Radical Change in Intergovernmental Organizations: The Rise of Structural Adjustment at the International Monetary Fund

The International Monetary Fund (IMF), an intergovernmental organization providing financial assistance to countries in economic trouble, has always been an infamous promoter of economic restructuring. Yet, its policy advice to borrowers—usually, developing countries—has changed remarkably over the organization’s 70-year history. Until the 1970s, the IMF prescribed a limited and predictable, if not always welcome, set of reforms: reduction of the budget deficit, more restrictive monetary policy, and devaluations (Diaz-Alejandro 1981; Payer 1974; Spraos 1984). But then, starting in the 1980s, the IMF’s mission expanded dramatically. First, it became a major proponent of so-called ‘structural adjustment’ that entailed a new breed of market-oriented reforms: liberalizing trade and foreign investment, privatizing state-owned enterprises, and deregulating interest and exchange rates (Summers and Pritchett 1993; Toye 1994). Within a decade, the list of IMF-mandated policies was further expanded to a host of new areas, including reforming national judiciaries, central bank independence, and even health and education (Chang 2006; Serra and Stiglitz 2008).

How was it possible for an intergovernmental organization with a decidedly restrictive mandate to embark on such a fundamental transformation of its mission? Other than official IMF history (Boughton 2001), there has been no systematic research into the origins of this significant shift. This is largely because most of the historical documents that shed light on this subject have been unavailable until recently. The present article takes on this task, relying on over 6,000 pages of newly-declassified archival documents from diverse sources, including the IMF, the papers of former US Treasury Secretary James Baker, and the Treasury of the United Kingdom, as well as interviews with former Fund officials.

We draw on these sources to explain how organizational change occurred in this international public bureaucracy. We view the IMF’s move to structural adjustment as a ‘divergent change’—that is, a major shift in an organization’s mandate and activities (Battilana, Leca, and Boxenbaum 2009; Greenwood and Hinings 1996; Nadler and Tushman 1989). Compared to convergent or incremental changes, divergent changes are rarer and more difficult to bring about, since they potentially violate established norms, cognitive categories and vested interests. Drawing on neoinstitutionalist theory, we show that two organizational actors, or ‘institutional entrepreneurs’ (Battilana et al. 2009; DiMaggio 1988; Fligstein 1997; Hwang and Powell 2005), attempted to expand the IMF’s mandate in the 1980s. IMF management and staff made the first attempt, but failed to produce divergent change; in contrast, the U.S. Treasury led a second attempt, and was successful. As the IMF’s dominant shareholder government, the U.S. possessed a range of resources—social, political, material, and ideational—that allowed it to effect a major change within the organization. Consistent with neoinstitutionalist theory, however, this change did not occur through a change in the Fund’s formal charter, but rather through the legitimation of a new set of norms regarding the IMF’s appropriate role in the international economy.