Please note, due to essential maintenance online transactions will not be possible between 02:30 and 04:00 BST, on Tuesday 17th September 2019 (22:30-00:00 EDT, 17 Sep, 2019). We apologise for any inconvenience.
To send content items to your account,
please confirm that you agree to abide by our usage policies.
If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account.
Find out more about sending content to .
To send content items to your Kindle, first ensure email@example.com
is added to your Approved Personal Document E-mail List under your Personal Document Settings
on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part
of your Kindle email address below.
Find out more about sending to your Kindle.
Note you can select to send to either the @free.kindle.com or @kindle.com variations.
‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi.
‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
The effect of new International Monetary Fund (IMF) lending announcements on capital markets depends on the lender’s political motivations. There are conditions under which lending reduces the risk of a deepening crisis and the risk premium demanded by market actors. Yet the political interests that make lenders willing to lend may weaken the credibility of commitments to reform, and the act of accepting an agreement reveals unfavorable information about the state of the borrower’s economy. The net ‘catalytic’ effect on the price of private borrowing depends on whether these effects dominate the beneficial effects of the liquidity the loan provides. Decomposing the contradictory effects of crisis lending provides an explanation for the discrepant empirical findings in the literature about market reactions. This study tests the implications of the theory by examining how sovereign bond yields are affected by IMF program announcements, loan size, the scope of conditions attached to loans and measures of the geopolitical interests of the United States, a key IMF principal.
Democracies are more supportive of US positions on important votes in the UN General Assembly than of nondemocracies. Is this because democracies share common perspectives, or does this pattern reflect coercion? Since 1985, US law has stipulated that the US State Department identify important votes and that aid disbursements reflect voting decisions. To unravel these alternative explanations, we introduce a strategic statistical model that allows us to estimate voting preferences, vulnerability to influence, and credibility of linkage, which are theoretical quantities of interest that are not directly observable. The results reject the hypothesis of shared democratic values: poor democracies have voting preferences that are more oppositional to US positions than autocracies, and they are more willing than autocracies to take symbolic stands that may cost them foreign aid. Democracies support US positions, however, because US aid linkages are more credible when directed toward democratic countries. Splitting the sample into Cold War and post–Cold War segments, we find that the end of the Cold War changed the way US linkage strategies treated allies and left- and right-leaning governments, but the effects of democracy remained constant.
How can international organizations persuade governments to adopt policy recommendations that are based on private information when their interests conflict? We develop a game-theoretic model of persuasion that applies regardless of regime type and does not rely on the existence of domestic constituency constraints. In the model, an international organization (IO) and a domestic expert have private information about a crisis, but their preferences diverge from those of the government, which must choose whether to delegate decision making to the expert. Persuasion can take place if the international institution is able to send a credible signal. We find that this can take place only if the preferences of the IO and the domestic expert diverge and the institution holds the more moderate policy position. This result contrasts with conventional wisdom, which holds that the necessary condition for IOs to exert influence is support from a domestic constituency with aligned preferences. Our model suggests that, far from being an obstacle to international cooperation, polarized domestic politics may be a necessary condition for IOs to exert effective influence.
The argument is that international organizations are best understood as equilibrium outcomes that balance the power and interests of the leading state and the member countries. Institutional design is endogenous to this interaction, and includes membership, formal voting rights and informal governance procedures. The model that follows gives specific content to this claim by specifying how three particular forms of power interact. Structural power represents the outside options of the leading state and the externalities that its participation generates for other members. Formal voting rights set the policy of the organization and create the parameters within which informal influence is exercised. Informal influence consists of participation in decision making and special access to information, and it allows the leading state to override the common policy when its vital interests are affected.
Hybrid institutional forms involving both formal and informal governance mechanisms are the norm because they make it possible to accommodate the interests of both strong and weak powers. Informal governance can be legitimate because the degree of conflict of interest between the leading state and the membership varies within the range of issues or cases that fall under an organization's competence, so the member countries tolerate a degree of informal influence in cases of special concern to the leading power in return for a larger share of decision-making authority in ordinary times. This tacit contract depends upon the restraint of the leading state, however, and the legitimacy and credibility of the organization can be eroded if informal influence is used too frequently.
Comparative cases provide useful counterpoints to the IMF, illustrating the broad sweep of the theory of informal governance, and also demonstrating that the theory can help to explain the substantial differences across international institutions for diverse issue areas. The cases chosen are the World Trade Organization and the European Union (EU). Important aspects of informal governance emerge in each of these organizations. Indeed, in each case, the informal practices play an essential role in institutional design, and ignoring them would lead to fundamental misunderstanding of how each institution functions. However, informal governance plays very different roles in each case, and I argue that the model presented in Chapter 3 sheds light on the variety of international organizations
The comparative statics of the model make strong predictions about institutional design. The expectation of long-term conflict of interest and the dispersion of structural power impose limits on the willingness of states to invest in jointly controlled institutions and lead to more formalization. However, we do not necessarily expect weak institutions to be associated with formalization because of the intervening effects of the returns to cooperation. When the returns to cooperation are high, states become willing to invest substantial powers in institutions even when the existence of multiple leading powers increases the costs of delegation. However, in order to minimize these costs, they choose formalized institutions that make delegating extensive powers more acceptable. Consequently, whenever extensive delegation arises under circumstances of multiple leading powers with substantially conflicting interests, it should take legalized forms.
Government is gradually replacing anarchy in the international system, and international governance is largely accomplished by means of international organizations. International organizations have proliferated, have expanded in membership, have acquired new legal enforcement powers, and have extended their reach into the details of domestic political economy in their member states. A few, including the International Monetary Fund (IMF, or the Fund), command significant resources and wield considerable authority. International organizations are emerging as important actors in their own right, but they also remain potent power resources for influential states. The informal power that a leading state can exert through international organizations plays an important role in US foreign policy.
By the beginning of the twenty-first century, international organizations had become an essential instrument of effective statecraft even for the most powerful state in the system, and for most other states under most circumstances, they were the only forums in which anything could be accomplished. International organizations are useful, to powerful and weak states alike, because they can extend credibility and legitimacy to efforts that would otherwise lack credibility and legitimacy. This often makes the difference that makes multilateral cooperation feasible; and the challenges posed by an increasingly interdependent global economy typically demand coordinated responses.
The legitimacy and independence of international organizations are always provisional, because they exist in a system of states, and states enjoy very unequal power resources. In order to assure the participation of the most powerful states, international institutions have developed informal procedures that accommodate their interests.
This book began by setting out a theory of equilibrium institutions, which was organized around the concept of informal governance. Formal and informal governance represent alternative social choice mechanisms – the former based on voting and formal rules, the latter based on power and informal influence – and these two mechanisms coexist in international organizations. The choice of procedures that incentivize or delegitimate the use of informal power is a critical step in institutional design, and in equilibrium the mixture of these modes of governance in international organizations balances the power and interests of strong and weak states. Chapter 1 situated this argument in political theory, and Chapter 2 formalized it as a game-theoretic model.
The second part of the book explored the implications of this theory in three international organizations chosen for case studies: the IMF, the WTO and the EU. The cases demonstrated two propositions. The first proposition is that, in spite of the variety of issue areas, the varying memberships and the differing contexts in which these organizations operate, informal governance mechanisms play important roles in each. Formal rules are also important in each organization, but in each case, the functioning of the organization cannot adequately be understood without taking into account the many ways in which informal governance mechanisms modify or overrule the formal procedures. Scholars who study the EU and the WTO have devoted considerable attention to this phenomenon, but they have generally failed to connect the dots, because they have not appreciated that informal governance mechanisms exist primarily to serve the interests of powerful states, while formal rules are generally designed to protect the weak.
Conditionality, the practice of requiring policy reform as a condition for receiving IMF support, is not stipulated in the IMF's Articles of Agreement and was originally instituted at the insistence of the United States and over the objections of the rest of the membership. After the collapse of the Bretton Woods system of fixed exchange rates the Fund reinvented itself as an agency with extensive involvement in the politics of development, and a broad consensus emerged on the Executive Board that managing conditionality should become a more important part of its mandate. As late as the 1970s, only 26 percent of IMF loan disbursements involved substantial conditionality, but the Latin American debt crisis in the 1980s and the expansion of lending to Africa increased this figure to 66 percent by the end of the 1980s. The number of conditions specified in an IMF program steadily climbed in the subsequent decade as the Fund sought to manage the transition from state planning to the market in former Communist countries and grappled with financial sector issues in the East Asian crisis. At the same time, the scope of conditionality ventured into areas of domestic economic structure and policies outside the Fund's traditional purview and competence.
The Executive Board does not play a direct role in designing the conditionality in individual programs. As a practical matter, by the time a program reaches the board it has been thoroughly analyzed by the staff, negotiated with the authorities of the borrowing member country, and approved by management and the shareholders that choose to participate.
The European Union (EU), like the IMF and the WTO, combines elements of formal and informal governance, but the wider distribution of power in Europe and the high and rapidly increasing returns to European cooperation have shaped a different balance between formal and informal governance. The United States casts a long shadow over the EU, having deliberately encouraged many of its early steps towards integration, and having inadvertently incentivized many of the more recent developments, but the leading economic power's absence from EU membership is even more significant than its external influence. The model of informal governance focuses attention on the distribution of structural power, which in Europe is relatively flat: there are several countries that can compete for the role of leading power, and the power differentials among European countries are smaller than between European countries and the United States. In the absence of a single, overwhelmingly dominant state, several leading states are able to play the game of informal influence in Europe, which implies either low levels of cooperation or high levels of legalization. The history of European integration has seen both patterns, and legalization has been the only available solution to the dilemmas of sovereignty. Indeed, the contemporary EU is the most striking example of legislative and judicial delegation to an international organization.
As I write these words, the international economy is emerging from its most serious crisis since the Second World War. The Great Recession began in the US housing market, but quickly spread through the global network of financial institutions to affect every country in the world, most much more severely than the United States. The crisis has underscored weaknesses that had become apparent earlier in the institutions that govern the global economy – the International Monetary Fund (IMF, or the Fund), the World Trade Organization (WTO) and the European Union (EU); each of these institutions suffers from a severe crisis of legitimacy and effectiveness. Sweeping changes have been proposed in the architecture of international governance, and significant reforms have been introduced in the IMF and the EU. Meanwhile, politics continues: many states are seeking unilateral or bilateral rather than multilateral policy solutions, and the existing international governance mechanisms appear to be inconsistent with the changing distribution of global power.
The IMF responded to the impact of the crisis in some of the peripheral countries, including Belarus, Hungary, Iceland, Latvia, Pakistan, Romania, Ukraine, and finally Greece, but its resources were woefully inadequate to address the problems in the core countries. As the crisis deepened, the IMF's leading members tripled the size of its available resources, but it was apparent that states and their central banks remained the major players in international finance. The EU was challenged by the depth of the financial crisis in its poorer members, which seemed to threaten the stability of the euro zone and called for coordinated responses that were slow to emerge.
The degree of the IMF's autonomy is controversial. The IMF was not designed to be the independent world central bank that Keynes envisaged; from the beginning, its members, most notably the United States, expressed a preference for a member-controlled organization rather than a supranational one. However, the Fund's management and staff have gradually gained autonomy from the shareholder countries represented on the Executive Board, and critics of the IMF fear that this autonomy goes too far. An alternative critique assumes that international organizations simply reflect the interests of a few powerful states, or of one. An impressive amount of evidence indicates that major shareholders are able to skew the distribution of IMF loans and to subsequently undermine the enforcement of conditionality. Similarly, countries that enjoy special relationships with major IMF shareholders may be able to avoid extensive conditionality when they borrow from the Fund. In almost all cases, the evidence indicates that the powerful shareholder that exercises influence over the IMF is the United States.
How does a country that holds only seventeen percent of the voting power in an organization exercise a controlling interest in its activities? The argument made here is that the aspects of the IMF's formal design that make it appear to be so autonomous, and that allow it to exercise considerable discretion in ordinary times, also make it extremely vulnerable to capture by a determined state that enjoys an organizational advantage.