Bringing the Fun(d) to reform : A model of economic reform and the workings of IMF conditionality
Author: Thom Åbyholm, ESOP Student Scholarship Recipient 2013.
The political economy of reform has been an important area of research, ever since the worldwide recession in the 1980`s following the second oil price increase. The reformers of the 80`s had highly divirgent experiences from their efforts to reform, even though they faced similar economic circumstances and had a remarkably similar set of policies at the outset. This thesis presents a model of economic reform, analyzing which level of reform that will be implemented in response to different political conditions, highlighting the connection between the domestic politics and the economic responses to a reform program. In particular, I argue that when a reformist government faces opposition to a reform, the economic responses generated by the reform is crucial in building a constituency for its survival.
This makes the sustainability of a reform susceptible to both virtuous and vicious circles. Using the logic of backward induction I find that the probability that a reform will be sustained, as determined by the economic responses to the reform and the response of the opposition, will determine the depth of reforms implemented by the government. As an extension, the International Monetary Fund is introduced to the model in the role of a structural adjustment lender. By comparing the outcomes of tying the reform to an IMF agreement to the theoretical counterfactual provided by the main model, it is shown how conditionality can be conducive to deeper reform in some cases, while being detrimental in other. Thus, the results of the model presented in this thesis imply that any judgement about the soundness or justification of the use of conditionality should be made with regard to the political conditions in the country on which conditionality is imposed.
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