Domestic Sources of State Credibility: Government Popularity, IMF programs, and International Financial Markets*

How does public opinion affect IMF programs? This book conducts systematic studies on the role of domestic public support for a government on IMF programs. It argues that government popularity shapes a government's credibility during IMF programs and demonstrates how the credibility changes both the terms and the outcomes of IMF programs. 

In this book, I explain variations in private international investors’ reactions to International Monetary Fund (IMF) programs. Why do IMF programs lead to the intended recovery of confidence in the international financial markets for some countries, but result in hostile international investors’ reactions for others? Existing studies find that a country’s macroeconomic conditions and political institutions explain investor behavior. However, the literature has not addressed why investors’ reactions shift over a short period of time when a borrower’s economic conditions and political institutions remain constant. I fill this gap by bringing domestic public to the fore in the political economy literature on IMF lending.


When a government participates in an IMF program, it signals that the government will carry out ‘sound’ economic reform, defined as IMF conditionality. However, because IMF conditionality is politically unpopular, investors’ reactions to IMF programs depend on the credibility of a state’s commitment to implementing IMF conditionality. I argue that instead of processing complicated information on economic reforms, investors rely on a borrowing government’s domestic popularity as a useful heuristic: the information is easily accessible and generates satisfactory expectations about the implementation of IMF conditionality.

A government’s popularity affects investor reactions in two ways: (1) First, government popularity shapes the terms of IMF programs. IMF officials provide more lenient programs (larger loans and fewer conditions) to more popular borrowers because the borrowers are more credibly committed to reform. Investors, then, react favorably to lenient programs as they believe the programs are sustainable. I call this “indirect effect” of public opinion.  (2) Second, given the terms of IMF programs, investors continue to rely on a borrower’s political popularity to assess the programs’ implementation prospects, reacting favorably (harshly) to a rise (fall) in a government’s approval rating. I call this “direct effect” of public opinion.  Consequently, an IMF program alone does not restore investors’ confidence. Rather, an IMF program carried out by a strong government does.

I use a combination of quantitative and qualitative methods to test my theory. I have built a novel and comprehensive government popularity dataset by assembling various global, regional, and country-specific polls that cover 52 emerging market economies for 1991-2017. Figure 1 sketches the average development of government popularity before, during, and after IMF programs.  

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Figure 1. Average Development of Government Popularity Before, During, and After IMF Participation.

 Evidence on Indirect Effect: Using my original dataset on government popularity, Chapter 3 demonstrates that the terms of IMF programs vary with a borrower’s popularity. Concerned about the loan repayment prospects, the Fund grants smaller loans with more binding quantitative conditionality when a borrower has a lower level of public support (Figure 2). I also find that the terms of IMF programs have a limited effect on investors’ reactions. I further complement the statistical findings with the interviews I conducted myself with IMF officials.

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Figure 2. IMF Programs and a Borrowing Government's Popularity

 Evidence on Direct Effect: In Chapter 4, I present evidence that controlling for the terms of IMF programs, government popularity has a significant impact on international portfolio investors’ reactions (Figure 3). Using several time-series analyses, I demonstrate that government popularity provides stronger and more consistent explanations for investor reactions than a borrower’s macroeconomic fundamentals or political structure. Moreover, I show that the impact of government popularity is strongest in the initial two years of IMF programs when investors have little information about the program’s implementation. 

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Figure 3. Marginal effect of IMF programs on a borrowing government's sovereign bond spreads across government popularity

Chapter 5 conducts another empirical test by employing a process-tracing case study analysis of the 2010 Greek sovereign debt crisis. This chapter provides rich qualitative evidence in support of the causal mechanism laid out in my theory. Utilizing archives such as IMF Executive Board meeting minutes, I show that the Greek public’s support for their government affects a wide range of Fund’s decisions from loan approvals to the size and conditionality attached to the loan. Similarly, through financial newspapers and market indicators, I illustrate how news about Greek public opinion alter international investors’ perception of the Greek government. 

Altogether, this book clarifies how the IMF, the mass public, and private investors interact and shape the outcomes of IMF programs. I suggest that there are feedback effects between government popularity and IMF programs (Figures 4-a and 4-b). Popular governments fall into a virtuous cycle: they receive ‘easy’ IMF programs, and the lenient programs help the governments maintain strong public support, which in turn, leads to favorable reactions from investors and further raises government popularity. In contrast, unpopular governments face a vicious cycle: the IMF provides ‘harsh’ programs, and the stringent programs decrease the governments’ popularity, which leads to hostile investors’ reactions and further deteriorates popular support for the governments. My findings have important implications for the study of global financial governance, economic development, credible commitment, and international organizations.

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Figure 4-a. Vicious circle

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Figure 4-b. Virtuous circle

*The book manuscript is currently in progress. This research is supported by the Horowitz Foundation for Social Policy and the Mass Politics of  Disintegration. The research is based on my dissertation, which won the Best Dissertation Award in International Relations, defended at the University of Wisconsin - Madison in 2021.