A country in financial crisis typically seeks assistance from international official organizations such as the IMF and World Bank. These organizations often issue special loans that are accompanied by corrective policy actions known as structural adjustment programs. The purpose of these policies is to reduce the debt burden of a country and promote sustainable economic growth. However, the effectiveness of bailouts is disputed by a variety of factors.
The first question concerns whether a financially troubled country is willing to request the assistance of international official bodies and, in turn, whether these institutions agree to offer funding. This decision is primarily driven by the level of risk involved in borrowing from the markets, and a government’s perception of its ability to restore market confidence.
Despite the importance of this decision, relatively few scholars have studied it in depth. In particular, scholars have focused on the role of IMF-imposed conditionality in bailouts. It has been argued that, for example, the design of conditionality can significantly influence its effectiveness and that the enforcement of conditionality may be problematic.
In addition, it has been argued that the effectiveness of IMF-imposed conditionality depends on the political and economic relationship between a country and the major members of international official bodies. For instance, Stone (2004) and Kilby (2009) argue that it is difficult for the IMF to enforce strict conditionality on political allies of the US. Accordingly, it has been argued that the IMF’s lending decisions are politically motivated and that moral hazard is an important problem in the process of bailouts.