF Use Conditionality to Reduce Corruption?

The most direct manner in which the IMF could control the finances of its borrowers is by conditioning loan approval on reducing corruption. However, such an overarching policy would be far more easily articulated than carried out in practice, as the IMF has neither the resources nor the mandate to police every dollar of government spending. (31)

Nonetheless, the IMF could at least monitor what John Githongo describes as "looting.... the kind of seams whose figures are so huge that when they are successfully concluded they have macroeconomic implications fairly quickly." (32) If the IMF declared that such theft would be factored into its decision-making process, corrupt leaders might become more hesitant to steal. (33)

The IMF could also use conditionality to control corruption in an indirect, although perhaps more effective, manner. Namely, it should condition loan guarantees on the borrower's disclosure of budgetary information. The IMF Articles of Agreement require member countries to furnish information on macroeconomic indicators and exchange reserves, but do not demand the publication of government budgets. (34) In fact, Article VIII specifically forbids the IMF from compelling members "to furnish information in such detail that the affairs of individuals or corporations are disclosed." (35) Such self-imposed secrecy does nothing to advance the purposes of the IMF, (36) and serves only to protect well-connected actors who have something to hide about their incomes. (37)

By demanding disclosure of borrower country spending, the IMF would help reduce corruption by providing citizens of borrower countries a greater opportunity to scrutinize how their tax money is being spent. (38) Furthermore, if Article VIII were amended, the IMF could demand that politicians and other high-ranking officials in borrower countries disclose their personal financial information. Such a move could substantially increase the accountability and credibility of governments in the developing world. (39) And unlike other structural conditions, which depend on the borrower government keeping its promises after coming to an agreement with the IMF, disclosure requirements …

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Publication information: Article title: The IMF and AGOA: A Comparative Analysis of Conditionality. Contributors: Fuhr, David - Author, Klughaupt, Zachary - Author. Journal title: Duke Journal of Comparative & International Law. Volume: 14. Issue: 1 Publication date: Spring 2004. Page number: 125+. © Not available. COPYRIGHT 2004 Gale Group.

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