As my colleague Uri Friedman discussed in today's Morning Brief, the
Spanish government has unveiled tough
new austerity measures to reduce its deficits after securing a nearly
$37 billion bailout from the European Union. The measures, part of the
conditionalities attached to the bailout money, include cuts to unemployment
benefits, the elimination of Christmas bonuses for civil servants and a rise in
The government is already facing a backlash, including protests by miners
over subsidy cuts, but data on past interactions between governments and
international financial institutions suggests that Prime Minister Mariano Rajoy's government is actually in the
safest period of the crisis. When economic conditions improve is when he will
have to worry about his government's political prospects.
paper recently published in the journal International
Organization seeks to answer the question of whether IMF and World Bank
interventions induce political crises. The authors, Axel
Dreher of Heidelberg University and Martin Gassebner
of the Swiss Economic Institute, began their research before the recent round
of European bailouts but in an interview with Foreign Policy, Dreher
said he sees similar dynamics at work in the recent crises.
The paper examines more than 90 developing countries between 1970 and 2002
and finds that intervention by one of the two international financial
institutions significantly increases the likelihood of political crisis. These
crises can be anything from coups and assassinations to mass demonstrations and
An illustrative example discussed in the paper is the political turmoil
which struck Bolivia in 2003, when more than 100 people were killed in
political protests spurred by governments moves to raise taxes and increase
natural gas exports. This followed 15 years of IMF-imposed structural adjustment
program. The violent clashes led
to the resignation of President of Gonzalo Sanchez de Lozada and, three
years later, the rise of populist President Evo Morales.
The paper's other significant finding is that the likelihood of a political
crisis actually increases as economic prospects improve under assistance from
an international financial institution. When times are really tough, the Dreher
argues, the "government's leeway is increased due to the availability of
additional loans." Governments are able to blame unpopular programs on the
necessity of cooperating with the outside institution and voters are unable to
tell is the government is merely incompetent of if its hand are tied by the conditions of the loan.
"If the government remains under an arrangement while the
economy performs better, this signals that the government is more incompetent
because a really competent government would no longer need the help of the
international organizations," Dreher says.
Countries like Spain, Italy and Greece may have more robust
democratic institutions than developing countries like Bolivia, but they are no less susceptible to moral hazard.
"You can see that [European governments] are able to
implement certain conditions by using the troika -- the EU, the ECB and the IMF --
by way of a scapegoat," he says. "They say, we don't want to implement these
conditions, we think they are too harsh, but we need the support of these
organizations to stay in the Euro."
This is essentially the case Spanish Prime Minister Mariano
Rajoy made to voters today, according
to the New York Times, telling the public, "I know these are not pleasant
measures but they are necessary."
But Dreher suggests that this kind of excuse won't work forever. "If the situation becomes better and the
government remains in these partnerships with the conditions that come with the
money, probably voters would turn against the government," he says."
Dreher and Gassebner's research suggests that if governments
like Greece and Spain want to stay in power, "they would have to try to get out
of these programs as soon as the situation becomes better."
Of course, given the scale of the economic woes these governments are
currently facing, that's probably a problem they wouldn't mind having right
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