The IMF makes countries open up their financial sectors, and US banks reap the profits

April 6, 2021

U.S. banks' influence over the IMF leads to high profits. (AP Photo/Esteban Felix)

The United States' outsize influence on the International Monetary Fund compels loan recipients to give special treatment to American financial institutions, which creates a feedback loop that encourages bankers to pressure politicians to shape IMF policy — and compromises the legitimacy of international finance, a researcher behind a new study argues.

"Influential firms essentially inherit the informal influence that their countries have over international institutions," said Randall W. Stone, lead author and a professor of political science at the University of Rochester.

The study, published March 17 in International Studies Quarterly, looked at data from 169 IMF member countries; it is the first to also examine firm-level data. The researchers found that from 1992 to 2009, 35% of IMF programs required countries to make certain changes to their financial sectors, often opening them up to foreign investment when, previously, the countries had protected their financial sectors from foreign competition.

The study found that U.S. financial institutions invested more heavily in countries with financial conditionality, apparently expecting a windfall. When financial sector conditionality was imposed, U.S. firms were 53% more likely to acquire financial firms than they were on average. Nonfinancial conditionality had no statistically significant effect on U.S. investments, nor did IMF programs in general. 

And there was evidence that American firms believed they had more to gain than firms from other countries when financial conditionality was imposed: If two international firms, one American and one not American, each already had a single investment in a country, the U.S. firm was 2.9 percentage points more likely to invest again — 48 times the average rate of investment.

At the same time, the researchers suggest that countries that accept financial conditionality take that as a signal that they can get better terms on their IMF loans and more lenient ongoing treatment from the IMF if they help American financial institutions profit within their borders, because the U.S. has openly pressured the IMF on behalf of nations in which American banks are heavily invested, Stone explained. He pointed to Argentina's financial crisis in 2001, which was precipitated by the U.S. asking the IMF to continue the country's loans, because, "U.S. banks were highly exposed to Argentina."

"The IMF is supposed to contribute to financial stability," Stone said. "The IMF, left to its own devices, will enforce the conditionality pretty systematically. But the United States often intervenes when its friends have borrowed money and they get in trouble to let them off the hook. Governments realize … a good way to placate the United States, to be on the good side of the United States, would be to make sure that U.S. firms get some of the action when the financial sector is liberalized."

In essence, lobbying by moneyed interests within the U.S. is rippling out into foreign policy, largely for the sake of multinational institutions' profit margins. 

Stone said, "It has the effect of undermining the credibility of the institution, the legitimacy of the international financial system. Other countries are looking for alternatives. China is dissatisfied, so they create the Asian Infrastructure Investment Bank." 

Previous research has found other issues with the IMF: Its programs can increase income inequality; and a 2011 study found that members of Congress were more likely to vote for IMF funding if they received more campaign contributions from banks. The way the IMF is currently structured has benefits for the United States government, to the detriment of the world order, Stone said. 

"Control over an institution like the IMF is incredibly useful to a U.S. administration, because you can mobilize a lot more funds rapidly than the U.S. government can do without authorization from Congress," he explained. "It provides this wonderful lever, and it doesn't give you leverage over all the countries all the time, because they're not always looking for an IMF loan. But when they are looking for an IMF loan, it gives you a lot of influence."

Stone has written two books about the IMF — Lending Credibility followed in the grand tradition of political science puns, and in it, Stone called "for making the IMF more independent — more like an independent central bank." But the U.S. and American financial institutions are invested in the status quo, partly because of banking lobbyists in Washington. 

"If we wanted to change something," he said, "We should change the way money works in Washington. If you reformed access and campaign contribution rules and created more lobbying disclosure, transparency, I think that would be very beneficial." 

The paper, "Multinational Banks and IMF Conditionality," published March 17 in International Studies Quarterly, was authored by Trung. A Dang, United Nations; and Randall W. Stone, University of Rochester.

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