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The Review of International Organizations

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01.06.2012

Crossing the threshold: A positive analysis of IBRD graduation policy

verfasst von: Stephen Knack, F. Halsey Rogers, Jac C. Heckelman

Erschienen in: The Review of International Organizations | Ausgabe 2/2012

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Abstract

According to World Bank policy, countries remain eligible to borrow from the IBRD until they are able to sustain long-term development without further recourse to Bank financing. Graduation from IBRD is not an automatic consequence of reaching a particular income level, but rather is supposed to be based on a determination of whether the country has reached a level of institutional development and capital-market access that enables it to sustain its own development process without recourse to Bank funding. This paper takes a positive approach to IBRD graduation policy, investigating what income and non-income factors appear to have influenced graduation status in recent decades, based on panel data for 1982 through 2009. Explanatory variables include the per-capita income of the country, as well as measures of institutional development and market access that are cited as criteria by the graduation policy, and other plausible explanatory variables that capture the levels of economic development and vulnerability of the country. We find that the observed correlates of Bank graduation status are generally consistent with the stated policy. Countries that are wealthier, more creditworthy, more institutionally developed, and are less vulnerable to trade, financial, and other shocks are more likely to be graduates. Predicted probabilities generated by the model conform closely to the actual graduation and de-graduation experiences of Trinidad and Tobago and Korea, among other countries, and suggest that Hungary and Latvia may have graduated prematurely—a prediction subsequently borne out by the large loans that they later received from the IBRD in the wake of the global financial crisis.

Vorheriger Artikel Punctuated equilibrium in the energy regime complex

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The Articles can be found at http://go.worldbank.org/WAUZA5KF90.

These sample-size statistics apply to the main specification. For one specification in Table 4, which drops the institutional capacity variable, the sample is slightly larger.

Models of de-graduation fail to attain convergence, and some regressors in the logit analysis must be dropped for graduation models to converge. As suggested by a referee, it is possible to analyze graduation and de-graduation together, by an appropriate transformation of the data, by assuming the two processes are symmetric. Three of the six de-graduation events would be right-censored in such an analysis, however, if years in which income is below the IBRD threshold were dropped, for consistency with the graduation sample. In the logit analysis, where the timing of graduation is not at issue, dropping all country-years in which income is below the threshold does not eliminate time-series variation in graduation status, as income for the de-graduates eventually rises above the threshold again. In the hazard analysis, rising above the threshold again would initiate a new spell that in our data is invariably right-censored.

Among these three countries, only Korea contributes more than one observation to the logit analysis following its de-graduation. The oil-exporting de-graduates also contribute very few observations to the logit analysis following their de-graduation, because the sample includes only country-years in which incomes exceeded the IBRD threshold. Trinidad re-enters the sample in 2001, and Venezuela and Gabon re-enter only in 2007 and 2008. The vast majority of 0 values on the graduation status variable are thus accounted for by countries that have not yet graduated, as opposed to countries that have de-graduated.

Similar indicators are available from the Economic Intelligence Unit (EIU) and other sources, but only the ICRG covers a large sample of countries going back to the early and mid-1980s. The World Bank’s Country Policy and Institutional Assessments (CPIA) include several relevant indicators, but beginning only in the late 1990s, and only for countries that have not graduated. They therefore cannot be used for explaining differences between graduates and non-graduates. Moreover, the CPIA ratings are publicly available only for IDA-eligible countries, and only from 2005 onward.

Many cross-country time-series studies (for example, Burkhart and Lewis-Beck 1994) conclude that the link between democracy and high per capita income is explained mostly by causation from income to democracy. Acemoglu et al. (2008) conclude from their analysis that there is no causal link between income and democracy, but that both are determined jointly by longer-run historical factors.

Ratings are provided twice a year, in March and September. We took the average of these. We did not use sovereign bond ratings from rating agencies like Fitch and Moody’s because of the incompleteness of their coverage. Early in our sample period, in particular, many countries were not rated.

The minutes of the January 26, 1982, discussion of the graduation policy by the Bank’s Executive Directors reflect agreement that particular country circumstances, such as “the problems of small countries with narrowly-based economies,” should influence how soon a country graduates once it surpasses the income threshold (Shihata 2000).

The same source provides similar data on debt crises and currency crises, but those turned out to be unrelated to graduation. For simplicity, we report only the results for banking crises.

It is correlated with the linear time trend at −.78.

These are average marginal effects over the sample, rather than for a theoretical observation with all other regressors set at their mean. The latter method produces larger estimates.

When we test each component of Institutional Capacity separately, corruption turns out to be the strongest predictor of graduation, followed by rule of law, and then bureaucratic quality. Of the two Political Freedoms components, results for civil liberties are somewhat stronger than for political rights. These results are available on request from the authors.

The average odds of being a graduate for observations in the main sample are about 2 to 1, and a reduction in odds of 95% from that level would imply odds of about .1 to 1, or 1 in 10.

In 1975, the Bank decided to provide IBRD loans “only on an offset basis to oil producing countries in capital surplus.” It is unclear how long this policy lasted. Oil exporters were excluded from access to exceptional resources under the pilot Crisis Response Window in IDA15 (World Bank 2010).

The 14 countries are Gabon, Venezuela, Cyprus, Czech Republic, Estonia, Lithuania, Oman, Portugal, Slovak Republic, Slovenia, Hungary, Korea, Latvia, and Trinidad. The first two in this list de-graduated; the last four graduated and then de-graduated; and the remainder graduated. Three other countries are excluded because of missing data: Barbados graduated in 1984 but is missing data on Institutional Capacity; Bahamas graduated in 1989 but is missing data on Credit Rating until 2000; and Iraq de-graduated in 2003 but is missing data on income.

A Hausman test fails to reject the random effects specification in favor of the fixed effects estimation, so the former is preferred on efficiency grounds.

Regressions in this table are all based on the main sample and use the ex post measure of per capita income. However, we obtain similar results for the institutional variables if we use the expanded sample or contemporaneous income data.

Our main regressions, in Table 3, use the Freedom House indicator rather than Polity to preserve sample size. Polity does not cover some small countries covered by Freedom House.

According to the World Bank’s Articles of Agreement (Article IV, section 10): “The Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member or members concerned. Only economic considerations shall be relevant to their decisions…” Of course, political considerations may influence a member government’s own decisions with respect to graduating from the IBRD.

Ravallion (2009) constructs an indicator of countries’ capacity to eliminate extreme poverty through income redistribution, measured in terms of the marginal income tax rates on the non-poor that would be required. This indicator is available for only a very few countries with incomes exceeding the IBRD threshold, so we are unable to use it in our tests.

Tax effort varies from 1.3% to 56.7% in the sample, with a mean of 18.6%. It is correlated with Political Freedoms at .55 and with Institutional Capacity at .40, and is not significant if either or both of those institutional development indicators are included in the regression.

An unpublished 1982 memorandum to the Executive Directors describes as an example of institutional weakness “countries that have recently experienced rapid increases in real income because of improved terms of trade or new mineral discoveries” but with “social indicators such as health and education levels [that] are often much lower than in other countries at the same income level.” The same memorandum implies that a failure to address development disparities between groups or regions within a country reflects institutional weaknesses.

Data retrieved from the World Bank EdStats database. Barro and Lee provide estimates only for every fifth year between 1970 and 2010, so we linearly interpolate for the years in between. Results are very similar to those reported here if we treat the in-between years as missing data.

Data are from the World Bank’s World Development Indicators (WDI).

Data are from the World Bank’s World Development Indicators (WDI). Other measures of income equality (e.g., income share going to the middle quintile) or inequality (e.g., share going to the top decile or quintile) produced similar results.

Inequality changes slowly over time in most countries, so results in Table 4 are based on the country average values for Gini, from all available data over the 1982–2008 period. If we instead use the annual values and drop all years with missing data, the available sample is far smaller, and Gini is again not significant. Similarly, poverty headcount measures are available only for a very small number of annual observations, and we do not take period averages for poverty headcount because it often exhibits strong variability over time within countries.

Calculating coefficient estimates and standard errors for Credit Rating conditional on different years (i.e., the time trend variable), we find negative but insignificant point estimates for 1982 through 1989. Point estimates are positive thereafter, attaining significance at the .10 level by 1996 and at the .05 level by 1998. Results for Credit Rating shown in the table are conditional on the average value (1997) of the time trend variable.

Results available on request. Similarly, voting compatibility with the interest of major donors in the UN General Assembly does not help explain graduation decisions. Kilby (2011) presents evidence that the geopolitical interests of large donor countries, as proxied by General Assembly voting patterns, affect aid allocations of the Asian Development Bank. Barro and Lee (2005) find a similar result for IMF loans.

Hazard ratios are reported in the table, but the test statistics are computed from the unexponentiated regression coefficients. Hazard ratios are not directly comparable to odds ratios. The former is a ratio of probabilities, e.g., 40% to 20%, while the latter is a ratio of odds, e.g., 2-1 to 1-1. For those examples, they both equal 2. But a ratio of the two odds 10-1 and 5-1 equals 2, while the corresponding ratio of probabilities would be about 1.08 (roughly 90%/83%).

Note that analysis time is not identical to years over the threshold (which cannot be determined precisely for all observations). Moreover, this hazard profile is not comparable to the estimated effects of time over the threshold in the logit analysis. The former shows how the hazard—i.e., probability of graduating in a given year—changes with time, while the latter estimates the relation between time and the probability of being a graduate.

We include the actual year of graduation, because in several cases it coincides with the year of the final loan.

Fixed-effects tobit models cannot be estimated using conditional maximum likelihood, and unconditional fixed-effects tobit estimates are biased.

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Titel: Crossing the threshold: A positive analysis of IBRD graduation policy
verfasst von: Stephen Knack
F. Halsey Rogers
Jac C. Heckelman
Publikationsdatum: 01.06.2012
Verlag: Springer US
Erschienen in: The Review of International Organizations / Ausgabe 2/2012
Print ISSN: 1559-7431
Elektronische ISSN: 1559-744X
DOI: https://doi.org/10.1007/s11558-011-9136-3

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