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WHO IS RUNNING THE IMF: CRITICAL SHAREHOLDERS OR THE STAFF?



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This draft January 2004 WHO IS RUNNING THE IMF CRITICAL SHAREHOLDERS OR THE STAFF by Michele Fratianni and John Pattison Abstract The paper deals with the principal agent relationship at the International Monetary Fund IMF We argue that residual control rights at the IMF are vested with the critical shareholders the countries included in the G 7 This group controls vast financial resources and enjoys the highest regulatory and governance standards among IMF members Imperfect incentives for monitoring and the complexity of the issues give staff and management a degree of autonomy The evidence marshalled in the paper suggests that critical shareholders are in charge on those issues they care most about leaving discretion to staff and management on peripheral issues Key words IMF G 7 principal agent relationship critical shareholder staff autonomy JEL Classification D71 F13 F15 W George Pinnell Professor of Business Economics and Public Policy Indiana University Graduate School of Business Bloomington Indiana 47405 USA Tel 812 855 9219 Fax 812 855 3354 Email fratiann indiana edu Senior Vice President Canadian Imperial Bank of Commerce Commerce Court West 199 Bay St Toronto Ontario M5L 1A2 Canada Tel 416 980 5306 Fax 416 368 9826 Email John Pattison cibc com 2 I INTRODUCTION The International Monetary Fund IMF as one of the Bretton Woods institutions was designed to provide the public good of an efficient international monetary system But over the years the IMF has transformed itself into a multi product institution its output ranges from a good housekeeping seal of approval to member countries through so called surveillance and conditionality lending all the way to technical assistance Presiding over this wide array of activities are member governments the shareholders of the IMF But as it is true of privately owned corporations these shareholders face a monitoring problem and may not be able to fully achieve what they wish The purpose of this paper is to examine who is in charge at the IMF the principal the agent or both The key questions are who sets the mission who controls the agenda who implements decisions and how independent are management and staff from shareholders The theme is not new Vaubel 1986 for example is an early proponent of bureaucratic growth of international organizations IO due to the fact that shareholders have small incentives for monitoring Vaubel et al 2003 corroborate this finding by estimating a larger than unity elasticity of staff size with respect to member states without however controlling for the size and complexity of the output Along the same lines Barnett and Finnermore 1999 posit that international organizations once created develop their own agenda Staff autonomy is grounded on the ability of the staff to retain control over vital information Frey 1997 instead emphasizes prestige and influence with reference groups as the main forces motivating the staff of IOs Using this insight Willett 2001 p 323 reasons that the environment of the IMF is much like that of central banks and finance ministries As such there would seem to be relatively little 3 incentive for key decision makers at the IMF to maximize staff size Nielsen and Tierney 2003 hypothesize that the IO agent in their case the World Bank retains some degree of autonomy so long as his actions are not greatly at odds with the principal s preferences When significant differences emerge the principal finds an incentive to reassert his authority and to bring about a change in the agent s behavior Martin s 2003 study of the IMF combines elements of informational asymmetries and preference alignment between principal and staff The principal delegates more autonomy to the staff when issues become more complex and the environment is riskier to the principal for example during financial crises On the other hand if staff actions divert significantly from the principal s preferences staff autonomy declines If shareholders trusted completely the agent delegation would be complete and so would agent autonomy Majone 2001 Clearly we have not reached this stage at the IMF The central message of our paper is that a core of shareholders at the IMF is in full control of the institution s mission on the big issues and that staff autonomy is restricted in areas of marginal interest to the critical shareholders The rest of the paper is organized as follows Section II presents general considerations on the principal agent relationship in the public sector The key point there is that while agency problems tend to be more serious in the public sector than in the private sector the nature of the production function of the underlying institution determines agency costs and the restrictions placed on the agent by the principal Section III discusses two sharp alternative hypotheses concerning the governance of the IMF critical shareholders are in charge versus management staff are in charge We explore also that that the two hypotheses can co exist but for different states of the world Section 4 IV presents evidence obtained from the literature The sum total of the evidence is more qualitative than quantitative given the nature of the topic Conclusions are drawn in the last section II AGENCY COSTS AND THE PUBLIC SECTOR Casual observation suggests that agency problems and effective monitoring of the agent are more serious in the public sector than in the private sector To begin with corporations seek profit or shareholders wealth maximization Government agencies instead have multiple objectives and have to resolve the difficult task of assigning weights to each of those objectives Furthermore objectives or their associated weights change because of the political process and the power of interest groups While privately held corporations remain focused on the maximization of profits or shareholders wealth the political process changes the rules of the game as political parties or groups with different ideological agendas alternate in power In democracies political control is contested at fixed dates or within fixed intervals Elections are the equivalent of takeover bids in the private sector Political takeovers can be interpreted in either of two ways The first is that they give an opportunity to replace inefficient bureaucrats with more efficient ones Breton and Wintrobe 1982 p 97 The second is that elections serve the purpose of altering the ideological make up of the civil service either by replacing top management


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