Pick your poison: economic crises, international monetary fund loans and leader survival

Abstract

Loans from international organizations impose large costs on the receiving nation. The decisions to accept such loans and then whether or not to implement the prescribed reforms are made with high stakes in mind. Domestic leaders are most likely facing punishment for the current economic crisis, but what is their incentive to implement the arrangements if the costly reforms associated with the loans may reduce their ability to satisfy their supporters? To fully understand this relationship, I develop a theory that explains leader tenure in the post-reform period as a function of the rational decision to accept a loan. Leaders who expect to be secure in the adjustment period are more willing to accept the conditions that accompany loans rather than attempt to withstand the crisis on their own. With the use of a selection duration model, I examine the interplay between electoral incentives and institutional dynamics to show that leaders governing under different institutional arrangements are affected differently for involvement in IMF loans. Since leaders choose when to accept IMF loans based on their own expectations of post-reform tenure, democratic leaders are less likely to participate in loans. Authoritarian leaders, on the other hand, are more likely to participate in agreements because their hold on power in the post-reform period is stronger.