Conceptualising EU/IMF Financial Assistance Negotiation in Latvia

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• Samuel Dahan
• Tuesday 28 February 2012, 17:00-18:00
• Lucia Windsor Room, Newnham College.

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I. How the topic will be addressed: detailed outline This paper highlights the preconditions for a successful EU/IMF financial assistance programme by providing an analytical approach to the negotiation process for financial stabilisation in Latvia. We believe that auditing the negotiation process may help us to understand and improve the negotiation capability of an organisation. For instance, decision-makers engaged in a financial assistance negotiation might need to place a high priority on pinning down the difference that the process makes, net of other influences, to the outcome. Measuring decision-making successes and failures requires first choosing a conceptual framework for the analysis. Such a framework would allow for the testing of hypotheses concerning the negotiation process based on evidence from actual experience, in addition to laboratory evidence. The paper is structured as follows: The first part constructs an analytical framework for conceptualising financial stabilisation negotiations. It then outlines the various international negotiation strategies that can be used by recipients and lenders in order to affect the outcome. It also discusses the importance of actors’ negotiation ‘capability’ in shaping negotiation strategies and outcome. The second part presents findings on the Latvian case with a brief review of the negotiation process and outcome in the form of a description of policy interaction with policy circles and a review of core areas of policy conditionality. The paper then explains the factors that account for the negotiating strategies attempted by the IMF , the DG ECFIN , the Latvian Government and the Social Partners, as well as their influence on the outcome. It also draws comparative evidence from other country cases. Finally, it concludes by summarising lessons that can be learnt from the negotiation process surrounding financial assistance in Latvia. 1 – Conceptualising financial stabilisation negotiations This paper does not present a new model of lenders-recipients relations that can predict the outcomes of financial assistance negotiations, but rather suggests a means to discuss issues concerning the political economy of financial stabilisation. Our contribution does not start form the assumption that ‘best policy exists’. Instead, our country study on Latvia intends to identify the bases of actors’ policy preferences and the underlying motivations for their negotiation strategies. A Typology of Negotiation Strategies Strategies are part of the process of negotiation which encompasses a sequence of actions in which parties address demands and proposals to one other for the purpose of reaching an agreement changing the behaviour of at least one actor (Odell, 2002). Built on existing typologies,1 we conceive all behavioural strategy options as being represented along a simplified continuum ranging between two polar ideal types: competitive behaviour (or distributive) and cooperative behaviour (or integrative). At one pole is the pure competitive strategy: a set of actions that promote the attainment of one party’s goal at the expense of 1 Distributive versus integrative bargaining (Walton and McKersie, 1965; Da Conceição-Heldt, 2006), value claiming versus value creating (Lax and Sebenius, 1986; Odell, 2000), bargaining versus problem solving (Hopmann, 1995; Elgström and Jönsson, 2000). bargaining versus arguing (Müller, 2004; Kotzian, 2007) and strategic action versus communicative action (Niemann, 2004). those of the other parties. At the opposite pole is the pure cooperative strategy which involves actions to expand the pie and promote the mutual attainment of negotiation goals. This typology will facilitate empirical research into the determinants of the choice of negotiation strategies by both breaking down negotiation behaviour into clearly observable actions and moving away from assumption about the underlying intentions of the actors. Organisational capabilities: what is shaping negotiation strategies? A major step in analysing the link between the process and the successful outcome in Latvia is the development a clear understanding of the factors outside the negotiation process that affect the positions of actors, the negotiating strategies they fashion, and the success of those strategies. Such factors do not determine the outcome of any negotiation in a mechanistic sense. Rather, they present lenders and recipients with ‘organisational capabilities’ to consider in deciding what they think they can achieve through the negotiation. Such resources constitute the leverage that negotiating organisations are able use during the negotiation process. Based on theory of negotiation, we outline the main negotiating resources that lenders and recipients have at their disposal and how far these resources affect negotiation strategies and outcome: (1) the overall power of the recipients and lenders, (2) the policy preferences and ideologies of the parties, (3) the criteria of justification used by the parties to legitimise their solutions to the crisis, (4) the best alternative to a negotiated agreement (BATNA), (5) the mandate or the constraints imposed upon the negotiators, and finally, (6) the control actors may have over the process. (1) There is no doubt that resources, or what has been called ‘aggregated structural power’ (Habeeb, 1988) are an important source of negotiating power. For instance, it can be assumed that larger countries dispose of greater economic and political power than smaller countries. (2) The ideological resources, domestic politics and geopolitical factors on which both the lenders and recipients are able to draw in their negotiation all play important roles. Our country study will demonstrate how interests and motivations are prioritised shaped by the global, national economic, political and ideological contexts in which each actor and the negotiations themselves are embedded. (3) Criteria of justification in which parties embed their positions play also a significant role. We refer to objective arguments that parties use to anchor/strengthen their positions. Lenders typically find it hard to challenge a recipients’ priority that are constructed with arguments, particularly one that draws strengths from a wider international discourse that might contradict lenders preferences. One may notice that objective criteria are relevant when they are shared and understood by all the parties. In the context of the financial crisis, the absence of shared criteria of justification among economists is a major issue. The international macroeconomic discussion seems to be harmful for financial assistance negotiation. (4) Another important source of leverage is the best alternative to a negotiated agreement (Fisher and Ury, 1981). The BATNA is determined by the availability of options outside the negotiation table, that is to say a plan B. Simplifying, the parties that lose less in the event of a breakdown of the negotiation tend to have a better BATNA . In the case of a financial assistance programme, the BATNA of the recipients is generally weak since the EU/IMF plan is often a last resort solution. (5) Recipient governments that are constrained by a strict domestic mandate, such as a finely balanced coalition, powerful interest groups, or a weak electorate, may also be able to use these constraints to gain leverage and adopt a competitive strategy. For example, the degree to which the population of a Member State is Eurosceptic is a possible proxy for the domestic constraints that governments face. (6) This framework also recognises the importance of the actors’ control over the process of financial stabilisation negotiation: agenda-setting, policy formulation, implementation, evaluation and revision. However, we focus particularly on the agenda-setting and policy formulation stages because these stages involve the strongest form of recipient-government control over its national development strategy and policies. Recipient strategies of non-implementation of the negotiated policies or ones that focus on leveraging influence during the implementation in order to alter the policies to meet the recipient government’s objectives are important because they illustrate recipient leverage over its policy agenda. At the same time, these are a weak form of control. 2 – Experiences and strategies in the Latvian stabilisation negotiation Outcome The negotiation outcome, in its most general sense, means whether the interactions ended in agreement or deadlock, and how much was gained or lost by each party and by the group of parties as a whole. How much negotiators gained or lost is understood most often by reference to the status quo prior to the talks. Is the party better off, worse off, or about the same as before? For instance, we will investigate the core areas of policy conditionality (fiscal, monetary, financial sector and structural reforms) and discuss what could have been the outcome without an assistance programme in Latvia. Outcome variation may also be observed by means of comparative case studies. This can be achieved by comparing the Latvian outcome with other Member States engaged in financial stabilisation negotiation. Decision-making process in action The country study intends to provide a ‘thick description’ that reconstructs decision-making processes as far as possible by accessing the perspectives and strategies of the IMF , DG ECFIN and the Latvian actors. II. Theoretical and empirical techniques The conclusions on the audit of the negotiation process in Latvia will be drawn from a wide range of policy, organisational learning and negotiation literature. They will be combined with intensive ethnographic field research, interviews and experience working in the field of multilateral negotiation. This qualitative approach is adopted because the investigation of the financial stabilisation process cannot be turned into a series of qualitative indicators. However, the experiences of the various countries engaged in a financial assistance negotiation process can be compared and the strengths and weaknesses of their negotiating strategies, as well as the factors accounting for them, can be discussed in relation to each other. III . Policy relevance of the analysis Unfortunately, organisations (public or private) have no systematic approach to learning from their decision-making processes or negotiation experiences. We argue that negotiation is an organisational capability. Consequently, organisations should invest in organisational changes and learning in ways that help them to get consistently better outcomes. This requires the organisational leaders to shift from thinking about the negotiation process as solely a matter of individual skill at the table to thinking about negotiation as a matter of organisational competence that requires building and adjusting processes to encourage best practices and continuous improvement. It requires conducting a brief but careful audit of how negotiations are being conducted across the organisation. And it requires producing a set of recommendations that respond to the problems that are revealed by the audit. In the case of the DG ECFIN , the assessment of the financial assistance negotiations (in Latvia and elsewhere) will help to highlight the main reasons behind the successes and failures of financial assistance programmes and might help to draw lessons for both the organisation as a whole and other lenders.

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