In order to provide financial assistance to a troubled country, international official organizations usually require the recipient to implement a series of economic reforms that are designed to return the government budget to surplus in the short term and maintain sustainable economic growth in the long run. These conditions are based on a wide range of factors, including the effects of moral hazard, corporate governance and financial engineering.
Empirical studies investigating the effectiveness of IMF bailouts find mixed results. Some authors argue that the excessive risk-taking behavior of investors and debtors induced by IMF-imposed conditionality is one cause of the negative impact of IMF intervention on the economic performance of bailed out countries. Other authors, however, have found that the economic conditions of a recipient country are largely determinant of the success of IMF interventions.
As a result of the mixed results of the IMF bailouts, some experts have called for international official organizations to abandon their current conditionality and adopt more general political criteria when making decisions about lending to distressed countries. Such a move, however, would raise a number of questions regarding the IMF’s role in the international community and its relationship with the United States, which is currently the Fund’s key shareholder.
Furthermore, increasing partisanship in the US Congress and the growing power of China’s leadership make it unlikely that the IMF will be allowed to change its political criteria for assessing candidate countries for assistance. Therefore, if the Fund is to survive in its current form, it will have to adopt a new approach that focuses on economics and not politics.