Hostname: page-component-8448b6f56d-cfpbc Total loading time: 0 Render date: 2024-04-19T18:51:12.709Z Has data issue: false hasContentIssue false
  • English
  • Français

The IMF As a Biased Global Insurance Mechanism: Asymmetrical Moral Hazard, Reserve Accumulation, and Financial Crises

Published online by Cambridge University Press:  05 November 2018

Phillip Y. Lipscy  and
Haillie Na-Kyung Lee
Get access

Abstract

A large literature has established that the International Monetary Fund (IMF) is heavily politicized. We argue that this politicization has important consequences for international reserve accumulation and financial crises. The IMF generates moral hazard asymmetrically, reducing the expected costs of risky lending and policies for states that are politically influential vis-à-vis the institution. Using a panel data set covering 1980 to 2010, we show that proxies for political influence over the IMF are associated with outcomes indicative of moral hazard: lower international reserves and more frequent financial crises. We support our causal claims by applying the synthetic control method to Taiwan, which was expelled from the IMF in 1980. Consistent with our predictions, Taiwan's expulsion led to a sharp increase in precautionary international reserves and exceptionally conservative financial policies.

Type
Research Article
Information
International Organization , Volume 73 , Issue 1 , Winter 2019 , pp. 35 - 64
Copyright
Copyright © The IO Foundation 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank James Fearon, Judy Goldstein, Dennis Quinn, James Vreeland, participants at workshops at Georgetown University, Stanford University, the International Political Economy Society Annual Meeting, the Political Economy of International Organizations Annual Meeting, and two anonymous reviewers for helpful feedback. We also thank current and former officials of the IMF, Chinese government, Japanese Ministry of Finance, Japanese Ministry of Foreign Affairs, Taiwanese Ministry of the Economy, Taiwanese Ministry of Foreign Affairs, United States Department of State, United States Department of the Treasury, and World Bank who were exceedingly gracious with their time and resources. This research was made possible by the generous support of the Shorenstein Asia Pacific Research Center, Freeman Spogli Institute for International Studies, and Sakurako and William Fisher.

References

Abadie, Alberto, Diamond, Alexis, and Hainmueller, Jens. 2010. Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California's Tobacco Control Program. Journal of the American Statistical Association 105 (490):493–505.Google Scholar
Abadie, Alberto, Diamond, Alexis, and Hainmueller, Jens. 2011. Synth: An R Package for Synthetic Control Methods in Comparative Case Studies. Journal of Statistical Software 42 (13):1–17.Google Scholar
Abadie, Alberto, Diamond, Alexis, and Hainmueller, Jens. 2015. Comparative Politics and the Synthetic Control Method. American Journal of Political Science 59 (2):495–510.Google Scholar
Abadie, Alberto, and Gardeazabal, Javier. 2003. The Economic Costs of Conflict: A Case Study of the Basque Country. American Economic Review 93 (1):113–32.Google Scholar
Abiad, Abul, Detragiache, Enrica, and Tressel, Thierry. 2010. A New Database of Financial Reforms. IMF Staff Papers 57 (2):1–28.Google Scholar
Aizenmann, Joshua, and Lee, Jaewoo. 2005. International Reserves Precautionary Vs. Mercantilist Views, Theory and Evidence. IMF Working Paper WP/05/198.Google Scholar
Amemiya, Takeshi. 1984. Tobit Models: A Survey. Journal of Econometrics 24 (1–2):3–61.Google Scholar
Avraham, Ronen, Logue, Kyle D., and Schwarcz, Daniel. 2014. Understanding Insurance Anti-Discrimination Laws. Southern California Law Review 87 (2):195–274.Google Scholar
Baldwin, Robert E., Chen, Tain-Jy, and Nelson, Douglas R.. 1995. Political Economy of US–Taiwan Trade. Ann Arbor: University of Michigan Press.Google Scholar
Barro, Robert J., and Lee, Jong-Wha. 2005. IMF Programs: Who Is Chosen and What Are the Effects? NBER Working Paper No. 8951.Google Scholar
Belsley, David A., Kuh, Edwin, and Welsch, Roy E.. 2004. Regression Diagnostics: Identifying Influential Data and Sources of Collinearity. Hoboken, NJ: Wiley-Interscience.Google Scholar
Bernanke, Ben S. 2005. The Global Saving Glut and the US Current Account Deficit. Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, 14 April.Google Scholar
Bernanke, Ben S., Reinhart, Vincent R., and Sack, Brian P.. 2005. Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment. Brookings Papers on Economic Activity 2004 (2):1–78.Google Scholar
Bhattacharya, Sudipto, Boot Arnoud, W.A., and Thakor, Anjan V.. 1998. The Economics of Bank Regulation. Journal of Money, Credit and Banking 30 (4):745–70.Google Scholar
Billmeier, Andreas, and Nannicini, Tommaso. 2013. Assessing Economic Liberalization Episodes: A Synthetic Control Approach. The Review of Economics and Statistics 95 (3):983–1001.Google Scholar
Bird, Graham, and Rowlands, Dane. 2001. IMF Lending: How Is It Affected by Economic, Political and Institutional Factors? The Journal of Policy Reform 4 (3):243–70.Google Scholar
Boughton, James M. 2001. Silent Revolution: The International Monetary Fund 1979–1989. Washington DC: International Monetary Fund.Google Scholar
Brewer, Elijah III, and Jagtiani, Julapa. 2009. How Much Did Banks Pay to Become Too-Big-to-Fail and to Become Systematically Important? Federal Reserve Bank of Philadelphia Working Paper.Google Scholar
Broz, J. Lawrence. 2015. The Politics of Rescuing the World's Financial System: The Federal Reserve as a Global Lender of Last Resort. Korean Journal of International Studies 13 (2): 323–351.Google Scholar
Broz, J. Lawrence, and Hawes, Michael. 2006. Congressional Politics of Financing the International Monetary Fund. International Organization 60 (2):367–99.Google Scholar
Bryant, Fred B., and Yarnold, Paul R.. 1995. Principal-Components Analysis and Confirmatory Factor Analysis. In Reading and Understanding Multivariate Statistics, edited by Grimm, L.G. and Yarnold, P.R., 99–136. Washington, DC: American Psychological Association.Google Scholar
Carter, David B., and Signorino, Curtis S.. 2010. Back to the Future: Modeling Time Dependence in Binary Data. Political Analysis 18 (3):271–92.Google Scholar
Chinn, Menzie D., and Frieden, Jeffry A.. 2011. Lost Decades: The Making of America's Debt Crisis and the Long Recovery. New York: W.W. Norton.Google Scholar
Chiu, Hungdah. 1982. Chinese Yearbook of International Law and Affairs. Baltimore, MD: Occasional Paper/Reprints Series in Contemporary Asian Studies, for the Chinese Society of International Law—Chinese Branch of International Law Association.Google Scholar
Chu, Yun-han. 2015. Unraveling the Enigma of East Asian Economic Resiliency: The Case of Taiwan. In Two Crises, Different Outcomes: East Asia and Global Finance, edited by Pempel, T.J. and Tsunekawa, Keiichi, 64–89. Ithaca, NY: Cornell University Press.Google Scholar
Copelovitch, Mark S. 2010a. IMF Loan Size and Conditionality Data, 1983–2003. University of Wisconsin–Madison.Google Scholar
Copelovitch, Mark S. 2010b. Master or Servant? Common Agency and the Political Economy of IMF Lending. International Studies Quarterly 54 (1):49–77.Google Scholar
Copelovitch, Mark, Frieden, Jeffry, and Walter, Stefanie. 2016. The Political Economy of the Euro Crisis. Comparative Political Studies 49 (7):811–40.Google Scholar
Dean, James W. 2001. Why Financial Crisis May Come to China but Not Taiwan. In Beyond the Asian Crisis: Pathways to Sustainable Growth, edited by Chowdhury, Anis and Islam, Iyanatul, 279–98. Northampton, MA: Edward Elgar.Google Scholar
De Beaufort, Wijnholds, Onno, J., and Sondergaard, Lars. 2007. Reserve Accumulation: Objective or By-Product? European Central Bank Occasional Paper (73):1–47.Google Scholar
De Long, Bradford, De Long, Christopher, and Robinson, Sherman. 1996. The Case for Mexico's Rescue. Foreign Affairs (May/June).Google Scholar
Dooley, Michael P., Folkerts-Landau, David, and Garber, Peter. 2003. An Essay on the Revived Bretton Woods System. National Bureau of Economic Research, Cambridge, MA.Google Scholar
Dreher, Axel, and Jensen, Nathan. 2007. Independent Actor or Agent? An Empirical Analysis of the Impact of US Interests on International Monetary Fund Conditions. The Journal of Law and Economics 50 (February):105–24.Google Scholar
Dreher, Axel, Sturm, Jan-Egbert, and Vreeland, James R.. 2015. Politics and IMF Conditionality. Journal of Conflict Resolution 59 (1):120–48.Google Scholar
Dunteman, George H. 1989. Principal Components Analysis. New York: Sage.Google Scholar
Flood, Robert, and Marion, Nancy. 2001. Holding International Reserves in an Era of High Capital Mobility. Brookings Trade Forum 2001:1–68.Google Scholar
Frankel, Jeffrey, and Roubini, Nouriel. 2002. The Role of Industrial Country Policies in Emerging Market Crises. In Economic and Financial Crises in Emerging Market Economies, edited by Feldstein, Martin, chapter 3. Chicago: University of Chicago Press.Google Scholar
Gartzke, Erik. 2010. The Affinity of Nations: Similarity of State Voting Positions in the UNGA. San Diego: University of California. Data set available at <http://pages.ucsd.edu/~egartzke/datasets.htm>..>Google Scholar
Gaulding, Jill. 1994. Race, Sex and Genetic Discrimination in Insurance: What's Fair. Cornell Law Review 80 (6):1646–94.Google Scholar
Gourinchas, Pierre-Olivier, Caballero, Ricardo J., and Farhi, Emmanuel. 2008. An Equilibrium Model of Global Imbalances and Low Interest Rates. American Economic Review 98 (1):358–93.Google Scholar
Gourinchas, Pierre-Olivier, and Jeanne, Olivier. 2007. Capital Flows to Developing Countries: The Allocation Puzzle. NBER Working Paper No. 13602.Google Scholar
Grimes, William W. 2011. The Asian Monetary Fund Reborn? Implications of Chiang Mai Initiative Multilateralization. Asia Policy 11 (January):79–104.Google Scholar
Grimes, William W. 2008. Currency and Contest in East Asia: The Great Power Politics of Financial Regionalism. Ithaca, NY: Cornell Unviersity Press.Google Scholar
Haggard, Stephan. 1990. Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries. Ithaca, NY: Cornell University Press.Google Scholar
Helleiner, Eric. 2011. Understanding the 2007–2008 Global Financial Crisis: Lessons for Scholars of International Political Economy. Annual Review of Political Science 14:67–87.Google Scholar
Ikenberry, G. John, and Lim, Darren J.. 2017. China's Emerging Institutional Statecraft: The Asian Infrastructure Investment Bank and the Prospects for Counter-Hegemony. Washington, DC: Brookings Institution.Google Scholar
International Monetary Fund. 1980. Annual Report. Washington, DC: International Monetary Fund.Google Scholar
Jacobson, Harold K., and Oksenberg, Michel. 1990. China's Participation in the IMF, the World Bank, and GATT: Toward a Global Economic Order. Ann Arbor: University of Michigan Press.Google Scholar
Kahler, Miles. 1993. Bargaining with the IMF: Two-Level Strategies and Developing Countries. In Double-Edged Diplomacy: International Bargaining and Domestic Politics, edited by Evans, Peter, Jacobson, Harold K., and Putnam, Robert D., 363–94. Berkeley: University of California Press.Google Scholar
Kaminsky, Graciela L., and Reinhart, Carmen M.. 1999. The Twin Crises: The Causes of Banking and Balance-of-Payments Problems. The American Economic Review 89 (3):473–500.Google Scholar
King, Gary, Keohane, Robert, and Verba, Sidney. 1994. Designing Social Inquiry: Scientific Inference in Qualitative Research. Princeton, NJ: Princeton University Press.Google Scholar
Leblang, David A., and Satyanath, Shanker. 2006. Institutions, Expectations, and Currency Crises. International Organization 60 (1):245–62.Google Scholar
Leblang, David A., and Satyanath, Shanker. 2008. Politically Generated Uncertainty and Currency Crises: Theory, Tests and Forecasts. Journal of International Money and Finance 27 (3):480–97.Google Scholar
Lee, Yong Wook. 2006. Japan and the Asian Monetary Fund: An Identity-Intention Approach. International Studies Quarterly 50 (2):339–66.Google Scholar
Li, Chien-pin. 2006. Taiwan's Participation in Inter-Governmental Organizations: An Overview of Its Initiatives. Asian Survey 46 (4):597–614.Google Scholar
Lipscy, Phillip Y. 2003. Japan's Asian Monetary Fund Proposal. Stanford Journal of East Asian Affairs 3 (1):93–104.Google Scholar
Lipscy, Phillip Y. 2015a. Explaining Institutional Change: Policy Areas, Outside Options, and the Bretton Woods Institutions. American Journal of Political Science 59 (2):341–56.Google Scholar
Lipscy, Phillip Y. 2015b. Who's Afraid of the AIIB? Why the United States Should Support China's Asian Infrastructure Investment Bank. Foreign Affairs, 7 May.Google Scholar
Lipscy, Phillip Y. 2017. Renegotiating the World Order: Institutional Change in International Relations. Cambridge, UK: Cambridge University Press.Google Scholar
Lipscy, Phillip Y. 2018. Democracy and Financial Crisis. International Organization 72 (4):937–68.Google Scholar
Liu, Christina Y. 1992. Money and Financial Markets: The International Perspective. In Taiwan: From Developing to Mature Economy, edited by Ranis, Gustav, 195–222. Boulder, CO: Westview Press.Google Scholar
Lombardi, Domenico, and Woods, Ngaire. 2008. The Politics of Influence: An Analysis of IMF Surveillance. Review of International Political Economy 15 (5):711–39.Google Scholar
Maddison, Angus. 2010. Statistics on World Population, GDP and Per Capita GDP, 1–2008 AD. University of Groningen. Data set available at <https://www.rug.nl/ggdc/historicaldevelopment/maddison/original-maddison>..>Google Scholar
Mendoza, Enrique, Quadrini, Vincezo, and Rios-Rull, Jose-Victor. 2007. Financial Integration, Financial Deepness and Global Imbalances. National Bureau of Economic Research Cambridge, MA.Google Scholar
Mosley, Layna, and Singer, David A.. 2009. The Global Financial Crisis. International Interactions 35 (4):420–29.Google Scholar
Oatley, Thomas, and Yackee, Jason. 2004. American Interests and IMF Lending. International Politics 41 (3):415–29.Google Scholar
Obstfeld, Maurice, and Rogoff, Kenneth. 2009. Global Imbalances and the Financial Crisis: Products of Common Causes. Paper prepared for the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, Santa Barbara, CA, 18–20 October.Google Scholar
Radelet, Steven, and Sachs, Jeffrey. 1998. The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. Brookings Paper 28 (1):1–74.Google Scholar
Reinhart, Carmen M., and Rogoff, Kenneth S.. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.Google Scholar
Rigger, Shelley. 2013. Why Taiwan Matters: Small Island, Global Powerhouse. New York: Rowman and Littlefield.Google Scholar
Rogoff, Kenneth. 2002. Moral Hazard in IMF Loans: How Big a Concern? Finance and Development 39 (3). Available at <https://scholar.harvard.edu/rogoff/publications/moral-hazard-imf-loans-how-big-concern>..>Google Scholar
Rosas, Guillermo. 2009. Curbing Bailouts: Bank Crises and Democratic Accountability in Comparative Perspective. Ann Arbor: University of Michigan Press.Google Scholar
Roubini, Nouriel, and Setser, Brad. 2005. Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005–2006. Unpublished manuscript, New York University and Oxford University.Google Scholar
Rowen, Henry. 1998. The Political and Social Foundations of the Rise of East Asia: An Overview. In Behind East Asian Growth, edited by Rowen, Henry, 1–36. New York: Routledge.Google Scholar
Steinwand, Martin C., and Stone, Randall W.. 2008. The International Monetary Fund: A Review of the Recent Evidence. The Review of International Organizations 3 (2):123–49.Google Scholar
Stone, Randall W. 2002. Lending Credibility: The International Monetary Fund and the Post-Communist Transition. Princeton, NJ: Princeton University Press.Google Scholar
Stone, Randall W. 2008. The Scope of IMF Conditionality. International Organization 62 (4):589–620.Google Scholar
Stone, Randall W. 2011. Controlling Institutions: International Organizations and the Global Economy. Cambridge, UK: Cambridge University Press.Google Scholar
Summers, Lawrence H. 2007. Reflections on Global Account Imbalances and Emerging Markets Reserve Accumulation. L.K. Jha Memorial Lecture, Mumbai, India, 24 March. Available at <https://www.harvard.edu/president/speeches/summers_2006/0324_rbi.php>..>Google Scholar
Thacker, Strom C. 1999. The High Politics of IMF Lending. World Politics 52 (1):38–75.Google Scholar
Truman, Edwin M. 2005. A Revived Bretton Woods System: Implications for Europe and the United States. Paper presented at the conference on “A Revived Bretton Woods System? Implications for Europe and the United States,” Federal Reserve Bank of San Francisco, 4 February. Available at Peterson Institute for International Economics, <https://piie.com/commentary/speeches-papers/revived-bretton-woods-system-implications-europe-and-united-states>..>Google Scholar
Van Dijck, Pitou, Verbruggen, Harmen, and Linnemann, Hans. 1987. Export-Oriented Industrialization in Developing Countries. Manila, Philippines: Council for Asian Manpower Studies.Google Scholar
Van Rijckeghem, Caroline, and Weder, Beatrice. 2000. Spillovers through Banking Centers: A Panel Data Analysis. IMF Working Paper WP/00/88.Google Scholar
Vaubel, Roland. 1983. The Moral Hazard of IMF Lending. World Economy 6 (3):291–303.Google Scholar
Vaughan, Emmett J., and Vaughan, Therese M.. 2013. Fundamentals of Risk and Insurance. New York: Wiley.Google Scholar
Villanueva, Delano. 1999. An Analysis of Financial Crisis. In The Asian Financial Crisis: Origins, Implications, and Solutions, edited by Hunter, William C., Kaufman, George G., and Krueger, Thomas H., 485–90. Boston, MA: Kluwer Academic.Google Scholar
Villarreal, M. Angeles 2017. US–Mexico Economic Relations: Trends, Issues, and Implications. CRS Report for Congress, 1–33. Washington, DC: Congressional Research Service.Google Scholar
Voelz, Manja, and Wedow, Michael. 2009. Does Banks’ Size Distort Market Prices? Evidence for Too-Big-to-Fail in the CDS Market. Bundesbank Discussion Paper no. 006.Google Scholar
Vreeland, James R. 2003. The IMF and Economic Development. New York: Cambridge Unviersity Press.Google Scholar
Wong, Timothy Ka-ying. 1999. The Political Economy of Taiwan's Foreign Policy. Hong Kong Institute of Asia-Pacific Studies Occassional Paper no. 92.Google Scholar
Wooldridge, Jeffrey. 2002. Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press.Google Scholar
World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. Oxford: Oxford University Press.Google Scholar
Yang, Ya-Hwei. 2001. The Financial System and Financial Reform. In Taiwan's Economic Success since 1980, edited by Mai, Chao-Cheng and Shih, Chien-Sheng, 347–77 Northampton, MA: Edward Elgar.Google Scholar
Zhang, Wei-Bin. 2003. Taiwan's Modernization: Americanization and Modernizing Confucian Manifestations. Singapore: World Scientific.Google Scholar
Supplementary material: File

Lipscy and Lee supplementary material

Lipscy and Lee supplementary material 1

Download Lipscy and Lee supplementary material(File)
File 725.5 KB
Supplementary material: File

Lipscy and Lee supplementary material

Lipscy and Lee supplementary material 2

Download Lipscy and Lee supplementary material(File)
File 171.4 KB