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Conditional on Conditionality: IMF Program Design and Foreign Direct Investment

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  • Byungwon Woo

Abstract

The article explores how International Monetary Fund (IMF) program design influences foreign direct investment inflows. The author argues that stricter IMF conditionality signals a program-participating government's commitment to economic reforms, as it incurs larger ex ante political cost and risks greater ex post political cost. Thus, the catalytic effect of an IMF program is conditional on conditionality: programs with stricter conditions catalyze more foreign direct investment than those with less stringent conditions. Empirical analysis of the IMF conditionality dataset supports the argument and shows that after accounting for IMF program participation, the more structural conditions included in an IMF program, the more foreign direct investment flows into the country.

Suggested Citation

  • Byungwon Woo, 2013. "Conditional on Conditionality: IMF Program Design and Foreign Direct Investment," International Interactions, Taylor & Francis Journals, vol. 39(3), pages 292-315, July.
    • Handle: RePEc:taf:ginixx:v:39:y:2013:i:3:p:292-315
    DOI: 10.1080/03050629.2013.782303
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    References listed on IDEAS

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    1. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2006. "Does Membership on the UN Security Council Influence IMF Decisions? Evidence from Panel Data," CESifo Working Paper Series 1808, CESifo.
    2. Stephan Haggard, 2000. "Political Economy of the Asian Financial Crisis, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 107.
    3. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2006. "Does membership on the UN security council influence IMF decisions?," KOF Working papers 06-151, KOF Swiss Economic Institute, ETH Zurich.
    4. Adrian Penalver, 2004. "How can the IMF catalyse private capital flows? A model," Bank of England working papers 215, Bank of England.
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    Cited by:

    1. Bernhard Reinsberg & Thomas Stubbs & Alexander Kentikelenis, 2022. "Compliance, defiance, and the dependency trap: International Monetary Fund program interruptions and their impact on capital markets," Regulation & Governance, John Wiley & Sons, vol. 16(4), pages 1022-1041, October.
    2. Bernhard Reinsberg & Thomas Stubbs & Alexander Kentikelenis & Lawrence King, 2020. "Bad governance: How privatization increases corruption in the developing world," Regulation & Governance, John Wiley & Sons, vol. 14(4), pages 698-717, October.
    3. Thomas Stubbs & Bernhard Reinsberg & Alexander Kentikelenis & Lawrence King, 2020. "How to evaluate the effects of IMF conditionality," The Review of International Organizations, Springer, vol. 15(1), pages 29-73, January.
    4. Marijana Andrijić & Tajana Barbić, 2021. "When the Going Gets Tough … the Effect of Economic Reform Programmes on National Well-Being," Sustainability, MDPI, vol. 13(20), pages 1-19, October.
    5. Chletsos, Michael & Sintos, Andreas, 2021. "Hide and seek: IMF intervention and the shadow economy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 292-319.
    6. Iasmin Goes, 2023. "Examining the effect of IMF conditionality on natural resource policy," Economics and Politics, Wiley Blackwell, vol. 35(1), pages 227-285, March.
    7. Bernhard Reinsberg & Alexander Kentikelenis & Thomas Stubbs & Lawrence King & Centre for Business Research, 2018. "The World System & the Hollowing-out of State Capacity: How Structural Adjustment Programs Impact Bureaucratic Quality in Developing Countries," Working Papers wp503, Centre for Business Research, University of Cambridge.
    8. Gehring, Kai & Lang, Valentin, 2020. "Stigma or cushion? IMF programs and sovereign creditworthiness," Journal of Development Economics, Elsevier, vol. 146(C).
    9. Chungshik Moon & Byungwon Woo, 2022. "Curse of friendship: IMF programme, friendship with the United States and foreign direct investment," The World Economy, Wiley Blackwell, vol. 45(7), pages 2188-2221, July.
    10. Marijana Andrijic & Tajana Barbic, 2018. "Trick or Treat? The Effect of IMF Programmes on Mobilising FDI in CESEE Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(3), pages 245-267, July.

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