Abstract
Given the popular wisdom that the U.S. government influences IMF policies and tends to support the business community, it might be expected that IMF programs benefit U.S. firms abroad and thus borrower nations are attractive destinations for U.S. foreign direct investment (FDI). Surprisingly, no study has tested the impact of IMF loans on U.S. FDI. Controlling for common explanations in the literature, we use a treatment effects model and interviews with IMF staff researchers to investigate whether countries under different kinds of IMF programs receive more U.S. FDI than countries not under IMF arrangements. Using panel data for 126 developing countries from 1980 to 2003, we find that IMF borrowers tend to be more attractive to U.S. investors but not all IMF programs have the same effect. Our findings suggest that differences in loan duration, the extent of borrower input in policy decisions, and loan amounts affect borrowers’ leverage with the Fund and the U.S.
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An exception is the work by Bird and Rowlands (2007), who carefully study the different kinds of IMF programs.
As a disclaimer, the views expressed by IMF staff researchers do not necessarily represent those of the IMF or IMF policy.
See Bird and Rowlands (1997), who are critical of the catalytic effects of IMF programs.
Although market reforms such as trade liberalization are not always favored by investors as tariff jumping to accumulate monopoly rents is an FDI strategy, the movement towards globalization and outsourcing in the developing world has greatly minimized the strategy. In fact, our results will show that trade has a positive and significant effect on FDI inflows, suggesting the limited importance of tariff jumping and increased relevance of market reforms for attracting FDI.
See Bird (1996) for a comprehensive review of the effect of structural adjustment programs supported by the IMF.
For a thorough review of the literature that explains why developing countries accept IMF conditions, see Vreeland (2003a, 12–16).
Developed countries generally are not recipients of IMF loans as they increasingly finance their deficits through private capital flows. A recent exception is Iceland.
See de Vries (1986, 165–166), who notes the Fund’s insistence on structural adjustment and reduced protectionism for countries seeking IMF assistance. See also Mourmouras and Rangazas (2004, 3), who argue that Fund “assistance is conditional on recipient countries’ pursuit of agreed macroeconomic and structural policies.”
See Adji et al. (1997) who show that IMF loans have little effect on FDI, however. Similarly, Bird and Rowlands (2002) find that it is difficult to determine whether IMF programs will have positive, negative, or insignificant effects on financial flows. Boockmann and Dreher (2003) and Dreher and Rupprecht (2007) go even further and claim that IMF programs have a negative effect on the initiation of market reforms, which arguably could affect foreign investment.
Most decisions require a simple 50% majority (Vreeland 2003a, 9).
Although the Fund’s Managing Director is traditionally a European, part of a compromise to divvy up top international jobs by nationality (the World Bank’s President is always American), as Barro and Lee (2002, 8) maintain, the U.S. “seems to have exerted the strongest voice at the IMF.”
See also Blomberg and Broz (2007) who show that the United States and other large contributors use their influence at the IMF to advance their interests.
See also Dreher et al. (2009), who document that temporary Security Council membership reduces the number of conditions included in IMF programs—a sign that U.S. politics influences IMF decision making.
For more insights on the use of IMF leverage based on the disbursements of funds through loan conditionality, see Dreher et al. (2009).
We exclude OECD countries because for more than two decades wealthier nations have relied on private capital sources and not the IMF for loan assistance.
Although the IMF issued loans prior to the 1980s, much of the monies appeared as emergency funds that the country never drew upon. It is not until the 1980s that stricter enforcement of loan conditionality and drawing down of loan monies occurs. We also chose to study the post-1980 period because PRGFs did not originate until 1987 and the IMF created EFFs in the 1970s.
Because the BEA suppresses country data for some years (e.g., when a single U.S. firm is the main investor in a country and thus the release of data would provide rival firms with useful information), we follow Rosecrance and Thompson (2003) and consider these data missing.
PRGF programs did not begin until December 1987 and thus the data start in the late 1980s.
See Abouharb and Cingranelli (2009) who also deal with selection issues in the context of IMF programs.
IMF loan data are available at: http://www.imf.org/external/np/tre/tad/extarr1.cfm.
These tests provide similar results if the robust option is specified with the xtiveg2 command thus making the standard errors robust to heteroskedasticity (see Baum et al. 2003).
For example, unlike the Full Information Maximum Likelihood Estimator (FIML), the two step estimator does not assume jointly normal error distributions.
The Panama case is dropped because it is an extreme outlier in terms of U.S. FDI (the mean U.S. FDI/GDP for Panama is 1.46 and for rest of sample it is about .04).
The results are robust to the inclusion of a year counter in the outcome equation. We also consider the possibility that our measure of trade openness is not actually capturing trade reform. To this end we test the models using the ‘Restrictions’ component of the Economic Globalization measure from the KOF Globalization Index (Dreher 2006b). This measure is a weighted index comprised of hidden import barriers, mean tariff rate, taxes on international trade, and capital account restrictions. The inclusion of this measure does not greatly change the substantive results and is itself only significant in the PRGF model (negative coefficient, at the .10 level). We choose to report the results from the trade openness measure but concede that the variable may not fully capture trade reform. Finally, the results are robust to dropping development and CPI from the right hand side of the selection equation.
See Staiger and Stock (1997) for instrument validity testing.
This being said, upon replacing budget balance with a dummy variable coded as 1 for post-Cold War years, the Anderson (p = .09), Sargan (p = .34) and F-tests (p = .09) become more acceptable and the coefficient for ALL is still positive and significant in the outcome equation. The results are available from the authors.
See also Dell’Ariccia et al. (2006) who find that the IMF’s decisions during the 1998 Russian crisis created a moral hazard issue for bond spreads.
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Acknowledgments
Author’s note: An earlier version was presented at the 2009 meeting of the International Studies Association. The authors wish to thank Nayantara Hensel, Nate Jensen, Junsoo Lee, Tatiana Vashchilko, and James Vreeland. We are especially indebted to the excellent comments of Axel Dreher.
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Biglaiser, G., DeRouen, K. The effects of IMF programs on U.S. foreign direct investment in the developing world. Rev Int Organ 5, 73–95 (2010). https://doi.org/10.1007/s11558-009-9071-8
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DOI: https://doi.org/10.1007/s11558-009-9071-8