A public choice theory of the IMF

Via Menzie Chinn, Mark Copelovich writes:

As the Fund's largest quota contributors, the "G-5" countries (the US, Germany, Japan, UK, and France) exercise de facto control over IMF lending decisions. At the same time, the G-5 countries are also home to the largest private creditors in global markets, including the world's largest commercial banks. Consequently, G-5 bank exposure heavily influences these governments' preferences over IMF lending policies. In particular, I find that IMF loan size and conditionality vary widely based on the intensity and heterogeneity of G-5 governments' domestic financial ties to a particular borrower country. When private lenders throughout the G-5 countries are highly exposed to a borrower country, G-5 governments collectively have intense preferences and are more likely to approve larger IMF loans with relatively limited conditionality. In contrast, when G-5 private creditors' exposure to a country is smaller or more unevenly distributed, G-5 governments' interests are weaker and less cohesive, and the Fund approves smaller loans with more extensive conditionality. I find strong evidence that these patterns hold both within countries over time (I focus on IMF lending to Korea and Mexico from 1983-1997 in the book), as well as more systematically over time and across cases for the universe of IMF loans from 1984-2003.

Most of the post concerns what will happen with Spain; can you predict Chinn's answer?

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