Compliance, defiance, and the dependency trap: International Monetary Fund program interruptions and their impact on capital markets

The International Monetary Fund (IMF) is infamous for its structural adjustment programs, requiring countries to undertake policy reforms in exchange for loans. Yet, not only do countries routinely fail to implement these reforms, but they also frequently return to the IMF to start the process anew. What explains this compelling case of transnational regulatory ineffectiveness? We argue that countries are caught in a dependency trap: politically contentious policy prescriptions drive non-compliance, triggering adverse market reactions that leave countries with few sources of financing beyond the IMF, leading to their eventual return to the doors of the organization for a fresh loan. Using new data on 763 IMF programs from 1980 to 2015, we initially demonstrate that the prevalence of market-liberalizing structural reforms increases the likelihood of program interruptions. We then show that program interruptions undermine investor confidence and increase sovereign borrowing costs. Our study uncovers hitherto neglected relationships between the international institutions of regulatory capitalism, country compliance, and financial market responses