IMF Structural Conditionality: How Much is Too Much?

As suggested above, an active debate has long been underway - and has intensified in the wake of the Asian crisis - about the appropriate scope and intrusiveness of IMF policy conditionality. In this paper, I take up one key element of that debate, namely, the role of structural policies in IMF-supported adjustment programs. By "structural policies," I mean policies aimed not at the management of aggregate demand but rather at either improving the efficiency of resource use and/or increasing the economy's productive capacity. Structural policies are usually aimed at reducing/dismantling government - imposed distortions or putting in place various institutional features of a modern market economy. Such structural policies include, inter alia: financial-sector policies; liberalization of trade, capital markets, and of the exchange rate system; privatization and public enterprise policies; tax and expenditure policies (apart from the overall fiscal stance); labor market policies; pricing and marketing policies; transparency and disclosure policies; poverty-reduction and social safety-net policies; pension policies; corporate governance policies (including anti-corruption measures); and environmental policies. To set the stage for what follows, it is worth summarizing the main concerns and criticisms that have been expressed about the IMF's existing approach to structural policy conditionality. These typically take one or more of the following forms. First, there is a worry that wide-ranging and micro-managed structural policy recommendations will be viewed by developing-country borrowers as so costly and intrusive as to discourage unduly the demand for Fund assistance during crises. Even though the cost of borrowing from the Fund (the so-called rate of charge) is much lower than the cost of borrowing from private creditors - particularly during times of stress - we observe that developing countries usually come to the Fund "late in the day" when their balance-of-payments problems are already severe. This suggests that developing countries place a non-trivial shadow price on the policy conditions associated with Fund borrowing. The concern is that if these conditions become too onerous, emerging economies will wait even longer to come to the Fund (as Thailand did in 1997) and/or will turn to regional official crisis lenders that offer easier policy conditionality (e.g., in 1998 Malaysia was one of the first beneficiaries of low-conditionality Miyazawa Initiative funds, and Asian countries could eventually decide to elevate the infant Chiang-Mai swap arrangements into a full-fledged Asian Monetary Fund). The outcome - so the argument goes - would then be even more difficult initial crisis conditions, greater resort to the anti-social behavior that the Fund was established to prevent, and a tendency toward Gresham's Law of conditionality (where weak regional conditionality would drive out not only the unnecessary but also the necessary elements of Fund conditionality).