Book Review: Randall Stone's "Lending Credibility"
The extent to which the IMF is a benefit or a detriment to countries trying to develop is one of the defining debates in international political economy. Randall Stone’s Lending Credibility: the International Monetary Fund and the Post-Communist Transition is yet another attempt to explore this issue. For Stone, while the IMF makes mistakes along the way, the lending institution is ultimately beneficial to countries trying to escape the trap of underdevelopment (Stone 2002: 2). In particular, the IMF’s inflationary advice – that controlling inflation is the most critical determinant for long-term growth – showed positive results in places like Poland and Bulgaria. This essay will review the main aspects of Stone’s Lending Credibility, before situating his work in other relevant IMF literature and highlighting some possible objections to his work. In short I argue that Stone’s book is an important contribution to the field by exploring the nexus between international and domestic politics, as well studying more closely inflationary policy. However, his book is not without its share of flaws. The latter section will address these concerns.
Lending Credibility: A Short Review
Stone set out to prove that international institutions do influence – in many ways positively influence – actors that choose to pursue the strategies advocated by such bodies as the IMF. For Stone, the literature on the IMF was overly negative, overly positive or generally ambiguous about the role these institutions play in spurring growth and development (Stone 2002: 39). Moreover, much of the literature had either neglected or misinterpreted the function that inflationary policies played with IMF. For example, many scholars on the left argued that the IMF was too concerned with controlling inflation, rather than looking out for the needs of the poor (Stone 2002: 6). But Stone claims that the poor are the people most ravaged by high inflation. “It was the poor,” Stone posited, “rather than the wealthy who suffered most from inflation” (Stone 2002: 7). Moreover, controlling inflation was critical for laying the groundwork for a successful economy: it increased incentives for investment, promoted confidence among foreign investors and led to better wealth distribution (Stone 2002: 8-9).
Stone set out several hypotheses before engaging in a game-theoretic analysis to understand the relationship between the IMF and post-Communist transitions. First, the IMF’s enforcement mechanism is more likely to punish smaller countries than larger countries for violating fund conditionalities. When larger countries are punished they are subjected to short punishments, “because the threat of longer punishments is not credible” (Stone 2002: 59). Second, IMF intervention does influence the economic choices of the states involved. The IMF has effect depending on the credibility of the threat that they will withhold financing from countries that do not comply with fund rules. Lastly, capital markets are aware of IMF signals. When the IMF is involved capital markets assume that conditionalities will be enforced, and the IMF will make responsible economic decisions concerning exchange rates and foreign currency (Stone 2002: 26-27). In testing these specific hypotheses, Stone not only hoped to show that the IMF did influence economic choices but he also sought to explain why variation existed among states that took on IMF conditions (Stone 2002: 81). Why did Poland do better economically than, say, Russia?
The conclusions Stone garnered generally agreed with his initial hypotheses. State size and influence does matter when it comes to who gets punished and for how long. Therefore, Poland’s response to IMF conditionalities varied in comparison to Russia or Ukraine. When Poland missed its targets in 1991 and 1992 the IMF responded immediately by suspending programs and funding to Poland (Stone 2002: 115). Stone suggested this was to Poland’s benefit. With respect to the Russian case, on the other hand, the IMF had trouble credibly forcing Russia to comply with its targets. As a result, Russia had a tremendously difficult time accomplishing anything economically (Stone 2002: 166-167). Stone’s argument goes as follows: Because Russia and Ukraine were “influential” countries – receiving direct aid -- the United States was more likely to soften the demands on Russian leaders in meeting the targets of the IMF (Stone 2002: 119). Both Bush and Clinton administrations asked the IMF the forgo some of the conditions on Russia and chose to rally other Western governments to their aid (Stone 2002: 124). With respect to Ukraine, Stone argued that as Ukraine moved closer to the United States their commitment to the IMF programs waned. Poland and Bulgaria, what we might call the success stories, had a limited relationship with American political elites.
Secondly, the role of IMF influence, generally speaking, does positively impact rates of inflation and better adjusts post-Communist countries to withstand financial markets. As Stone argued, “the over all thrust of the IMF advice was sound: prioritize the fight against inflation” (Stone 2002: 233). Lastly, capital markets are also affected by the IMF and there is some relationship – although the relationship is not as statistically significant – between the success of the IMF and movement of capital goods.
In short, Stone’s book is an important contribution to the growing literature that argues whether or not the IMF matters, and if it does how it matters. Stone tries to keep some distance from the variable he studied, however, trying not to become a cheerleader for the IMF. Instead, he finds that depending on the size and influence of the state and the extent to which the state controls inflation will be the ultimate determinant of whether or not a country becomes an IMF showcase. In general he believes that if countries follow IMF advice then those countries will benefit economically. In the case of Poland, Stone’s success story, this occurred. Russia, meanwhile, had a more difficult time developing their economy following the collapse of the Soviet Union.
Lending Credibility is an important contribution to the literature on two other fronts as well. First, Stone does a good job of showing the connection between external actors and domestic politics. The effectiveness of the IMF depends both on the responsiveness and credibility of the IMF but also on how domestic actors interact and take seriously the calls for reform from the fund. For years, IR Scholars have called for a further exploration of the connection between domestic politics and the international system but in some cases to no avail (See Putnam 1988). Rawi Abdelal’s National Purpose tries to explain the economic development of Eastern Europe as a product of nationalism, but Abdelal largely ignores the international system (See Abdelal 2001). Other scholars, like Jeffery Sachs, tend to ignore the domestic realm altogether and instead focus solely on the IMF and World Bank (See Sachs 2005). Stone corrects this. Second, Stone focuses his lens on one aspect of the IMF program – the policies relating to inflation. Too often political scientists treat institutions as wholes without examining some of their working parts. Stone isolates his work to examine inflationary policy in particular and found that one recommendation from the IMF must be heeded: control inflation.
Reassessing Stone: Some Critiques
Devesh Kapur, a general critic of IMF programs, has argued that if the IMF had a dollar “for every criticism of its purpose,” that they would never have to go to their shareholders for more money (Kapur 1998: 54). Kapur’s arguments are the standard response from critics of the IMF: that IMF programs inevitably hurt the poor; that the fund places blame for the failure of the programs on debtor countries; and that debtor countries do not set the terms at which they are held to (Kapur 1998: 55-57). James Vreeland, in his important book The IMF and Economic Development, argued that there was a negative statistical relationship between the IMF and economic growth (Vreeland 2003: 8). The IMF also disproportionately hurt the poor and shifted income away from them (Vreeland 2003: 152). Stone tries to counter some of these criticisms in his book. He, of course, argues that the poor suffered because of the lack of IMF programs and the country’s failure to institute sound inflationary policy. However, like Vreeland, Stone only analyzes a few cases – Poland, Russia, Ukraine and Bulgaria to prove his hypotheses. Vreeland and Stone’s results might just be a result of case selection rather than anything the fund did or did not do. As Vreeland criticizes in his book, only Professor Stone has found that the IMF does a good job at curtailing inflation (Vreeland 2003: 159). Perhaps it could be argued that there was something peculiar about the post-Communist situation rather than something innately effective in the IMF.
A second criticism of Stone’s book is his treatment of how the external environment operates within domestic politics. While I argued that exploring the nexus between the international system and domestic politics was an appropriate step, part of Stone’s research project was underdeveloped. When it comes to the IMF, Stone is precise in how the fund functions and works. However, Stone’s understanding of the domestic arena is limited. For example. Stone’s reasoning for why Russia failed is because Russia did not implement the IMF’s programs properly and because sectors of Russia’s economy were corrupt and ineffective (Stone 2002: 164). Ukraine was a hard task for the IMF because political and business elites were slow to break away from Russia and implement their own reforms. Thus Ukraine did nothing with respect to their economy in the early 1990s. (Stone 2002: 207-208). Bulgaria and Poland, on the other hand, had fractious political divides but IMF edicts were more consistently enforced and those countries saw the positive impact of IMF. This discussion about the domestic intricacies is puzzling though because Stone’s initial hypotheses – that it is easier to consistently enforce IMF edicts on small size states than large ones – would seem to make this detailed discussion of domestic politics moot. Whether Russian or Polish elites were corrupt (and some were), would seem to have little bearing on whether or not the IMF was successful per his argument. The argument was one about size and influence, and the IMF’s ability to punish, not about the extent to which political players were particularly adept or corrupt. If Stone’s argument is that size, influence, enforcement credibility, domestic actors and external actors all matter, we are left with little more than a kitchen sink model of development: everything matters just a little bit.
Third, Stone’s argument about state size and influence struck me as interesting given Stone’s affinities for the influence of international institutions in world politics. The emphasis on states as actors is generally attributable to the influence of realism and neorealism on international relations. As most realists related, states were the major actors in world politics and because of this, they believed that liberal institutionalists were overly optimistic about the importance of institutions (Grieco 2000: 12). Stone argues that although institutions like the IMF can influence states power does “constrain what the IMF can achieve” (Stone 2002: 2). Stone seems to largely sidestep one of the defining debates in IR by simply suggesting power and institutions both matter. This ultimately works against him because one of the central hypotheses of his work – that variation can be attributed to the size or influence of IMF countries – remains underdeveloped. Moreover, a hard-nosed realist might take Stone’s work as a classic example of how international institutions do not work because states with “size and influence” disregard them altogether.
Conclusions and Future Research Implications
Randall Stone’s work on post-Communist transitions in Eastern Europe is an important contribution not only to the field of IPE but also to the more narrow field of Slavic studies in general. His two most important contributions were showing how international institutions like the IMF intersect into domestic politics, as well as showing how focusing on just one aspect of the IMF program – inflationary policies – can benefit states that adopt those policies. But Stone is not without his flaws. One, Stone’s cases might be exceptions rather than the rule, as James Vreeland and others have tried to point out. Therefore Stone’s work is not very generalizable. Second, although Stone attempts to connect the domestic to the international, he does not quite pull it off. Instead, it seems as though he adopts a bit a of a kitchen-sink approach by casting in all variables, minor or not. This reduces the clarity and precision of his work. Lastly, Stone underdevelops this idea of “influence,” “size” and “power” in his work. It is admirable that he did not get mired down in the same old debates about realism and neoliberal institutionalism; however, there was some contradictions about what mattered most: power or institutions. He seemed to want to have it both ways.
A future book might apply Stone’s framework to more cases. Does the IMF do a good job in small states where the IMF stays committed to seeing that targets are met and programs are accomplished? Also, a future book might avoid post-Communist transitions, which in many ways were blank slates for IMF bureaucrats. In more established regimes would the results be different? A final suggestion for a future research agenda would be to do away with the macroeconomic indicators for growth and instead analyze the informal sector and the rise of business entrepreneurship in each country. The tendency in IPE is to focus on economic growth indices alone and then determine success or failure. The IMF is also certainly party to this. With a more microlevel analysis we might escape some of the same old arguments – whether the IMF is good or bad for example – and instead focus more on domestic actors in the world economy. This could open up future avenues for research as well.
 Stone lays out over nine different hypotheses that are tested by his formal model. I have narrowed these hypotheses to only three, which gives the reader a general overview of Stone’s work without laboring over every detail of every hypothesis. To analyze every hypothesis would take up more time and space than this paper would allow.
 As I reveal later in the essay I think he unfortunately underdevelops the connections between the two. It is a nice start but ultimately limited in some ways.