POLICY TRANSFER

IN THE CONTEXT OF

THE INTERNATIONAL MONETARY FUND

: DRAWING THE PROCESS OF CHANGE IN HUNGARY

by Chirada Na Suwan

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Dissertation submitted to the Department of Politics of the University of York in partial fulfillment

of the requirements for the degree of Master of Art in Public Administration and Public Policy

2009

 

   

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ABSTRACT

A growing interest in policy transfer analysis results in over-theorizing of the concept. This

dissertation attempts to re-conceptualize existing concepts of policy transfer, policy learning

and policy networks in order to explain policy change phenomenon. The models explain the

relationship between policy transfer and theories of policy development including policy

change. Recognize the impact of power relations, the dissertation applies this concept in the

context of the IMF as an agent of both coercive and voluntary policy transfer in order to

explain the process of change and thus prove the validity of the model constructed. The

studies reveal that policy-oriented learning combined with policy networks and negotiations

provide channels and methodologies to transform input knowledge into output knowledge

and to implementation i.e. the change in policy. Coercive policy transfer is regarded as

theory of policy change while voluntary policy transfer promises to produce only

knowledge. The empirical studies in the context of Hungary reveal politics of negotiation

that shapes decision-making between the Fund and its clients. Various case scenarios

illustrate how policy actors conduct transfer activities under the institutional constraints that

have profound implication on learning habit.

 

   

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ACKNOWLEDGMENTS

My sincere thanks goes to Dr. Werner Bonefeld, my dissertation supervisor who provided insightful counsel throughout my consultation period. I am especially grateful to him for continuing discussion and revision of research proposal which helped me better conceptualize research questions and structures. My special thanks to Professor Mark Evans, Dr. Nicole Lindstrom and Dr. Jim Buller each of whom contributed important perspectives and provided great supports throughout the research development as well as my student life in the University of York. I am fortunate indeed to have had such supportive and knowledgeable friends and colleagues who helped to make this a wonderful learning event for me. My sincere thanks to Claudia Marcela Gazol and Richard Firth each of whom shed more light on my dissertation path as well as gave supports at the time I needed most; especially Lan Doan who gave greatest supports during my research abroad. I am grateful to many family and friends who assisted in technical and general ways, and helped preserve, protect, and defend my general sanity:

 

   

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TABLE OF CONTENTS

Page Chapter I. INTRODUCTION 6 Research Aims Theoretical Perspectives and Contributions Empirical Case and Contributions Methodology Organizational Structure of the dissertation II. POLICY TRANSFER ANALYSIS: A WAY FORWARD 11 Policy Transfer Analysis: an Overview From Lesson-Drawing to Coercive Policy Transfer Debates surrounding problems and utilities of policy transfer Enhancing the Value of Policy Transfer Address the Boundary Problem Conceptualize Policy Transfer Process III. THE USEFULNESS OF POLICY TRANSFER FOR THE UNDERSTANDING OF IMF ACTIVITIES 30 Coercive Policy Transfer and the IMF Agent of Coercive Policy Transfer and its Tools IMF Transfer Process and the Role of Politics Coercive Transfer as a theory of Policy Change Voluntary Policy Transfer and the IMF IMF: the Policy Facilitator IMF: Lesson learner? The Weakness of Voluntary Transfer as a theory of Policy Change IV. THE CONVERGENCE PATH OF HUNGARY 44 Systematic Change: The Story of Power Relations and Historic Legacy Understanding the Problem of Fiscal Management of Hungary V. POLICY TRANSFER BETWEEN THE IMF AND HUNGARY 54 Coercive Policy Transfer and the Road towards Reforming Public Finances Conceptualize the Elements of Stand-By Arrangement Explore the Negotiation within Coercive Policy Process Conditionality and Policy Change Voluntary Policy Transfer and Policy Learning IMF Surveillance in Hungary Voluntary or Enforced Learning? VI. CONCLUSIONS 69

 

   

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APPENDIX: POLICY TRANSFER FRAMEWORK 73 BIBLIOGRAPHY 74

 

   

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CHAPTER ONE

INTRODUCTION

In an increasingly interconnected world, a rapid growth in communication allows

policy success/ failures, knowledge and ideas to spread across and between countries. This

phenomenon characterizes the concept of policy transfer – an important analytical tool that

contributes to policy development. Agents of global economic forces have been using policy

transfer as a technically-and-politically-feasible tool to extract benefits from greater world

integration.

The majority of literatures treat policy transfer as a dependent variable seeking to

explain its nature i.e. who is the actor and the role involved and what type of transfer is being

examined. The main proponents of this discipline include Rose (1991, 1993) on lesson-

drawing and Dolowitz & Marsh (1996, 2000) on policy transfer framework.

The majority of researches focus on transfer cases at sub-national and cross-national

level whereby governments of different jurisdictions play major roles. Dolowitz and Marsh

expand the dimension of the framework further to include the roles of others outside

governmental regimes i.e. policy entrepreneurs, non-governmental organizations,

transnational and international organizations. The concept of policy transfer has become

highly applicable in explaining a variety of policy activities around the world.

Given this diffuse nature of analysis into a wide range of disciplines from domestic

and international political sciences to comparative politics; it has been criticized for a

pervasive characteristic and a difficulty in identifying its scope and utility. It is the focus of

 

   

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this dissertation to re-conceptualize the concept of policy transfer in order to assess its

usefulness on the ability to explain policy-making process and policy change.

Although various literatures have provided greater analysis of the concept, we cannot

fully comprehend or realize its contributions. Our comprehension of policy transfer and

lesson-drawing is no more than its English definition unless empirical analysis is

demonstrated. A map of the process can only be a representation of reality when assigning

the role of actor and object in the transfer analysis. This is a necessary criterion for the study

of this discipline as it determines the nature as well as the processes that involved.

A wide range of activities by the International Monetary Fund (IMF) – including

advocating, and at times enforcing, the implementation of financial and economic policies

across the world – greatly complicates policy transfer process. Existing literatures on the

institutional governance and a sociological context lack the application of transfer analysis to

better understand the recent upsurge in its activities and the patron-client relationship. Thus

this provides new research opportunity to study other aspects of policy transfer analysis and

shed some light on the process of legitimizing externally-promoted policy change in its

member countries.

The emergence of an international consensus has pressured countries towards

adopting a policy. The role of the IMF as an international financial institution justifies the

reason why member countries facing financial difficulties or in dire need of developmental

loans seeks multilateral support in the context of IMF programs. Various activities performed

by actors in IMF policy transfer process present convincing evidence of coercive policy

transfer and, thus invite further studies on the role and impact of this agent of transfer.

With more than 67 countries participating in 461 IMF-supported stabilization

programs and 160 currency crises over the period from 1975-1997 (Hutchison 2002), it is

difficult to draw a conclusion from IMF policy studies which are country-specific. Thus, the

 

   

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research question could be best addressed by tracing a specific case. Recognize a long-

standing IMF’s involvement in the transition economies, the second part of this dissertation

brings to bear a conceptualized transfer analysis that helps to illuminate the process of change

as well as the way power and influence works in the IMF’s relations with Hungary.

Research Aims:

This dissertation aims to address both the research problems on policy transfer

analysis and the lack of research on the IMF as an agent of transfer. It focuses on identifying

the evidence and the impact of transfer process on policy-making in Hungary. In doing so, it

sets out in the first section of this dissertation to explore policy transfer concept, untangle the

contemporary problems and seek a way forward by providing conceptualized models of

policy transfer analysis that links to other theories of policy development. We focus on the

IMF as an agent of policy transfer and identify its roles in the transfer process. The second

part of the dissertation examines how transfer process works in practice and how it affects

learning process and policy change in both the IMF and Hungary. That said, we focus

specially on making a contribution to the literature of policy transfer in the context of the

IMF and not a direct critique of the IMF over the effectiveness of its policies in Hungary.

To achieve the research aims, the dissertation discusses the problems obscure the

understanding of policy transfer framework, and how those issues be addressed by

incorporating the concept of policy learning, policy networks and the analysis of the IMF.

The paper explores the practicability of transfer analysis by identifying the features of

transfer that are applicable in the context of the IMF, demonstrating how these processes

work in practice through the case of Hungary, and investigate whether these processes result

in policy change.

Theoretical Perspectives and Contributions:

 

   

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This dissertation contributes to policy transfer studies in regards to the double role of

the IMF as an agent of coercive and voluntary transfer. It fills the literature gaps regarding the

reason and the impact of transfer processes on policy-making and policy change.

In order to conceptualize the studies of policy transfer, related concepts such as

policy learning, policy transfer network are discussed as well as a reference to theories of

policy change. To determine the role of the IMF we utilize the works of Stone (2000, 2001)

on the roles of domestic and global policy entrepreneurs in the international diffusion of

policy ideas beside the major literatures from Dolowitz & Marsh (1996 & 2000). These

literatures provide the basis for theoretical analysis on the impact of policy transfer process

on policy change.

Empirical Case and Contributions:

The background and development of Hungary justify the reason it was chosen as an

empirical case for IMF policy transfer studies. Hungary has been under the influence of this

supra-national organization since the start of its accession in 1982. The discussion on IMF

policies in Hungary represents an attempt to transcend political pressures and institutional

constraints shaping the process and the outcomes of policy transfer. A developmental

phenomenon in Hungary represents the outcome on the part of the borrowing country.

Methodology:

Both primary and secondary literatures are used in the analysis of policy transfer

literatures, the IMF as well as theoretical application to the case of Hungary. Various theories

of policy analysis including policy diffusion, policy learning, policy networks, policy change,

policy transfer networks and organizational analysis are discussed and re-conceptualized into

coherent model of policy development in an attempt to shed some light on the ambiguity of

policy transfer literatures.

 

   

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Case investigation is developed in order to address the second set of research

questions showing the evidence and the effect of transfer process. Official documents of the

IMF and Hungary are used wherever possible. Secondary literatures analyzing the IMF and

the development in Hungary is of great used since the official documents rarely reveal the

politics of negotiations and influences that often shape decision-making within the Fund and

between the Fund and its borrowing country. Data capturing economic performance of

Hungary in the area of public finance is also presented to demonstrate its economic

development.

Organizational Structure of the dissertation:

This dissertation is divided into two sections. The first section focuses on theory and

method which consists of two chapters. Chapter one presents the discussion on policy transfer

analysis and conceptualizes the models to fill the literature gaps. Chapter two discusses the

relationship between policy transfer and the IMF as an agent of both coercive and voluntary

transfer.

The second part of dissertation presents the empirical application of policy transfer

by the IMF and encompasses two chapters. Chapter three introduces Hungary as a case study

and discusses its background and development since the transition period until the fallout of

global economic crisis in 2008. Chapter four examines the practicality of policy transfer

analysis in IMF policies to Hungary. The discussion demonstrates how ideas and influences

for policy transfer enter the domestic policy-making process. It then identifies the impact of

transfer process on the internal working of Hungarian economy. In conclusion, the

dissertation highlights its key findings and identifies important avenue for further research.

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CHAPTER TWO

POLICY TRANSFER ANALYSIS: A WAY FORWARD

The purpose of this chapter is to present literature reviews on policy transfer studies

with a focus on policy transfer continuum explaining different type of transfer as a

background analysis and assessment of its contribution. It illustrates problems and questions

critical to the understanding of this discipline and attempts to address those issues. The

chapter demonstrates the output and the impact of transfer processes on policymaking by

utilizing the concepts of policy learning and policy change to help classify policy transfer

phenomenon by scope and identify the impact on policy development.

1.1 Policy Transfer Analysis: an Overview

Comparative policy analysts recognize the increase in the occurrence of policy

transfer which has led to an increased research interest in this area. Existing terminologies

such as lesson-drawing (Rose 1991, 1993), cross-national conscious imitation (Wolman

1992), policy convergence (Bennett 1991), policy learning (Bennett and Howlett 1992) and

policy diffusion (Walker 1969) all represent different forms of policy transfer. Dolowitz &

Marsh (1996) organize those scattered literatures into a coherent whole. They provide their

own definition and framework for the study of policy transfer. This framework describes ‘a

process in which knowledge about policies, administrative arrangements, institutions etc. in

one time and/or place is used in the development of policies, administrative arrangements

and institutions in another time and/or place’ (Dolowitz & Marsh, 1996: 344). Apart from

two-level transfer approach, Evans & Davies (1999) propose a multi-level, multi-

disciplinary perspective of this analysis which recognizes the importance of agent and

structure in transfer process. Realizing the complexity of this discipline beyond the national

 

   

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level, existing framework has been expanded to include the significance of others outside

the government especially international governing organizations (IGOs) (Dolowitz & Marsh

1996, 2000 and Stone 2000, 2001)1. Evans & McComb (2004) apply the policy transfer

network as a methodology for studying policy development in multi-organizational setting.

Analyses in this dissertation are based on these stretched frameworks as they advance the

concept of policy transfer and altogether provide better methodologies in explaining the role

of IGOs especially the IMF.

Policy transfer literatures could be organized into two distinct types; one which

studies different aspects of the process and another which applies the concept directly. There

are four main approaches in the studies of policy transfer; formal policy transfer analysis,

personal interaction approaches, aggregate comparative approaches and inclusive

approaches[**Unit guide for lecture on policy transfer by Professor Mark Evans, Policy

Analysis module 2009, Department of Politics, University of York]. Formal transfer

analysis – found in the work of Bennett, Rose and Wolman – focuses on the process of

transfer and the role of agent in explaining the voluntary or negotiated importation of ideas,

policies or institutions. Personal interaction approaches; utilized by Stone and Freeman for

example, analyze the structure of decision through which policy transfer takes place and

relationships between actors and their dependencies. Distinct categorization of analysis for

aggregate comparative approaches examines the diffusion of transferred objects and the

variation between institutions or countries caused by structural factors such as economic,

ideological, cultural and institutional variables. The work of Peter Guys (1997) provides us

useful framework for analyzing factors that contribute to policy learning and adaptation of

institutions and actors in the transfer process. Lastly, the inclusive approaches like that of

Dolowitz and Marsh which draws on existing literatures mentioned earlier and encompasses

                                                                                                                         1  See  Policy  Transfer  Framework  in  Appendix    

 

   

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different claims about the nature of policy development. It is considered the strength of this

dissertation which utilizes the merits of these approaches to treat policy transfer as both a

dependent and independent variable explaining policy development and policy change. Thus

gives a comprehensive understanding of IMF activities and a full analysis of the empirical

case.

A range of explanations for policy transfer from perfect rationality to direct

imposition has been emphasized by Dolowitz & Marsh (2000). This policy transfer

continuum runs from coercive or obligatory form of transfer on one end and reduces the

level of coerciveness as it approaches lesson-drawing at the other end. Given this

characteristic, it is applicable in explaining different nature of transfer cases; for example a

one-way influence from the supranational to the national level as in Europeanization cases

or an intra-regional economic and cultural exchange among Latin American countries.

These different cases underline the freedom of choices of political actors engaging in the

transfer process. Dolowitz & Marsh suggest that ‘this continuum is a heuristic device that

allows us to think more systematically about the process involved’ (p.14). We seek to

investigate this claim during empirical cases.

Subsume as a reason for transfer activity by Dolowitz & Marsh, researchers have not paid

much attention to other significances of this continuum. James & Lodge (2003) even

criticize the usefulness of this concept. They argue that ‘collapsing the dimensions of

difference on a single continuum means that the framework obscures the potential range of

different explanations of the policy-making process’ (pg. 185). From the scope of this

dissertation, we disagree and argue that such characteristic of the continuum in fact helps

simplify complex processes of policy-making, especially on the part of international

governing organizations (IGOs). It allows us to examine the activities and influence of these

institutions in a wider context.

 

   

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There are different natures of transfer process being described along policy transfer

continuum. We examine two types of transfer distinguished by agent’s own intention i.e.

voluntary and coercive transfer as follow.

From Lesson-Drawing to Coercive Policy Transfer:

The modern study of policy transfer originates from a sub-set of policy diffusion

concept; a comparative politics literature, which primarily focuses on voluntary feature. The

concept is often discussed in relation with policy learning (Bennett and Howlett 1992),

organizational learning (Argzyris 1999) and existing literatures mentioned previously. It has

been stretched to include the concept of lesson-drawing by Rose (1991, 1993) who suggest

similar process that ‘…starts with scanning programmes in effect elsewhere, and ends with

the prospective evaluation of what would happen if a programme already in effect elsewhere

were transferred here in future’(1991 p.3). Object of transfer or lesson is defined by Rose as

‘a program for action based on program or programs undertaken in another city, state, or

nation, or by the same organization in its own past (1993 p. 21). Dolowitz & Marsh (1996)

then suggest broader range of objects being transferred which include policy goals, policy

instruments, ideology, ideas and concepts, attitudes as well as negative lessons (p. 349-50).

The scope of voluntary policy transfer definition – combining the one from Dolowitz &

Marsh and the one from Rose – suggests that transfer process is applicable across different

jurisdiction as well as within the organization since lesson(s) can come from its own past.

It can be observed that the combined definition implies two dimensions to the role of

transfer agent and the processes that involved. This creates challenge as well as opportunity

in further analysis of its contribution. As far as the time dimension is concerned, every agent

of transfer is entitled to two roles; exporter and importer of ‘knowledge’ derived from

transfer processes across time and place. The application of the concept is appropriate when

past policy success or failure can be drawn for better policy development at present time or

in the future. The scope of this dissertation; however, covers only the transfer analysis from

 

   

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one jurisdiction to another, and not how the organization evolves over time. Although such

analysis is applicable under the concept of lesson-drawing from institution’s own past, the

intentional or unintentional diffusion of knowledge, as well as the internal learning process

within an agent of transfer are better the subject of organizational analysis or management

studies (Evans and Davies 1999).

Many public policy literatures and policymakers utilize voluntary policy transfer

concept as a cross-national source of analysis and policy-making2. These studies

demonstrate that voluntary policy transfer is highly applicable at sub-national, cross-national

and jurisdiction level. ESRC Future Governance Programme set up by the UK government

to study and draw lessons from policy initiatives has been utilizing voluntary policy transfer

as its theoretical basis.

Apart from cross-national level, it is also possible to realize the contribution of

framework on policymaking at a global level by non-governmental regimes. Dolowitz &

Marsh (2000) as well as Stone (2000) have included the roles of NGOs, transnational

corporations, consultants, and supra-national institutions in voluntary transfer process. The

spread of ideas, programs, and influence to national policy-makers is through the

information and policies in their reports, conferences, consultant service. In the era of

globalization such means of communication – enhanced by a group of policy actors called

networks – are very influential in formulating both global and domestic policies.

Such impact of knowledge induced by the ‘policy facilitators’ is difficult to observe.

Existing literatures mainly focus on direct influence from international organization as an

agent of coercive transfer forcing change in domestic policy of borrowing countries in

                                                                                                                         2  (Jones & Newburn 2006); Refer to more research programs under ESRC Future Governance

Programme (2000-2006)  

 

   

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exchange of some form of assistance. One can argue that change occurs just by comparing

policy contents before and after the transfer of knowledge from policy facilitator. But the

impact of such knowledge cannot be realized until one studies how it affects the behavior of

policy actor by incorporating the concept of learning. Knoepfel & Kissling (1998) provides

comprehensive studies on learning processes unfold in different policy fields which have

profound implication on elements shaping the learning outcome. Chapter four demonstrates

the application of this concept further.

Realize the influence of global community on the sovereignty of nation states;

Dolowitz & Marsh identify the concept of coercive policy transfer at the other end of policy

transfer continuum. A coercive transfer occurs if there is the present of any push factors

such as externalities, functional interdependence and technology including the emergence of

an international consensus pressuring a country towards adopting particular policy

(Dolowitz & Marsh 1996).

Although factors causing coercive policy transfer prompt abundant empirical evidence, the

literature that explores a direct application of this concept is surprisingly underdeveloped.

Relevant literatures often discuss the coercive roles of the U.S. Federal Government, the

European Union, and international governmental organizations. They attribute the change in

policy of counter- party to factors such as Federal (financial) Incentives (Welch &

Thompson 1980 and Asare 2008), constituted governance regimes of each member of the

EU (Bulmer & Padgett 2004), and the need to catch up with developed nations (Johnson

1995, Leftwich 2000, Pierre & Peters 2000, Hyden 2004, Sato 2004 etc.). However, those

literatures lack in-depth analysis regarding the process which underlies ‘coercive’ transfer.

Classifying transfer case into a one-way influence or a pure coercive nature is less

practical when we recognize that individual nation voluntarily joins the membership of a

particular regime or union (Dolowitz & Marsh 2000; p. 15). Country has certain degrees of

 

   

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bargaining power to negotiate the content of transferred object by threatening to leave or

reject the membership. The concept of rational choice theory guides political actors to

behave in a highly strategic manner so as to maximize the attainment of their preferences

(Hall & Taylor 1996; 11-13). This concept helps explain politics and decision-making

between actors during negotiation phase in coercive transfer process.

Literature analyzing different schools of institutionalism also provides insights into how

policy-making is mediated by different organizational structures. The World Bank and the

IMF for example have institutional differences in approach and constituency even though

they are both created by Bretton Woods Institutions. The World Bank's clients are the Third

World government and the institution is development oriented. Its organization structure

promotes innovation and the idea of community participation. Thus its influence – reflected

in its policy instrument – is in part persuasive and coercive. While the IMF's clients are the

international banking sectors in needs of its lending programs. The terms of conditionality

associated with lending package implies higher degree of coercion. Both institutions rely

heavily on relationships with borrowing countries; however, the politics and process of

negotiation of the two institutions vary according to the degree of coercion. This emphasizes

the importance of policy transfer continuum in recognizing different degree of bargaining

power of actors in transfer process.

Agent and intention of coercive transfer are different from that of cross-national

voluntary policy transfer as the main players are ‘transnational organizations and

international aid agencies [who] have been able to compel governments to adopt programs

and policies against their will… [or] as part of their obligations as members of international

regimes and structures… ’ (Dolowitz & Marsh, 2000 pg. 14-15). The influence of Britain

beyond the boundaries of its formal Empire and the analogous power of the United States as

hegemonies who ‘structure the situation so that other nations develop preferences or define

 

   

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their interests in ways that are consistent with one’s own nation’ (Sweeney, 2005; Nye,

1990:191) represent examples of cross-national coercive transfer.

The necessary but insufficient condition to identify coercive transfer requires us to

focus on policy contents as well as power relations among actors in the transfer process. In

such cases policy-makers have to be aware of its power to bias policy choice as it is

certainly not politically neutral (Stone 1999). Domestic policy risks being under influence of

others. However, this does not always result in an undesirable outcome. The transfer of

various international best practices and other technical know-how (knowledge product) such

as the International Convergence of Capital Measurements and Capital Standards (Basel II)

and international tax law and practices enhances good governance and facilitates further

integration. Though proved to be beneficial, trend in coercive transfer is yet to be claimed as

a result of globalization which is believed to facilitate regional integration and collaboration

among countries in the form of regional trade agreement such as the Association of

Southeast Asian Nations (ASEAN), the North American Free Trade Agreement (NAFTA)

and MERCOSUR (Southern Common Market). These regional institutions can use direct or

indirect push factors such as membership status, certain privilege or limited access to group

benefits to bring about policy change in other country.

The outcome of coercive policy transfer depends on the terms agreed by all parties

involved in the negotiation. The major impact on policy-making process is the alteration of

existing policy or the new implementation of program on the part of recipient country.

Evans and Davies (1999) suggest that policy transfer concept is neither an inclusive model

of policy development nor a diffusion of knowledge but actually a multi-level explanation of

policy change (p. 367). In their attempt to treat policy transfer as a theory of policy change,

they study the framework in three dimensions consisting of global, macro and inter-

organizational level called ‘policy transfer network’ which is the main component leading to

policy change.

 

   

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There are plenty of empirical cases that articulate the claim that coercive policy

transfer is a theory of policy change. To take one example on activities by international

financial institutions (the World Bank in particular) in the delivery of international public

goods (IPGs) to developing countries, the Bank provides financial supports in exchange for

full program(s) implementation such as vaccine research, in-house economic research on

development, capacity building for research in developing countries, collation and

dissemination of research’ (Kanbur 2002; p.2), and much more. Chapter four discusses, in

the context of the IMF, the evidence of coercive policy transfer as well as the impact it has

on policy development and policy change in Hungary.

1.2 Debates surrounding problems and utilities of policy transfer:

Policy transfer approach has extracted significant scholastic interest of various

disciplines and has been utilized in a wide ranging and evolving literatures. However, the

exponents of the concept argue that the inclusiveness of policy transfer as a theory of policy

development rearticulates other ideas in policy-making process (Wolman 1992, James &

Lodge 2003). They argue that accumulating knowledge across time and space is considered

a general phenomenon in every policy-making process. Wolman raises the question over

what kinds of processes characterize the policy transfer process. He argues that ‘…various

means of gathering information about foreign policies might be characterized as a pre-

eminent form of policy-making by anecdote rather than by analysis’ (1992 p. 33). He

suggests that the process is neither an exercise in rational policy analysis3 or incrementalism

model of decision-making but describes the phenomenon to ‘involve more major,

discontinuous change’ (p. 42). The dissertation investigates this claim in more details.                                                                                                                          3  The rational policy analysis model describes a series of analytic steps in the search for solutions to

problems including defining the problem, identifying causes, setting forth goals and objectives, considering constraints, listing alternatives, positing evaluation criteria, evaluating alternatives by the chosen evaluation criteria, choosing preferred solution. (Wolman 1992 p. 41-42) See more in (Patton and Sawicki 1986)  

 

   

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Evans & Davies point out also that the framework does not have a unified theoretical

or methodological discourse to develop hypotheses or draw a practical lesson/program that

satisfies its purpose (1999 p. 361). Novel hypotheses from the concept are thus subjected to

empirical testing and easily be validated or falsified by evidences. Moreover existing

literatures rest too much on abstracts and assume perfect fit empirical cases which make

policy transfer concept look pervasive in nature. This results in excessive claim over its

upsurge popularity. It is necessary then to classify this phenomenon by scope which means

in an empirical sense establishing cases which are not examples of policy transfer [**ibid].

In an abstract term; the boundary problem could be addressed by identifying the relationship

between policy transfer process and policy development which may allow us to define the

concept distinctively from other forms of policy-making.

Despite the issue with scope of framework, Stone (2000) advocates the application of

policy transfer in the global public policy network as a way to enhance global governance

structure. Her analysis provides the summary of different terminologies used in policy

transfer studies as well as their contribution to the concept. Some (Freeman 1999 and Egan

1998) suggest that the technique of diffusion influences policy arrangement which leads to

policy transfer as the outcomes of diffusion.

Although the extending of the concept to cover more variety of structures and

settings is widely accepted, a problem of terminology arises. Stone argues that ‘[the

definition of] policy transfer directs analytical gaze towards the state when it may be that

ideas, interests, behaviors, perceptions and discourses are transported and adapted

irrespective of state structures’ (2000, p.19). The extant literature and its application also

imply geographic concentration toward Western countries. The literature ignores the

drawing of lessons and policy experience from developing countries to donor countries. The

dissertation attempts to fill these literature gaps.

 

   

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The earlier work of Dolowitz & Marsh (1996) discusses the distinction between

coercive and voluntary transfer not in terms of continuum but reason for an act of transfer.

They claim that the need to find a better solution for a persisting policy problem or

dissatisfaction from a perception of policy failure is the reason why governments engage in

voluntary policy transfer. Evans & Davies (1999) suggest also that more research is needed

in order to address the reason why the practice is on an increasing trend. However, James &

Lodge (2003) argue that the intention to conduct policy transfer should not be treated both a

necessary condition and a reason for its existence. They also do not find it convincing that

there is a growing interest in this phenomenon. They assert that the empirical evidences that

researchers used to demonstrate this claim suffer from selection bias that ‘they [empirical

evidences] are all positive instances where transfer is supposed to have happened at a

particular time and do not constitute a convincing survey of policies in a sector or

jurisdiction over time’ (p. 183). They mentioned such examples are a) the UK social

security welfare – where much of the Conservatives’ program was transferred from the US,

b) the IMF conditional loans and c) the Spanish constitution – which was modeled after the

German one (Dolowitz, 2000 p. 1-2).

We argue that more analysis is needed before one arrives at such conclusion

regarding the reason for transfer as well as its trend. The debate surrounding issues with

definition and reason for policy transfer as well as its trend could be addressed only on a

case-by-case basis by recognizing power relations and different nature of transfer process

along the continuum. The main characteristic of policy transfer that differentiates it from

other frameworks especially the diffusion studies is that it does not allow for generalization

and therefore implies no prediction power in explaining why the phenomenon occurs (Stone

2000). Policy transfer continuum, as discussed, would help researchers framing their

empirical work by categorizing case into different type and process of transfer and

investigating the reason behind each action. By identifying the direction and magnitude of

 

   

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forces that drive each action or process; one can determine whether the phenomenon has

over time increased, decreased or remained the same or changed in some way. To take one

example on Europeanization Eastward, the direct imposition nature of transfer is recognized

on the part of the candidate countries. The trend of this type of transfer is realized only by

examining the prospect of EU enlargement policy. Another example is the diffusion of

regulatory institutions in Latin America. This is one form of voluntary policy transfer that

utilizes the process of intra-regional economic and cultural exchange as a mean to achieve

further integration. The trend of this process could be realized by determining the impact of

globalization on these regional networks. Similar line of arguments could be followed when

utilizing the concept of policy transfer continuum to examine the activities of the IMF. It is

one purpose of this dissertation to determine what drive the activities of an agent of transfer

i.e. the IMF. By doing so, we would also realize the trend of these activities overtime.

1.3 Enhancing the Value of Policy Transfer4

The studies that treat policy transfer as an independent variable fail to explain how

policy is developed or changed. Other literatures attempting to explain the process do not

provide convincing answer as to why a policy transfer occurs and how ideas/lessons enter the

domestic policy process. In a process of domestic modification and development of hybrids

policies, the boundary issue persists despite many attempts in elaborating the concept further.

As Stone cautions; ‘the process…starts to complicate policy transfer with other processes of

policy making. This process of modification in transfer requires closer investigation to

determine when transfer processes cease” (1999: p. 57). Therefore, it is important that the

scope of framework be identified before its contribution to policy development is realized.

                                                                                                                         4  This section expands on the conceptualized model developed in the unpublished essay for Policy

Analysis module; Department of Politics, University of York, Spring term, 2009  

 

   

23  

It will be argued that the inclusiveness of policy transfer as a theory of policy

development – If without justifying itself in the theoretical domain of policy learning – could

easily rearticulate other ideas in the policymaking process. Thus we seek next to provide a

conceptualized model identifying the scope of the discipline, explaining the process of

transfer and relating the concept with other theories of policy analysis in order to explain

policy change.

Address the Boundary Problem:

Before elaborating the features of the model developed, we discuss two main

concepts used in the analysis – Policy Learning and Policy Networks. Bennett & Howlett

(1992) provide great conceptualization on the studies of policy learning5 which clarifies the

role of knowledge in the policy process. A difference between various learning concepts i.e.

political learning, government learning, policy-oriented learning, lesson drawing and social

learning, has to be recognized as they describe different aspects of learning process (pp.

277-78).

How do we identify the domain of policy transfer? It could be argued that there are

great similarities between policy learning and policy transfer concepts; be they the actors, the

objects of studies, and especially the outcomes of process – knowledge. As Stone mentions,

‘transfers for ideas or programs are underpinned by deeper and prior processes of learning’

(2000 p. 9). We conceptualize various definitions of knowledge in the existing literatures of

policy learning and policy transfer. This analysis suggests that policy transfer is a unique

form of policy learning. It consists of a particular method of acquiring knowledge input as

well as methodologies used to transform this input into ‘unique knowledge’ that suits the new

setting. Notice that knowledge is both an input as well as an output of policy transfer process.                                                                                                                          5  By identify five conceptions of learning and its role in public policy information from the review of

major literatures i.e. Heclo (1974), Etheredge (1981), Sabatier (1978, 1987, 1988), Rose (1988, 1991) and Hall (1988, 1989) respectively.  

 

   

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However, the output knowledge resulting from the two learning concept is distinct in

characters, and it is what determines the domain of policy transfer.

The discussion below attempts to identify the domain of policy transfer based on the

similarities and differences in characteristics of knowledge applicable to each concept of

learning. Output of policy learning can be described as a policy knowledge derived from any

sources which represents a general phenomenon in policy development. The more specific

meaning as in the case of policy transfer would be the practical, purposeful, and remarkable

policy knowledge or activities systematically derived from existing sources of intelligence.

Diagram below describes the theoretical domain of policy transfer within the concept of

policy learning.

Figure 1: Theoretical Domain of Policy Transfer

In the model, the shading areas represent policy transfer analysis located within a

theory of policy learning as its methodological tool for transforming process. Input

knowledge is categorized under policy transfer analysis when the information is transferred

from different setting as in time or place – as indicated by the arrows. The concept of

networks and its underlying concept of negotiation provide mechanical transfer channels

 

   

25  

which link this flow of information (or input knowledge) from policy donor to policy

recipient.

Etheredge (1981)’s concept of Government’s Learning is the state organization’s

conceptual and methodological innovation resulting from ‘the growth of its intelligence’

(p.76-77) – hence implies state organizations innovative knowledge as a result of this

learning concept. Under the overlapping area with policy transfer, such knowledge of

government’s learning is; however, a more remarkable one and is derived from foreign (as in

place or in time) source of intelligence. What should not be counted in the context of policy

transfer is the non-remarkable, ‘the day-to-day diffusion of knowledge, intentional or

otherwise, at the micro-level within organizations’ as suggested by Evans & Davies (1999

p.367).

What counts as lesson-drawing in the shading area is defined in Rose’s terms as an

‘action-oriented intentional activity’ involving research that draw on existing knowledge or

information from different setting. Personal past experience does not count (Rose 1991)

which represents area not in shading. The output is policy knowledge from the process of

adaptation of instruments following a change in the environment.

Social learning concept according to Hall is analytically distinct but reveals a cause-

and-effect relationship with policy transfer analysis (Stone 2000). Social learning is defined

as ‘a deliberate attempt to adjust the goals or techniques of policy in response to past

experience and new information.’ (Hall 1993 p. 278) It implies that the concept of social

learning already takes into account that of policy transfer; actions occurred after recognizing

new knowledge. However, the output knowledge/ program activity from social learning is not

as complete as that of policy transfer. Such deliberate attempt(s) might not be a strategic

action driven by operational goal(s). Knowledge derived from continual environmental

 

   

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scanning or societal reaction that lacks direction and operational framework are not the

products of policy transfer process, for example.

Conceptualize Policy Transfer Process:

How would we describe the process of transfer and transformation that bring about

such output knowledge? This is where the contribution of policy transfer continuum could be

realized. The dissertation argues that there are two separate approaches to the policy transfer

analysis; one for voluntary transfer and one for coercive transfer. This is a result of different

degree of power relations between agents of transfer which determine what approach to be

used in each scenario. There are two main differences between voluntary transfer process and

coercive transfer process. First, methodological frameworks used in each case depend on the

degree of coercion or free choice of policy actor. Secondly, each concept has a different

impact on policy development and policy change in particular.

1) The process of coercive policy transfer:

Due to the degree of coercion that policy donor inflicts upon policy recipient, there is

no process of domestic modification. Output knowledge has been identified according to the

input from the donor. Alteration of input knowledge is made possible only through

negotiation process as showed in the diagram.

 

   

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Figure 2a: The Process of Coercive Policy Transfer

In regards to the impact of coercive transfer process on policy development, coercive

transfer analysis can be thought of as a theory of policy change. Output knowledge after

completing necessary negotiation process is ready; in fact, required to be implemented. In a

particular set of policies there are often be some elements that resemble existing practices

elsewhere. This is because the main agents promoting policy changes are the global

institutions who draw lessons from their global experiences and impose such policy

knowledge upon other recipient country.

It is also possible to have an ‘innovative policy/ program’ being forced upon. For

example; the World Bank's Carbon Finance Unit (CFU) purchases the project-based

greenhouse gas emission reductions in developing countries within the framework of the

Kyoto Protocol's Clean Development Mechanism (CDM) in an effort to combat climate

change. Upon a country’s own participation, policy change in the recipient countries would

 

   

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be seen in two parts; 1) the implementation of CDM 2) the innovative project aiming at

greenhouse gas emission reductions.

2) The process of voluntary policy transfer and policy change:

Voluntary policy transfer in figure 2b looks slightly different from that of coercive

policy transfer. Voluntary policy transfer utilizes the concept of policy transfer networks

(Evans & Davies 1999) to examine interpersonal relationships and how decision-makers

acquire knowledge in the collaborative form. Without the concept of networks and

negotiation, the flow of accumulated knowledge across time and space (input knowledge)

would enter a normal policymaking process through the channel of policy learning, (learning

path, learning pattern and learning form), and thus, not constitute the transfer concept. This

has profound implication for the degree to which we understand the transfer process as well

as the outcome of policy transfer.

Figure 2b: The Process of Voluntary Policy Transfer

 

   

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There is no clear casual nexus between voluntary policy transfer and policy change as

demonstrated in the model. The concept is located at a different domain than other policy

change theories emphasizing that change is not necessary a result of the transfer process as in

the case of coercive transfer. It is clearly illustrated in the above model that, without other

theories of policy change, there would have been a missing linkage between the role of output

knowledge in voluntary policy transfer and the change in policy. Even though Rose had

identified a range of options on how the knowledge/ lessons could be incorporated into the

political system i.e. by copying, emulation, hybridization, synthesis, and inspiration, he and

other proponents fail to clarify why such processes occur.

The phenomenon of experience-induced policy change remains difficult to

conceptualize as many of the fundamental elements of learning remain conceptually unclear

(Bennett & Howlett 1992 p. 276). Changes in policy can often be attributed to other factors

elaborated within policy change as well as organizational analysis literatures. The weakness

in voluntary policy transfer is a lack of analysis on the opportunities or circumstances that

lead to the implementation of output knowledge. It is unable to predict – before the fact

whether knowledge acquired from the process would cause a change in policy unless the

transfer of such policy is forced upon. This is why Dolowitz & Marsh distinguish voluntary

and coercive type of transfer and regard the lesson-drawing concept of Rose as a voluntary

activity ‘as in many cases lessons do not result in policy or institutional change’ (Dolowitz &

Marsh 1996; 344).

Chapter five discusses the application of these two models in the empirical study of

Hungary with special focus on IMF’s Stand-By Arrangements as a case of coercive policy

transfer and IMF surveillance as a case of voluntary policy transfer.

_______________________________

 

   

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CHAPTER THREE

THE USEFULLNESS OF POLICY TRANSFER

FOR THE UNDERSTNADING OF IMF ACTIVITIES

This chapter explores the application and limitation of policy transfer analysis in the

context of the IMF. The focus of this discussion is to illustrate the contribution of the concept

in global policy studies. It examines how different features of the framework can be applied

to explain various activities and instruments of one of the most influential international

financial institutions. It elaborates further from previous chapter the methodologies used to

identify and analyze transfer processes. The discussion forms the basis for the empirical case

of Hungary.

The role of the IMF as an International Financial Institution (IFI) is often discussed

in relations with that of its sister institution – the World Bank. This includes containing the

effect of financial crisis as evident in Latin America and East Asia during 1990s, fostering

transition from centrally-planned to market-oriented economies in Russia and the former

Soviet republics, alleviating poverty as well as enhancing the level of development in the

least-developed regions of the world as in the case of African countries (Wood 2006). These

three major roles are heavily criticized for being under influences of some powerful member

states such as the United States and major industrialized countries – the main advocators of

neo-liberalism. These hegemonic states have been using international institutions like the

Bank and the Fund as legitimated agents to spread their influences or particular ideologies

(Sweeney 2005). Policy transfer thus provides the most appropriate political tool and policy

instrument for this purpose.

 

   

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In the 21st century following many reforms in attempt to address their criticism and

increase their efficiency, Fund and Bank officials are engaged in four principal activities; 1)

Research and dissemination 2) Policy conditionality and technical advice 3) Emergency

financing and crisis management and 4) Longer-term debt relief and development financing.

The roles of the IMF in these areas allow us to apply the concept of policy transfer along the

continuum. Thus, it will be important to bear political fact in mind and be clear which parts

of its operations are being discussed i.e. financial or research areas since each implies

different transfer process. In the following sections, we examine the transfer of knowledge as

well as politics between the institution and its clients and investigate the extent to which these

activities result in policy change in the borrowing countries.

2.1 Coercive Policy Transfer and the IMF

Most researches in the context of the IMF do not focus on politics in IMF policy-

making process but analyze the policy impacts on the borrowing countries6 either by

measuring borrowing countries’ output cost of implementing the program (Hutchison 2002)

or investigating its own achievement by measuring the effectiveness of its program (Evrensel

2002).

Others emphasize Fund reforms and governance issues which help determine the

relationship between actors in IMF policy development (IEO 2008, Evans & Finnemore

2001, Seabrooke 2007). The discussion in regards to transfer process between relevant actors

is left unexplored, however. There are some literatures (Wood 2006, Tan 2007, Vetterlein

2007) which provide insightful information and discussion in regards to Fund and Bank

governance matters, power sharing among relevant actors inside and outside these institutions

including reasons behind their actions and how they evolve over time. The literatures enhance

                                                                                                                         6  See Barro & Lee 2005, Dent 2003, Honda 2008, Kim 2004, Lane & Phillips 2002, Nelson & Wallace

2005  

 

   

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our analysis on the relationship between each actor of coercive transfer beyond existing

official reports and documents that only describe and evaluate its operations and facilities

(IMF pamphlet series no.45/ 2001 etc., Mussa 2006, IMF 2008c).

There is a research need to demonstrate vivid evidence of IMF coercive policy

transfer process as well as determine its influence in policy-making process of the borrowing

countries. The above literatures provide great sources of information in regards to Fund

structures and institutional constraints which form the basis for our analysis of the case study.

Agent of Coercive Policy Transfer and its Tools:

One of the key purpose of the International Monetary Fund is ‘to give confidence to

members by making the Fund‘s resources temporary available to them under adequate

safeguards, thus providing them with the opportunity to correct maladjustments in their

balance of payments without resorting to measures destructive of national or international

prosperity’ [IMF Articles of Agreement, Article I (v)]. Such organization mandate legitimizes

the imposition of conditionality on borrowing countries as the necessary safeguards for

international funds. Policy transfer has direct application in explaining this role of the IMF as

an agent of coercive transfer with legitimized powerful bargaining power over its client(s).

Such conditionality has in turn been shaped by the governments that created and run

the institution and especially by its most powerful states (Wood 2006 and Sweeney 2005). In

fact, the organization mandate suggests that the lending has to be used ‘in a manner

consistent with the interests of the international community (Mussa 2006: 1)’ which on some

occasions allow direct political pressures to bear on the content of conditionality. Often

enough, we have seen IMF policy package covers area of structural reform toward financial

liberalization which is also a standard approach embodied in the Washington consensus7

                                                                                                                         7  suggesting ‘… a set of standard procedures and rules for reform, including prudent regulation,

transparent accounting and supervision, an orderly sequencing of capital account liberalization, and corporate restructuring.’ (Yoichiro 2004 p.55; Harwood and Smith 1997)  

 

   

33  

It is arguable under a technical viewpoint that the work of the economists is vital in

providing roadmaps for policymakers contemplating change especially in managing financial

crisis. The nature of this policy field requires technical work and economic model that is

supported by professional economists who claim more understanding of macroeconomics.

They argue that Fund policies are appropriate in dealing with the crises as situations require

macroeconomic stabilization policies that in the short term cause recession and reduce

growth. An approach that the IMF has been using in the past four decades to diagnose and

prescribe conditions for countries facing balance of payments difficulties is called the Polak

model. It uses an absorption approach controlling domestic credit to expand at a rate not

faster than the country’s growth of real gross national product (Polak 1997 sited in Wood

2006 p. 40). This model implies a precise set of policy prescriptions. On the basis of the

Polak model analysis, the Fund’s prescription in the case of balance of payments deficit

would typically include a cut in the government expenditure, increasing taxes and reducing

money supply causing the increase in domestic interest rate. Capital inflows due to the

increase in interest rate would automatically bring back the equilibrium hence provides the

solution to the problem.

Given all its advantage in terms of practicability, the Polak model as well as other

successor financial programming models have been criticized for the ignorance to social

consequences occurred during the adjustment process to reestablish equilibrium. Fund staffs

are criticized for having a conservative judgment that imposes the minimum or safe level of

money the government can create and spend. As the drawback of economics theory in

general, the problem lays with unrealistic assumption about the pace at which private

investment and demand will recover (Independent Evaluation Office 2003)

Negative policy consequences could not be attributed only to unrealistic nature of

policy tools but also inappropriate problem defining by relevant policymakers and political

pressures on some occasions. This coercive policy tool implemented since 1990s provoked

 

   

34  

another main criticism as it characterized a one-size-fit-all policy recommendation.

Especially, during 1990s the Fund forced similar policies on its members regardless of

different economic and political background as well as root cause of the problem. To take one

example of South Korea following the 1997 Asian financial crisis8. Feldstein (1998) argues

that problem of South Korea is due to brief period of economic downturn from contagion

effect of problematic trading partners; different from that of Latin American crisis and other

Asian countries which resulted from overvalued exchange rate and an excessive current

account deficit. South Korea should never be advised similar policy package as those of other

countries and suffered from the negative consequences of the policy. Had the Fund realized

its great influences over the borrowing countries and utilized transfer process appropriately, it

would have realized the importance of tailor-making policy to fit with countries’ particular

circumstances. As Rose (1993; 20) mentions, ‘The application of programs/lesson-drawing is

valid only if the systematic care is taken in analyzing under what circumstances and to what

extent a program in effect in one place could be effective in another’.

As illustrated in the above discussion, there are in fact many distinctive forces that

shape decision-making of the IMF and how effective the implementation is as well as the

policy outcomes. Wood provides insightful analysis regarding Fund prescriptions that ‘they

reflect bureaucrats trying to square political pressures and institutional constraints’ (2006

p.4). Organization analysis as well as power relations among policy actors thus contributes to

an in-depth analysis of agent(s) involved in the coercive transfer process. We identify three

main actors involved in all of Fund activities to include 1) powerful states like the United

States and other industrialized countries 2) professional economists and staff at the IMF and

3) governments and their policymakers in crisis ridden member countries seeking supports

                                                                                                                         8  The IMF suggested the Polak Model set of conditionality be… ‘Policy of reduced government

spending, higher taxes, and tight credit to be administered in South Korean’ (Feldstein, 1998 cited in Kim, 2004: 15)  

 

   

35  

from the IMF. The Fund is constrained by these actors who draw the jurisdiction for its

capacity, determine the result of negotiation as well as the policy outcomes. Since the nature

of IMF activity is country-specific, identifying transfer agents and applying the concept of

coercive policy transfer would be presented in the case study of Hungary’s IMF loan

application.

IMF Transfer Process and the Role of Politics:

Although the nature of its financial activity implies high degree of coercion due to

terms of conditionality, the relationship between the IMF and its clients should not be viewed

as a one-way influence but a middle-ground case of negotiated policy transfer. There are a

range of agents involved during IMF negotiation process with its potential client; for example

many forms of policy entrepreneurs, key bureaucrats and politicians from both sides.

Policy transfer network approach (Evans & Davies 1999 and Evans 2004) might be a

useful tool that enhances a better understanding of inter-organizational politics within multi-

organizational setting. However, such concept does not recognize different degree of

bargaining powers among actors which often obscure the whole notion of policy-oriented

learning it tries to explain. Therefore, it is unlikely that this approach would be an appropriate

tool to explain IMF coercive transfer which evolves around the concept of power relations –

patron-client relationship. The concepts of policy networks (Marsh & Rhodes 1992) and

epistemic community (Adler & Haas 1992) are highly applicable in explaining this activity.

They allow for negotiation process while emphasizing the role of elite decision-makers

within close-knit policy communities in the formulation of conditionality.

The role of the IMF in the delivery of international public goods (IPGs) implies a

particular nature of coercive process involving negotiation. The IMF has the capacity to

mobilize Northern resources to fund IPG activities for various development programs in the

 

   

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poor countries 9The institution – jointly with the World Bank – is the coordinator between

creditors and debtors in managing the flow of developmental aid from developed to

developing countries – mostly in African region. According to the IMF, debt reduction

packages have been approved for 35 countries, 29 of them in Africa, providing $51 billion in

debt-service relief over time. The IMF’s role under the Highly Indebted Poor Countries

Initiatives (HIPC) involves setting up the four conditions that must be fulfilled by a country

considering HIPC initiative assistance, assessing the country’s eligibility for debt relief

program, providing interim relief on its debt service falling due through the Fund’s Poverty

Reduction and Growth Facility as well as evaluating borrowing country performance. All

parties involved in the negotiation aim at formulating reforms package to help the applicant

reach ‘the decision point’ as well as ensuring that country implements satisfactorily key

reforms agreed upon.

As demonstrated in the conceptualized model explaining the process of coercive

transfer, Network analysis is considered an appropriate concept to explain this process. Benz

(1990) elaborates on the use of new type of conflict-solving mechanism which describes

negotiation processes in networks which deems applicable especially when a member country

entering IMF Stand-By loan Agreement which normally involves negotiating the terms of

conditionality. Benz suggests that ‘when the authority enters into negotiation about its

decisions with target groups and those affected by a policy or measure, this creates

opportunities for the reciprocal exchange of information, for the development of face to face

debate and for persuasion’ (1990 p.98). Networks concept eases decision-making process

especially when the topic under discussion involves complex and dynamic developmental

problems as in the case of HIPC initiatives and the management of financials crisis Under

this multi-organizational context, common knowledge and attitudes to policy change can be

                                                                                                                         9  The notion of IPG is a controversial issue since there is an incentive to justify any activity by any

global development agency in order to claim conventional aid. Read more in (Kanbur 2002)  

 

   

37  

fostered and reflect in the terms of conditionality agreed by all parties. Fund staffs may be

independently effective in disseminating ideas and interpret the ‘adequate safeguards’

provision for Fund resources. However, political dynamics of an ad hoc network set up to

engineer policy change in borrowing country entail negotiation, compromise and persuasion

between powerful governments, the work of economists and policymakers as well as the

borrowing government.

The political preferences of the US and G-7 countries are not so strong in the parts of

sub-Saharan Africa but in the high-profile cases where economic interests are at stake such as

in Argentina or Russia (ibid). Following this observation we realize that the criticism made

regarding one-size-fit-all policy in South Korea rarely takes into account politics between

agents of transfer. Critics often disregard the fact that the IMF major shareholders are very

influential in shaping Fund agendas. Criticisms are made attacking the IMF’s economists of

undertaking wrong economic policies, the inappropriate transfer process or the failure in the

part of borrowing government during the implementation phase resulting in negative policy

outcomes.

Coercive Transfer as a theory of Policy Change:

The expansive roles in global economic development of the IMF and many of its

widely-criticized policy recommendations greatly impact domestic policies of numerous

member states. Extant literatures mainly focus on economic or political consequences in

borrowing countries as a result of policy contents or implementation issues, and often omit

the analysis on the direct impact of IMF’s influence over domestic policy-making. Recognize

economic and political constraints on the part of borrowing countries as well as conditionality

set prior or even during negotiation process, change in policies of borrowing countries is

viewed as inevitable giving Fund obvious bargaining power. Borrowing countries face not

only various forms of conditions but also direct coercive power over lending or withholding

resources, disbursing or suspending payments (ibid)

 

   

38  

Evans (2009) brings policy transfer analysis into the study of post-war reconstruction

and provides implications of how one considers the legitimacy of externally-promoted policy

change. This argument is applicable to all of the activities by the World Bank and the IMF.

Conditionality is the most apparent policy tool for inducing policy change in the areas of

macroeconomic reforms regardless of the outcome – as evident in the Washington

Consensus. Consider a successful mission in Mexico, IMF resources and power to pull

Foreign Direct Investments (FDIs) into Mexico as well as persuasive power based on Fund

global knowledge and status produce ‘not only a change in policies but a subtle

reconfiguration of the institutions of policy-making [in Mexico]’ (Wood 2006 p. 10). As the

scope of IMF activities expands to take on much broader project of systematic

transformation, the effect of coercive transfer process also includes alteration of domestic

institution and state capacity as evident in the case of transition states. As presented in the

transfer analysis model in last chapter especially in the context of the IMF, coercive policy

transfer is thus regarded as theory of policy change. Factors that cause change in policy are

power relations among agents of transfer and scope of the technocrats. This is best seen by

tracing specific case of Hungary in the second part of this dissertation.

2.2 Voluntary Policy Transfer and the IMF

We acknowledge that different degree of power allow for the application of policy

transfer continuum in explaining various activities of the IMF. Voluntary policy transfer

provides useful lens for the study of structure and process of collaborative governance as well

as organization learning process. However, Evans & McComb (2004) realize that it lacks

adequate methodology within the framework for analyzing the process of voluntary policy

transfer, the role of actors and policy oriented learning. They illustrate the usefulness of

policy transfer network – developed by Evans & Davies (1999) – in the development of new

policies for performance measurement of social security fraud in UK as the methodology for

such purpose. Realize that it provides methodology for the analysis of policy development in

 

   

39  

multi-organization setting; we adapt policy transfer network as our methodology to

demonstrate how voluntary transfer by the IMF assert itself in the domain of policy learning

as in the model proposed in previous chapter.

IMF: the Policy Facilitator

The scope of voluntary transfer definition permits us to regard the IMF as one of the

most influential global knowledge agents who facilitate as well as shape policy-oriented

learning of others. Such influence is seen through the activities of research and dissemination

as well as technical advice conducted by Fund staffs. Many official documents and reports of

the IMF – such as Global Financial Stability Report (GFSR), World Economic Outlook

(WEO), Report on the Observance of Standards and Codes (ROSC) on Fiscal Transparency

Module – provide information that is very influential for finance and economic related

policymaking and government planning.

We examine in more details the role of the IMF in this voluntary search for policy

knowledge by low income countries that do not want or need IMF financial assistance –

 

   

40  

omitting the factor that automatically lead to policy change. The Policy Support Instrument

(PSI) launched in 2005 helps countries design effective economic programme that, once

approved by the IMF’s Executive Board, provides signal to outsiders i.e. official donors and

creditors the Fund’s endorsement of policies. Such information would reassure those

creditors the repayment prospects of loans made to the countries they are supporting. Fund

advisory role is vital for a continuous development of low-income countries that have made

progress toward economic stability but still seek ongoing IMF advice, monitoring and

endorsement of their economic policies. Such regular consultation process is known

as ‘surveillance’. In fact, this surveillance role of the Fund does not limit to only in low-

income countries. The process takes place both at the global and in individual countries

where domestic and external stability is at risk and where adjustment policy is needed.

Fund staffs visit and exchange views with the government and central bank – Global

Economy Team as in the case of Thailand – on a regular basis (usually once a year). In some

occasions their mission also include a meeting with parliamentarians, representatives of

business, labor union etc. to help in the evaluation of country’s economic situation. The

impact of political turmoil on Thai economy has drawn attention from the global community.

A visiting IMF official to Thailand in April 2009 suggested in a report to the IMF’s

Executive Board that despite continuous political uncertainty the country had built a tolerance

to changes of government and that the unrest might not make too much difference to the

country’s forecast of GDP. Fund view sent powerful signal to the markets about country

prospect and direction of its economic policies.

IMF: Lesson learner?

Scope of voluntary transfer permits the analysis of lesson learned from organization’s

past policy experience as discussed in the last chapter. However, we will not go into much

details on whether the IMF has learned/or not learned from past experience but rather to

explain the process of learning in relation to the model developed in previous chapter.

 

   

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Voluntary policy transfer utilizes the underlying concept of psychology describing

change in cognitive structure of policy actor. Rational-objectivist approach and Argument

based-subjectivist approach of learning (Knoepfel & Kissling 1998) demonstrate the nature

of voluntary policy transfer approach employed by the IMF. We suggest that both approaches

are needed in policy development and evaluation stages in order to improve the quality of

IMF policy after receiving the feedback of program impacts and effectiveness. Such learning

processes are represented – in our conceptualized model of voluntary transfer analysis – by

the double arrows connecting policy donor with policy recipient.

The notions of learning paths and forms of learning can be applied in conjunction

with Evans & McComb (2004) to emphasize the importance of networks analysis in the

context of this institution. Interpretive approach utilized during policy dialogue explains that

Fund staffs and relevant actors introduce their views and reach a solution to policy problem

through an exchange of ideas as well as transforming debate. The result of this social learning

process through networks is a dissemination of knowledge leading to a framework for action

(Singer 1993 cited in Knoepfel & Kissling 1998 p. 344-45).

Structure Adjustment Programs (SAPs) is a standard approach deployed by both the

World Bank and the IMF which had been criticized for failing the objectives of development

and poverty reduction. Many negative lessons had been drawn by both the public and Fund

staffs to transform this controversial programme into the Poverty Reduction Strategy Paper

projects (PRSPs) in order to redress economic relativism of SAPs. The PRSP approach was

developed from the efforts of a cluster of political actors and policy-makers, including

Northern hemisphere governments, transnational NGOs, and institutional officials of the

World Bank and the IMF resulting from epistemic and policy shifts in the North (Tan, 2007;

Ahmed, 2004; Christiansen with Hovland, 2003). In this case, the lessons learned have been

re-conceptualized and institutionalized through policy networks/ epistemic community via

 

   

42  

normal process of policy-making. Lessons learned have contributed to better frameworks for

development which are geared toward facilitating broad participation of civil society.

However, critics of PRSPs still argue that there are some legacies of SAPs which

form the basis of the PRSP operational frameworks. Lesson-drawing approach and program

reform in this case thus allow the validation of the new disciplinary force of PRSP approach

and the extension of SAPs in serving to legitimize and continuously manage the inequality

[between the rich and the poor countries] at the global level (Tan, 2007: 152). It might be

possible to argue that voluntary transfer/lesson-drawing in this context serves as a tool to

legitimize previously-criticized IMF policy and at the same time continue its controversial

agendas. Under global governance context voluntary transfer approach provides a tool and a

channel allowing politics to influence multi-level policy-making.

The Weakness of Voluntary Transfer as a theory of Policy Change

When the IMF seeks to develop new policies that reflect past policy failures, the

concept of hybridization & synthesis helps identify lessons into policymaking process.

Lesson-drawing contributes to identify policy failures and determine elements needed to be

changed. However, the process told us nothing about the nature or degree of change in policy

that actually occurred. Nor it implies factors or circumstance leading to change in policy. It

has been reflected in the conceptualized model above; that knowledge output derived from

lesson-drawing process of policy transfer cannot guarantee the implementation unless such

policy choice is filtered by various theories of policy change to be selected during normal

policy-making process.

In the case of lesson-drawing by the Fund, we can apply many theories of policy

change to explain the change from SAPs to PRGFs. This reform was driven by three main

concerns; negative impacts of SAPs that deteriorating social and economic condition in

recipient countries (factor of change identified by social learning concept), a need to reform

the system of aid delivery to low-income countries and ensuring efficient management of aid

 

   

43  

to be distributed domestically to alleviate the pressure on the poor (factors of change

identified by issue-redefining and agenda-setting under Punctuated Equilibrium concept).

Without these three reasons explicable by theories of policy change, elements identified from

SAPs failures using a lesson-drawing process would not ensure the program reform. Given all

its merits, voluntary transfer approach could not guarantee obvious change or improvement

of policy. It should not be thought of as a theory of policy change as in a case of coercive

policy but rather a knowledge-acquiring activity which aids problem construction, issue-

defining or the searching process for alternative solutions. But is this also the case for policy

recipient? The application of voluntary policy transfer concept in the context of IMF

surveillance in Hungary is discussed in the case study.

___________________________

 

   

44  

CHAPTER FOUR

THE CONVERGENCE PATH OF HUNGARY

This chapter introduces the case study of Hungary. It explores the systematic change

in Hungary from the collapse of the USSR to the enlargement of the European Union as well

as its convergence with the International Financial World through the relationship with the

IMF. The analysis focuses on a political context that led to a long-awaited fulfillment for

Hungary to be recognized among international community. The aim of this chapter is to

provide a background of Hungary as well as to identify specific circumstances that give

significant implication to the outcome of policy being transferred as well as the processes

involved.

Systematic Change: The Story of Power Relations and Historic Legacy

Hungary as well as the former Communist states of Eastern and Central Europe

makes interesting case for the study of rapid change in institutions and policies against the

backdrop of transition to democracy and free market economy. Hungary was under

Communist rule with forced collectivization and centrally-planned economy following the

World War II. Following its historical background in the pre-transformation period from

1947-1989, any attempt to take some reform steps encountered fierce resistance even after

Hungarian membership in the United Nations in 1953. This is due to great influence from

USSR as well as from János Kádár – the then communist leader who ruled Hungary for 32

years from.

However, many serious financial problems that surfaced Hungary in 1963, 1964 and

the oil crisis in 1978 as well as pressure from a group of technocrats from the inside

prompted Kádár to take the most radical reform as a way to direct its economy toward the

West. Due to the inability of the Soviet Union and the Council for Mutual Economic

Assistance (CMEA or Comecon) to provide improved economic integration among the

 

   

45  

members (Glenn 1992), Hungary had to rely on more Western financing including

technology and management methods in order to maintain consumer welfare as part of the

implicit social contract (Csaba, 1994 p. 213-15). The steps taken by its reform committee

over the 70s had a great impact to the country over the next 25 years as they initiated

liberalization processes regarding a two-tier banking system, currency convertibility, tax

reform, and bankruptcy legislation.

In regard to Hungary relationship with the IMF, the matter could have been pursued

since October 1946 and several occasions that followed (Csaba 1992) had not it been for the

increasing weight of Stalinism in Central Europe (Larosière 2002). The economic and

political context during the 80s and early 90s crated an opportunity window for IMF

application. Some Hungarian officials – notably Janos Fekete who was then in charge of

foreign exchange matters at the Central Bank – viewed Fund membership as an essential part

of the reform process (Larosière 2002; Boughton, James 2001). In the IMF feedback on

Hungary’s intention to apply, it reaffirmed that country financial situation and international

environment was calling for Fund supports. Due to more economic interactions with the

international financial markets, Hungary needed the IMF in terms of external balance of

payments support as well as conducting sufficient adjustment to mitigate the increase in

foreign debt owed to international banks.

The second oil shock of 1979-80 worsened its balance of payments deficit and

external debt. On the verge of losing its solvency in 1981due to the contagious effects from

Poland and Romania causing a massive deposit withdrawal from the National Bank of

Hungary by the Soviet and some Arab investors, Hungary had received rescue operations

from its Western partners. This assistance was made possible as the Hungarian application for

IMF membership was already well under way. Speech made by Ferenc Havasi – Secretary of

the Central Committee in charge of the economy implied strengthening relationship with the

West while signaling an end to the Soviet-first approach. This legacy has an important

 

   

46  

implication to country continuous dependency on external source of funds and supports

especially from its Western partners.

As you know, at the beginning of this year, Hungary has run into

exceptional difficulties in her international financial relations. First, we

were turning to our allies. Unfortunately, they were all preoccupied

with their own headaches. They were not in a position to help us…Then

we were turning to our Western partners. As the Hungarian proverb

says: it is in times of difficulty when you find out who your real friend

is. We were assisted, and I can report to the Parliament with pride: that

financial crisis has been overcome. (Csaba 1994 p. 216; Havasi 1982)

It was Hungary’s initiative in approaching the Fund; however, we recognize that several

negotiations between major stakeholders must have occurred to allow continuing contacts

between the two parties. In this occasion the IMF and its important shareholders including the

US Secretary of the Treasury recognized the potential of Hungary in fulfilling Fund’s

conditions. Fund management then recommended the Board of Governors who completed its

voting. Hungary signed the Articles of Agreement in May 1982 which has officially made the

IMF its agent of both coercive and voluntary policy transfer that facilitate the integration of

Hungary in the international financial system since.

The history of the relationship between Hungary and the IMF has been rich in events.

Hungary is considered the first European country of centrally planned economies that moved

towards more market oriented economy. Reforms had been conducted with the assistance of

the IMF together with the World Bank providing significant financial resources along with

prescribing the Washington Consensus combination of macroeconomic stabilization and

structural adjustment programs. These processes had moved forward but slower than many

had expected despite no resistance from Hungarian authorities. It was proved to be a daunting

task also for both institutions due to their limited experience in transforming heavily

managed, developing economies on structural adjustment, privatization and reform (Wood,

 

   

47  

2006). Consider an ongoing relationship between the two parties even prior to Hungary’s

accession as discussed above, one could not help but question why the IMF could not push

for greater market reforms. The answer was suggested by Csaba (1994) who described it as

‘peculiar institutional filters countering the advice of the IMF and the World Bank’.

The norm of behavior in intre-CMEA relation which reflected in its administrative

measures had resulted in the lack of data transparency and inaccurate economic information.

This was considered a fundamental deficiency that distorted real economic performance

during the reform process. The general government deficit/GDP ratio used back then as the

quantitative performance criteria thus appeared satisfactory. Moreover, all communication

with the outsiders was made through the National Bank who ‘held an ambiguous position

towards marketizing reforms’ (Csaba 1994 p. 218). The National Bank developed a high

secrecy in its activities which resulted in a disproportionately high degree of power among a

very small group of people.

These observations reflect not only the effective filtering mechanism into Hungary’s

relations with the IMF but also the lack of any checks and balances or the control of

illegitimate publicity of the National Bank. This allowed for the illegitimate decision-making

structures viewed by the outside authority as well as Hungarian experts and technocrats. This

prevented the Fund from forcing further adjustment or insisting upon specific reforms (ibid).

At least during a decade after Hungary’s accession to the IMF, the government managed to

enjoy certain degree of political autonomy over the Fund. Had not it been for these factors,

Hungary could have felt the impact of reforms at the very early day of its transformation.

Fortunately, the country could not delay the systematic change any longer. During

1987-1989 with the IMF regained its leverage over the Hungarian government due to several

problematic financial situations, the reforms then focused on import and export orientation,

marketization as well as several institutional reforms. Although the financial situation during

 

   

48  

the whole period posted serious concerns and urged the Fund to call for more immediate

reforms in the direction of the market, the Fund was in no position to intervene with Hungary

as its quantitative performance criteria appeared to meet the targets.

The window of opportunity for extensive reforms was finally wide opened after the

collapse of the Soviet Unions. Political climate of the whole region since 1990 implied the

need to turn toward the West. The impact of the Gulf War on global oil markets and the

impacts of the collapse of CMEA on Hungary’s current account though were to its benefit but

still looked problematic. Moreover, unlike the early accession period, the filter mechanism

did not persist in 1991-1994. Thus, several loan agreements were signed between the two

parties as well as other Western donors to provide supports for its structural reforms and

inadequate foreign reserves. Throughout the history of the relationship between Hungary and

the IMF prior to November 2008, the total of seven programs had been supported by the

Fund resources (Larosière 2002).

After 1996 the influence and direct supports from the IMF were to a lesser extent but

it certainly opened the door for Hungary to become a member of international communities

i.e. the OECD in 1996 and NATO in 1999. Other reforms during 2002 and 2006 covered

areas such as reduction of taxation, growth stimulation packages, and a gradual steady

reduction of the size of government targeting on the improvement of economic

competitiveness and quality of public service. These were a series of convergence programs

for EU accession in 2004 and integration programs afterwards (MoF, 2004).

Many literatures regard the transition and reform policies as having a positive impact

not only to the country but to the whole Central and Eastern Europe. However, recent

researches suggest otherwise. To take one example, Tiit et al. (2008) provide literature review

on transition strategies and immediate crisis management in Central and Eastern Europe that

has some implication also to Hungary. Using the analysis of the economic development of

 

   

49  

countries in the region during 1990-2005, they discover rather deteriorating policy outcome

and hence seek for its explanation.

They identify two main factors that contribute to such phenomenon; ‘a) comparative

neglect and weakness of a set of policies crucial for longer-term development, such as

science, technology and innovation policies’ (p. 65) and b) policy misjudgment by the

relevant parties that overlooked a number of development challenges. These policies had

increased financial fragility as well as weaken the comparative advantages of the economy

over long-term period.

These arguments are well supported by Csaba’s observation of IMF programs in

Hungary during the transition period. Political intervention during the negotiation process

resulted in the inappropriate strategies used in IMF policymaking towards Hungary. He

suggests that the country proved to be unfit for IMF programs in terms of support within the

government and the coalition parties as they favored growth acceleration policy as opposed to

those of IMF’s institutional reform and fiscal restraint. This resulted in policies that generated

growth at the cost of rapidly increasing risks.

Moreover, the policy documents that laid out country economic plan were a not an

operational one. The IMF and Hungary’s economic representatives conducted talks but

neither managed to produce any political measures that reflect mutual understanding.

Hungary’s position and its policymaking became ‘more responsive to what it perceived as

social needs, which were basically its own election rhetoric and the feedback from its handful

of faithful’ (Csaba 1992 p. 228). There were also many occasions that the government

showed a lack of commitment to fulfill its obligations with the IMF.

Recognize these historical legacies and political culture; it was not surprising to

know that there are some outstanding policy documents and adjustments to be made

especially in regard to Hungarian fiscal practice and the institutional side of the budget

 

   

50  

process which continue to post a threat to its economic development – as far as country’s

dependency on international practices and supports are concerned.

Understanding the Problem of Fiscal Management of Hungary:

Since the past two decades, the country has faced enormous challenges in managing

its expenditure to support various reform programs and the funding of essential

services10

while having to maintain fiscal balances. The government has been facing daunting

pressures to reinvent its budget institutions and to adjust itself to radical new budget policies

in order to facilitate its transition process. Having to face ‘an additional set of external

constraints imposed by the IMF and the World Bank, by the goal of membership in the

European Union and NATO, and in bilateral relationships with countries like the United

States and Germany that establish conditions for receiving economic assistance’ (Lance et al.,

1998; 94), the country needs to develop appropriate budgeting tools and techniques for the

management of public finance that take into account factors that constantly affect the state of

governance and economy.

Hungarian budgeting practice indicates a lack of strategic prioritization. According to

a comparative theory of budgeting11

, the rapid transition processes in Hungary in different

periods would reduce the certainty, stability and predictability in its budgeting. And at the

same time, the short term effect of those reforms would likely reflect in the possibility of

decline in wealth and hence add even more uncertainty in budgeting. All these mechanisms

                                                                                                                         10

 Including ‘privatizing state-owned industries, allowing sufficient resources for defense for eventual NATO membership, and protecting domestic constituencies from the ravages of economic upheaval’ (Lance et al. (1998; 89-90)  

11  Developed by Caiden & Wildavsky (1974), and Wildavsky (1986)  

 

   

51  

transcend the tendency for ‘repetitive budgeting’ practices12

causing multiple revisions in

spending and taxing decisions or even readdressing the goals and policy priorities.

This theory of budgeting also reveals another characteristic of the Hungarian public

sector – the importance of political culture. The country faces some difficulties in adjusting

communist political culture, which has been embedded in its public sector for almost 50

years. This results in the delay to the adaptation of new budgeting processes and policies as

its public finance sector slowly adjusts itself – unless there is a stimulus which accelerates the

change. We discuss this process of change in more details in the next chapter. Moreover,

Hungarian budgetary development has encountered great challenges due to a fragmented

budgetary system and the lack of standardized accounting information systems to start

with13

. This obscure definition and measurement issues deter a proper analysis of its

budgeting.

Regardless of reform attempts in the past decades, the review of the Hungarian

Ministry of Finance in 2004 still implies inappropriate and incomplete establishment of the

budget institutions – lacking even the legislation to prescribe the structure of the general

government. Only broad provisions on the government’s goals and functions are prescribed

under the General Government Act as opposed to identifying the basic principle of national

budgeting and clarifying the division of revenue and expenditure responsibilities

Recall the background discussion above regarding the IMF programs starting in

1992; the reduction in budget deficits has been the main target of the government since. Due

to the political aim of entering the EU by 2004 and criticism over its excess budget deficit,

the key goals established in 2002 were targeted at having a balanced budget and a fiscal

                                                                                                                         12

 Caiden and Wildavsky criticize repetitive budgeting for its inordinate delay, careless estimating by departments, and overtly political criteria for approving expenditures (Read more in Goode, 1984; 22)  13

 Read more in (Semjen 1994)  

 

   

52  

policy position promoting investment-based economic growth which has formed the basis for

other periods as well.

In 2006, its budget deficits reached its peak at 9.2% of GDP; the highest in the EU in

percentage terms with government debt well over 60 percent. Budget deficits are not the only

problem; high inflation – as much as 8% in year 2007 – is also another issue that the

government has been struggling with. Both – the reduction in government expenditure and

inflation – can be achieved by maintaining tight budgetary control. However, the degree of

success depends on the government’s continued commitment to fiscal responsibility.

Unfortunately, historical legacy has proved to deter such development. Comments

made to the Ministry of Finance suggest that ‘since the post-socialist transition, fiscal

developments have been determined mainly by political cycles as compared with many other

countries where the budget balance broadly reflects the impact of economic cycles’ (Kopits,

2007; 1). Throughout the transition period Hungarian government had been using various

strategies aiming at reducing government expenditures while pacifying the society by

 

   

53  

offering relatively generous welfare provisions (Bohle 2009; Vanhuysse 2006). The former

measures range from shock therapies such as substantial cut in subsidies, tough bankruptcy

laws and the austerity Bokros package causing major structural changes which were followed

by fierce resistance. As a result, the government had to launch compensation programs in

major segments of the economy as a political strategy to gain the popularity. These policy

swings had resulted in the macroeconomic imbalance and the fluctuation in government

expenditures as showed in the above diagram. More recent research conducted to draw

lessons from previous fiscal practice suggests also that ‘rhetorical commitment to fiscal

discipline made by a government at the beginning of its mandate was abandoned in the run-

up to the next election, as politicians felt compelled to step up expenditures or cut taxes to be

re-elected (MNB, 2007: 8)’. According to diagram above, budget deficits at the peaks

coincide with election years in 1994, 1998, 2002 and 2006 which validate this argument.

Hungary faces greater difficulties in controlling the public expenditure due to the

essential problems in budget planning process and other fiscal practices. Historical legacies

i.e. political cycles and inappropriate practices of public servants rooted in socialist political

culture prove to contribute to the pressing problem facing Hungarian government at the

present days.

__________________________________

 

   

54  

CHAPTER FIVE

POLICY TRANSFER BETWEEN THE IMF AND HUNGARY

Policy problems identified in the previous chapter allow for an on-going relationship

between the IMF and Hungary. This chapter then demonstrates various transfer processes and

circumstances that underlie this relationship. The purpose of the discussion is to determine

the extent to which policy change and learning process have resulted from these transfer

processes. It also investigates the factor(s) that determine such change.

Continuing problems regarding Hungarian public expenditure management were

identified in the previous chapter. Reforms for public finance had been initiated since 1987

aimed at creating not only sustainable institutional arrangements but also a government sector

adapted to a market economy (Lajos Jean-Jacques 2002). Hungary has realized the effect of

knowledge, value, policy and procedures in this field being transferred from international

community during the past two decades. Many researches have been conducted to study the

implementation of these international practices in the context of post-socialist country

(Leloup et al. 1998; MoF 2004; MNB 2007; Kopits 2007; ZEW and OEI, 2006 and Oxford,

2006). Many international organizations have conducted reviews and reports assessing its

performance periodically (IMF, 2007; OECD, 2007). Unfortunately, countless conflicts of

interest and polemic as well as historical legacies and various external circumstances have

proved to delay the progress. The fact that Hungary has not completed these reforms exposes

itself to increasing international pressures especially from the OECD, the EU as well as the

IMF criticizing inaction in these areas has hindered country’s full economic development and

good governance 14

.

                                                                                                                         14

 Refer to OECD 2002; OECD 2004a; OECD 2005a; IMF 2004 for more details on recommendations for institutional reform  

 

   

55  

1. Coercive Policy Transfer and the Road towards Reforming Public Finances:

The starting of global economic crisis in 2008 which stems from the developed

markets has spread to emerging markets via many transmission mechanisms. Hungary was

among the first emerging-market countries affected by the current global financial crisis due

to structural weaknesses and various macroeconomic imbalances especially fiscal and budget

deficits which have long been financed by foreign debts. The reversal of capital inflow to the

country has worsen the situation leading to significant debt and equity market sell-offs,

higher interest rates and spreads, and pressures on exchange rates, creating negative feedback

loops (World Bank 2008).

The collapses of housing market and severe pressure on its currency in late 2008

made the IMF conclude negotiation for a $15.7 billion loan to bolster Hungary’s finances;

with additional supports from the EU and the World Bank. The following section utilizes the

policy transfer frameworks of Dolowitz and Marsh (1996, 2000) to explain the elements of

this 17-month Stand-By Arrangement (SBA) signed by Hungary on November 6, 2008 under

the Fund’s fast-track Emergency Financing Mechanism.

Conceptualize the Elements of Stand-By Arrangement:

It is necessary that we identify the important elements in the SBA by answering the

main questions that form the basis of the framework; Why transferred? Who is involved?

What are the objects of transfer?15

This would enhance our understanding of the process of

transfer and how it affects policymaking.

Financial crisis and structural weaknesses described earlier prompted the Hungarian

government to approach the Fund for its financial assistance. Continuing relationship

between the IMF and Hungary under Article IV Consultation process allows for quick

responses to the crisis. The major actors involved in the IMF policy transfer are the Executive                                                                                                                          15

 Refer to the discussion on the policy transfer framework of Dolowitz and Marsh (1996, 2000) for more details.  

 

   

56  

Board of IMF and its management team led by Dominique Strauss-Kahn; Managing Director

of the IMF, on the part of policy enforcer. Also we have the Hungarian government with

Ferenc Gyurcsány; the Prime Minister, János Veres; the Minister of Finance, and András

Simor; the Governor of the National Bank of Hungary, as a legitimated group of actors in

negotiating as well as communicating the result of decision-making. The group of policy

entrepreneurs has been set up – an ad hoc network consists of the IMF staff mission led by

Anne-Marie Gulde; Senior Advisor in the European Department and the Mission Chief for

Hungary, along with James Morsink; Division Chief in the European Department. An IMF

staff mission and the Hungarian authorities are also in close consultation with the European

Union (EU) to discuss further responses to the challenges. Close dialogue between the Fund,

the Hungarian authorities and the EU resulted in many policies and programs recommended

to the Hungarian government. This consultation provided technical assistance for Hungary’s

loan application and policy conditionality attached in the proposal to the IMF.

Explore the Negotiation within Coercive Policy Process

As discussed in the first part of the dissertation, the lack of methodological

framework to explain the process that characterizes coercive transfer permits us to utilize

conflict-solving mechanism (Benz 1990) and the policy transfer network approach (Evans &

Davies 1999) in explaining negotiation processes between the actors as demonstrated in the

model:

 

   

57  

The general consultation process under IMF surveillance earlier in mid-October 2008

had resulted in broad agreement on a set of policies for the near-term stability to ensure fiscal

sustainability and strengthen the financial sector. The IMF claimed that banks and other

financial institutions operating in the country would continue to provide adequate financing

for such programs. And that Fund's assistance in the form of a Stand-By Arrangement would

be considered upon the additional structural reforms in order to justify an exceptional level

of access to Fund resources16

As financial difficulties in advanced economies had led to a

decline in global liquidity and investor confidence, Hungary had no choice but to approach

the Fund – ‘the primary official international lender of final resort’ (Mussa, 2006: 2) – for its

financial assistance. This allows for greater bargaining power of the IMF over its client.

Let us explore the position of Hungarian authorities when entering into negotiation

with the IMF. Policy recommendations from the IMF provide solutions to policymakers in

Hungary which help tip the domestic political balance. ‘The Bank and the Fund influence in

the short term depends on local conditions and whether politicians have an interest in using                                                                                                                          16 Statement by IMF Managing Director Strauss-Kahn on October 13, 2008 following the meeting with Ferenc Gyurcsány the Hungarian prime minister.

 

   

58  

Fund or Bank resources or conditionality to bolster a particular position or policy’ (Wood

2006 p. 6). As discussed last chapter historical legacy has caused inappropriate political

behavior as politicians halt expenditure-cutting policies in favor of introducing generous

social welfare scheme in order to be re-elected. This results in fiscal deficit problem that has

to be addressed by reversing this behavior.

However, this is not an easy task. In the past, Hungarian economists and policy

entrepreneurs had to make countless attempt to persuade politicians and legislators to pass

institutional reforms and, more difficult, to accelerate these processes. The situation has not

changed much despite increasing pressure from many directions. Hungarian experts and

officials in the area of public finance management as well as the OECD, the World Bank and

multilateral development institutions have been advocating institutional reforms and

approaches to budgeting and managing its public expenditure. The National Bank of Hungary

and the State Audit Office organized also a conference in May 2006 attended by elites and

leading politicians which resulted in an agreement upon the implementation of a rules-based

fiscal responsibility framework (FRF).One year later, the Parliament managed to set up a new

institution – the Parliamentary Budget Office (OKH) – to supervise authority besides the

State Audit Office (MNB 2007). This is a crucial step that the country made towards better

ex-post accountability in the budgeting process and fiscal discipline.

Consider the rhetoric played by Hungarian politicians, there is a need to accelerate

the reform process by enacting fiscal responsibility law in order to ensure the implementation

of fiscal rules on public debt and primary deficit, strengthen the medium-term expenditure

framework and create a fiscal council to provide independent and expert scrutiny.

Certainly, IMF policy recommendation regarding fiscal responsibility of Hungarian

government has strong support from the authorities. As Wood (2006 p.73) comments, ‘the

task of persuasion is a joint effort in which the Fund and Bank staff team up with sympathetic

 

   

59  

local decision-makers to persuade others’ – in our case would be Hungarian politicians and

legislators. Given the financial crisis at the time, this task was viewed as very effective and

hence provided the window of opportunity for actual implementation of FRF.

Another policy recommendation from the IMF worth mentioning is the pension

reform which outlines policy measures regarding the 13th monthly pension payment (pension

bonuses). This is another sensitive issue that requires government attention in mitigating

social impacts and maintains political stability. The IMF also regarded this opportunity to

recast itself as a defender of the most vulnerable and to help avoid the public criticism that it

overlooked social consequence of the program. The exemption then has been made to

exclude the low-income pensioners from the elimination of pension bonuses. This reflects

compromising interest by both parties and reveals IMF agenda i.e. eliminating expenditure

that inflates fiscal deficits while mitigating social impact in countries with large low-income

and jobless populations.

The result of these negotiation processes is predictable; the Hungarian authorities had

to and were willing to develop a comprehensive policy package designed according to IMF

policy recommendations. Hence a broad range of policies and structural adjustments are

identified in its Letter of Intent to the IMF. With respect to one of Hungary's most important

vulnerabilities discussed in previous chapter, the path of fiscal adjustment has been

accelerated thanks to this greater influence of the IMF.

On Monday November 3, 2008 Prime Minister Ferenc Gyurcsány announced that the

IMF Letter of Intent was completed. The document was signed by the Minister of Finance

and the Governor of the National Bank of Hungary. János Veres; the Minister of Finance,

presented the document to the public within 24 hours. The IMF Managing Director concluded

that "these strong policies justify the exceptional level of access to Fund resources equivalent

to around 1,020 percent of Hungary's quota in the IMF and deserve the support of the

 

   

60  

international community". The management team then submitted Hungary’s proposal to its

Executive Board for approval.

Upon evaluating its proposal, the IMF’s Executive Board finally approved SDR 10.5

billion (equivalence to about €12.3 billion or US$15.7 billion) financing package as part of a

$25 billion program – along with the EU and the World Bank financial supports – designed to

ease Hungarian short term financial market stress while supporting longer-run structural

goals. The IMF's financial support, combined with the commitments by the European Union

(€6.5 billion or about US$8.4 billion) and the World Bank (€1 billion or about US$1.3

billion), which total €20 billion (about US$25.8 billion) in financial support17

, provide

Hungary with the amount of reserves that is sufficient for the purpose of easing the rollover

of external debt and hence securing investor confidence. The support of $6.3 billion was

made immediately available and the remainder in five installments subject to quarterly

reviews.

Conditionality and Policy Change:

Programs identified in the Letter of Intent are regarded as a set of conditionality

attached to Fund financial facility and a commitment that the government of Hungary has to

fulfill. The promise of financial resources by international financial institutions has enforced

– rather induced – policymakers in Hungary to make policy changes throughout its history.

This time, IMF loans attach programs that are based on two key objectives: to implement a

substantial fiscal adjustment to ensure that the government's debt-financing needs will

decline; and to maintain adequate liquidity and strong levels of capital in the banking

system18

Financial crisis followed by IMF assistance provided opportunity for another rapid

                                                                                                                         17

 IMF Press Release No. 08/275 on November 6, 2008  

18  Announcement by the IMF via its official website at

http://www.imf.org/external/pubs/ft/survey/so/2008/CAR110608A.htm.  

 

   

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policy changes in many policy areas; be they fiscal policy focusing on the expenditure side,

financial sector policies as well as monetary and exchange rate policy.

It is important to look into the 'Quantitative Program Targets' and 'Structural

performance criterion' as they are indicators to monitor the progress and determine the

feasibility of implementing, as well as the continued success of the policy packages.

Although issue of data transparency had been addressed during previous reforms, history

Recent Economic Developments

Hungary was among the first emerging market countries to suffer from the fallout of the current global financial crisis. As financial difficulties in advanced economies led to a decline in global liquidity and an increase in risk aversion, investors increasingly started differentiating among emerging markets. Hungary's high external debt levels, which amounted to 97 percent of GDP at end-2007, and significant balance sheet mismatches, negatively affected investor appetite for Hungarian assets. Even though macroeconomic and financial policies had been strengthened since 2006, with substantial fiscal consolidation and tax administration improvements, Hungary was hit hard by the global deleveraging. Financial markets in Hungary have come under significant stress in recent weeks, reflecting the rise in perceptions of counterparty risk.

Program Summary

Growth is expected to contract in 2009 to -1 percent from around 1¾ percent in 2008. Already weak private consumption and investment will be negatively affected by a sharp reduction in new bank lending. Inflation, which peaked at 9 percent in early 2007, is projected to continue a downward trend and reach 4 percent at end-2009. In a difficult global environment and with low domestic demand, the economy is projected to recover only gradually due to the fact that the slowdown is simultaneously occurring in Hungary's main trading partners and the global deleveraging process that will leave less foreign capital available to quickly return to Hungary. Growth is not expected to reach its estimated potential of 3 percent until after 2011.

The authorities' economic program is designed to foster a rapid return of less stressed financial market conditions, while supporting longer-run structural goals. The main pressure points in Hungary are in public finances and the banking sector. In response, the program is based on the following key elements:

• Given Hungary's large public debt, substantial fiscal adjustment is required to provide confidence that the government's financing need can be met in the short and medium run. The program envisages a large structural fiscal adjustment of 2½ percent of GDP with emphasis on expenditure measures, consistent with the need to reduce the country's large public sector. To put fiscal sustainability on a permanent footing, a rules-based fiscal framework will also be introduced. To mitigate social impacts, low-income pensioners will be exempt from the elimination of pension bonuses.

• Upfront bank capital enhancement is needed to ensure that banks are sufficiently strong to weather the imminent economic downturn, both in Hungary and in the region. The banking sector support package in the program contains provisions for added capital and resources to finance a guarantee fund for interbank lending to establish a level-laying field for the Hungarian banks in an international environment where their competitors already have access to similar guarantees.

• Large external financing assistance is needed to support Hungary's return to normal international funding. In addition to the IMF, contributions are being received from both the EU and the World Bank.

Hungary joined the IMF on May 6, 1982; its quota is SDR 1,038.4 million (about €1,212.9 million or US$1,548.8 million), and it has no outstanding use of IMF credits.  

 

Sources:  IMF  Press  Release  No.  08/275  on  November  6,  2008  

 

 

   

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suggests that the IMF will not allow the government to justify the postponing of reform by

defining ‘vague’ performance criteria – without specifying timing and structural benchmarks.

An IMF staff mission – led by Mr. James Morsink – completed the first review under

the SBA during February 4-6, 2009 in a close cooperation with a parallel mission from the

European Commission. The report suggested that “The Hungarian authorities have

implemented the policies described in their previous Letter of Intent of November 2008. The

quantitative performance criteria and indicative target for December 2008 were all met.

Inflation was broadly as envisaged under the program. The structural performance criterion

and benchmarks were also all met” 19

.

Hungary’s implementation of a rules-based fiscal framework looks even more

promising now under the pressure of the IMF. The recommendations from international

organizations regarding proper budgetary procedures and institutional reforms have all been

underway. The markets in general reacted positively to the prospect of implementation of the

fiscal responsibility law as it is seen to strengthen the medium-term expenditure framework

by making the spending ceilings legally-binding. Thus, the change of domestic policy

especially in the area of public finance is evident and it confirms our discussion earlier

regarding the impact of coercive transfer process on policy-making of IMF’s client.

2. Voluntary Policy Transfer and Policy Learning

The following discussion applies the theoretical analysis developed in the first

section regarding the applicability of voluntary policy transfer. When incorporating the policy

transfer network into the analysis, we are able to explain the learning process in both policy

donor and recipient and make the implication regarding their policy development and policy

                                                                                                                         19

 IMF Press Release No. 09/36 on February 16, 2009  

 

   

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change. Here we specify the role of the IMF as a global knowledge agent in order to examine

the process and the degree of policy-oriented learning of Hungarian government.

IMF Surveillance in Hungary:

The voluntary policy transfer concept allows us to explore another activity of the

IMF as a ‘policy facilitator’ or policy donor promoting economic and financial policies in

Hungary through its surveillance. This section would provide the analysis of what is the

process of policy-oriented learning of Hungarian authorities and what are the outcomes of

this learning; given the global status and imprimatur of the IMF. The policy transfer network

approach is now applied to investigate these questions.

Figure 3: The emergence and development of a voluntary policy transfer network

The diagram above merges the concepts of policy network and policy-oriented

learning to provide a methodological framework for analyzing the process of voluntary policy

transfer. By utilize the concept in conjunction with Knoepfel & Kissling (1998), there is a

 

   

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profound implication for how policy actors in the network develop their learning patterns in

each stage and what results this collective learning pattern contribute to policy development.

We now apply the framework to our case study of the recent IMF surveillance in Hungary.

There are two levels to IMF surveillance i.e. multilateral level (oversight of the world

economy) and bilateral level (appraisal of and advice on the policies of each member

country). As one of its 186 members, Hungary has been holding bilateral discussions with the

IMF every year – under Article IV of the IMF's Articles of Agreement. During May 29–June

10, 2008; IMF staff team – led by James Morsink – met with the Prime Minister, the Minister

of Finance, and the Governor of Hungarian National Bank as well as senior officials in other

Ministries to discuss economic development and policies at times. The team also met with the

leader of the main opposition party, academics, policy analysts, and representatives from a

wide range of financial institutions.20

According to a voluntary policy transfer network, this represents the emergence of an

information feeder network between the IMF and Hungarian authorities. This pre-decision

process was simplified as problem recognition and a search for ideas and contacts had already

been identified because of existing problems and established relationship with the IMF. Let

us examine IMF surveillance process in the below diagram:

                                                                                                                         20

 Refer to ‘Staff Report for the 2008 Article IV Consultation’ (IMF 2008) in the Appendix III for more details  

 

   

65  

During the mission, Fund staffs collected economic and financial data which has

been standardized according to Fund’s Data Quality Assessment Framework (DQAF). The

purpose of discussion was to assess risks facing the country and recommend preventative or

corrective actions. According to the last consultation, Hungarian policymakers and economic

agents have been informed of the rising financial system risks; especially credit and liquidity

risks, due to high vulnerabilities and the deterioration in global financial conditions over the

past year (IMF 2008d). Policy recommendations in various policy areas were suggested 21

.

IMF surveillance processes have profound implications regarding the extent to which

Hungary could voluntarily adjust its policies and economic performance regarding the

                                                                                                                         21

 Refer to Public Information Notice in Appendix IV for more details  

Figure 4: IMF Surveillance  

Secondary Source: IMF Surveillance as of June 2009

 

   

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economic information and assessment obtained from IMF surveillance. Thus we seek to

investigate the feasibility of Hungary developing policy-oriented learning and a resulting

knowledge-induced policy change in the context of IMF policy facilitating.

Voluntary or Enforced Learning?

There are three forms of policy learning that emerge from this network. They are

enforced learning, instrumental learning and model-based learning according to Knoepfel &

Kissling (1998). According to the underlying discipline of psychology, this reveals the extent

of learning potential of Hungarian government. They indicate specific types of interaction

between the network (IMF shareholders, Fund staffs and Hungarian authorities) and its

environment (circumstances) which explain how economic knowledge is acquired and how it

shapes a transition and action of policy actors in each stage of learning. This allows us to

realize factors that drive Hungarian government to take actions aligned with IMF policy

recommendation. These factors include power and interest, financial gains, externalities,

opportunity cost, policy habit and international pressure.

The diagram indicates that IMF’s analysis of its member countries’ policies takes

into account both global and country-specific factors. This is an important incentive that

induces the government to implement policy recommended by the IMF or at least prioritize

the result of Fund risk assessment for policy-making as it allows the country to be integrated

into the world economy. There is a promising financial gains associated with such policy

actions.

Countries (mainly hegemonic capitalist states) wish to maintain or take on a greater

share of responsibility in global economic and financial affairs through the IMF as it is the

foremost important global financial institution. This would allow them to obtain greater

power and derive gains or to exert influence over others in their own interest (Fratzscher &

Reynaud 2007). Communication process in IMF surveillance between the country-level

 

   

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discussion and the IMF feedback reveal such political influence from major IMF

shareholders. It is confirmed by IMF staff briefing the process as followed;

“On return to headquarters, IMF staff mission prepared a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.” (IMF 2008d)

Their powerful influence alters a rational policy-learning and decision-making of the

Hungarian government ‘through the drafting process of the content of the Public Information

Notice (PIN) and the ultimate vote of the Executive Directors’ (p.5).

In consequence of the first observation, IMF surveillance is highly relevant for

financial markets and hence a necessary 'code of compliance' for Hungary since it can have

significant gains in foreign investment flows into the country and favorable financing

conditions - which is very necessary given its rich historical background and current situation

regarding the need for external sources of fund. The market impact of IMF information

suggests that the report of the IMF’s assessment (PINs) has to be made available to ensure

that information is released to the public. Fratzscher and Reynaud conduct a study which

shows that 'investors change their exposure to countries and re-price existing risk so that

financing conditions reflect more directly the stance of government policies and the

performance of an economy [being evaluated under IMF surveillance]’ ( p.3).

Notice also that these incentive elements under IMF surveillance resemble those

identified under coercive transfer analysis. But unlike the conditionality, the IMF cannot

enforce its surveillance advice or insist upon specific reforms in the domestic policy matters

of the Hungarian economy. However, the consequence of the relationships between the IMF

and Hungary provides opportunity structures that allow the Fund to ‘penetrate indigenous

decision structures [of Hungarian government] and gain a status of acceptance in policy-

making processes’ (Evans 2009 p. 3). Thus there is no free choice of political actor in

 

   

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decision-making or an incentive that would induce progressive learning or action taken by

Hungarian authorities. Although the process identified under IMF surveillance is similar to

that of voluntary policy transfer network, the main element of post decision process which

constitutes ongoing path of policy learning does not exist. We consider these missing

elements to be a crucial step toward an effective learning in the long run. We may conclude

that Hungarian government has been – and continued to be – experiencing externally induced

learning through IMF surveillance.

The role of IMF as a policy facilitator falls within the domain of indirect coercive

policy transfer – a middle ground case between coercive and voluntary ones. This could

imply some degrees of learning on the part of policy recipient. Important conclusion can be

drawn that without biased power relations between the Fund and its client, as well as

incentive elements in the learning instruments (IMF surveillance), the form of policy learning

applied by Hungarian government cannot promise action or change in status quo. Regardless

of how useful the voluntary policy transfer network is in explaining the learning process of

Hungarian government, policy adjustment reflects only circumstances surrounding agents of

transfer and not the knowledge derived from policy contents or collective learning processes

itself. As far as major IMF shareholders are concerned, a prospect of having a rational and

progressive policy learning activity that driven by domestic policy actors in Hungary is far

less likely.

____________________________

 

   

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CHAPTER SIX

CONCLUSIONS

This chapter reviews the contribution of policy transfer analysis in explaining change

phenomenon, revisits the application of policy transfer process in various activities of the

IMF, discusses the findings of this study and what empirical research in Hungarian context

finds concerning the contribution of policy transfer analysis and it ability to explain change.

To realize the usefulness of policy transfer analysis, there is a need to revisit the

conceptualized models describing the two processes of transfer activities. A growing interest

in the concept of transfer results in over-theorizing of the concept, thus the studies have lost

sight of what the concept represents. While a majority of researches utilizes the concept to

identify the role of transfer agent and what it should do to imitate appropriately or to explain

the diffusion of idea in various setting, this dissertation uses the concept in different manner.

It utilizes the concept of transfer in explaining change phenomenon.

In doing so, various literatures of policy transfer and policy analysis have been used

to develop models describing the processes of change. The models conceptualize the

relationship between policy transfer and theories of policy development. There are two major

differences between voluntary and coercive transfer process. First, methodological

framework used in each case depends on the degree of coercion or free choice of policy actor.

Secondly, each concept has a different impact on policy development and policy change in

particular. The features of both models in the context of the IMF reveal two major

implications for how policy transfer is capable of explaining policy change in both agents of

transfer.

 

   

70  

First, policy transfer justifies its theoretical domain within the concept of policy

learning which emphasizes the role of knowledge in policy process. Policy transfer represents

unique methodologies used to acquire knowledge input as well as methodologies used to

transform this input into knowledge output (recognized as the object of transfer in other

policy transfer literatures).

Secondly, the concept of policy transfer continuum broadens our understanding of

different roles of the IMF. It also suggests that different types of transfer along the continuum

imply different degrees of power relations between the IMF and its client. In consequence of

these observations; utilizing the concept of policy transfer continuum in framing an empirical

research makes us realize various means by which power of the donor is used to alter the

internal workings of the borrowing country.

The studies demonstrate that learning style under policy-oriented learning combined

with policy networks and negotiation provide channels and methodologies to transform input

knowledge into practical concepts that suit both the purpose and the context it seek to operate

within. The conceptualized models thus enable agents to transfer – between each other – the

output knowledge, policy instruments, as well as power to influence. Moreover, these

methodologies have profound implication for how the transfer processes may or may not

result in policy change.

Discussed and contested under different case scenarios, each model reveals the

underlying factors that could explain change phenomenon. Whilst the conceptions of

networks, negotiation and, most importantly, power relations which underlies coercive

transfer process are defined as methodologies promoting change, the concept of policy

transfer network which is used in voluntary transfer process represents only a methodology

for policy learning.

 

   

71  

Applying these models in the context of the IMF, we have realized various effects on

policy development of both agents of transfer. These include direct and indirect change of

policies in borrowing countries as well as knowledge contributed to normal policymaking

process. Such conceptualization allows us to realize how the IMF skillfully applies this

analytical tool to create opportunity structures that allow its activities to grow. The

application provides a better understanding of IMF roles and activities as an agent of coercive

transfer, policy facilitator and actor of lesson-drawing process.

One needs to take into account the concept of power relations in order to investigate

the impact that IMF transfer processes have on policy-making and policy change. This

patron-client relationship helps the Fund to create a variety of policy instruments that suit

different circumstances. The success of Fund attempts in causing domestic policy change in

the borrowing country is most likely certain.

Despite its powerful status, the studies reveal also the politics of negotiation that

shape decision-making within the Fund and between the Fund and its borrowing country. The

case studies of Hungary reflect the ways experts and technocrats from both sides try to square

political pressures and institutional constraints in order to implement particular policies.

Other important finding emphasizes the fact that the success of Fund transferred programmes;

either by force or welcomed by member countries, depends on the specifics of context as well

as historical legacies that created unique country circumstances that the IMF has to operate

within. Thus, the IMF requires the cooperation from a sympathetic borrowing government in

the negotiation processes to guarantee a successful transfer.

The IMF has certainly enjoyed its relationship with Hungary; even outside the

context of conditionality, as their relationship continues through consultation activities.

Although policy recommendation by knowledge agents might not have a direct influence to

policy-importing country as the compliance is not legally-binding; and that, voluntary

 

   

72  

transfer approach could not guarantee the obvious change or improvement of policy, policy

change could be possible. As demonstrated in the case of IMF surveillance, message sent by

the IMF to the outside world is very powerful and thus implies a certain degree of power in

directing country toward particular policy. The discussion on the part of Hungary emphasizes

this claim by the fact that all of its activities with the IMF are regard as high degree of

coercion due to the country’s dependence on Fund supports and resources. The case of

Hungary then has important implication for how the process of externally induced policy

change can be legitimized by institutionalize politics among agents of transfer during

domestic policy-making process.

__________________________

 

   

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APPENDIX

POLICY TRANSFER FRAMEWORK

 

   

74  

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