The economic characteristics of IMF program countries

doi:10.1016/0165-1765(92)90061-3

Economics Letters

Volume 38, Issue 2, February 1992, Pages 237-242

https://doi.org/10.1016/0165-1765(92)90061-3 Get rights and content

Abstract

A logit analysis is utilized to identify the factors that characterized developing nations that entered IMF stabilization programs in the early 1980s. Program countries recorded higher rates of domestic credit growth, larger shares of government expenditure, more severe current account deficits, smaller reserve holdings and lower per-capita incomes.

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This paper examines the factors that predict an IMF bailout. In doing so, we use a large dataset from 1993 to 2021 with 6550 observations and 138 features and adopt recent advances in machine learning and artificial intelligence models such as tree-based, boosting and artificial neural network techniques. We find that apart from traditional indicators such as debt and macroeconomic factors; agricultural, energy, health and social factors are strong predictors of an IMF bailout. These factors have hitherto not received much attention in the literature.
The IMF and precautionary lending: An empirical evaluation of the selectivity and effectiveness of the Flexible Credit Line
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Citation Excerpt :
First, it connects to a large body of work studying the determinants of countries’ participation in IMF borrowing more generally (see Steinwand and Stone, 2008; Moser and Sturm, 2011, for more systematic reviews).5 Whereas early studies focused mainly on the role of the macroeconomic-financial situation of the borrowing country (Bird and Orme, 1981; Joyce, 1992; Conway, 1994; Knight and Santaella, 1997), the more recent literature has also examined the importance of economic and political links with the IMF’s main shareholders, i.e., the US and other G7 countries (e.g., Thacker, 1999; Bird and Rowlands, 2001; Oatley and Yackee, 2004; Barro and Lee, 2005; Sturm et al., 2005; Barnebeck Andersen et al., 2006; Broz and Hawes, 2006; Eichengreen et al., 2008; Pop-Eleches, 2009; Breen, 2010; Copelovitch, 2010; Dreher and Walter, 2010; Presbitero and Zazzaro, 2012; Bird et al., 2015; Papi et al., 2015). Although the results tend to vary along with country samples, time periods, variable definitions and estimation methodologies, several papers have documented positive associations between countries’ share in US/G7 trade, their share in US/G7 banking claims, and/or measures of their alignment with the US/G7 in UN General Assembly (UNGA) voting, on the one hand, and access to IMF loans, on the other.
This paper provides an empirical evaluation of the Flexible Credit Line (FCL), the IMF’s prime precautionary lending instrument since 2009 to which so far only Mexico, Colombia and Poland have subscribed. We consider both questions of selectivity and effectiveness: first, which variables explain the three countries’ participation in FCL arrangements? And second, to which extent has the FCL delivered on its promise of boosting market confidence in its respective users? Based on a probit analysis, we show that FCL selectivity can be explained by both demand- and supply-side factors. The probability of participation in the FCL was greater in countries that experienced larger prior exchange market pressures, that had lower bond spreads and inflation, that accounted for higher shares in US exports, and that exhibited a higher propensity of making political concessions to the US. Using a synthetic control approach, we find evidence for some, but generally limited beneficial effects on sovereign bond spreads and gross capital inflows into the three FCL countries. Overall, our results suggest that any economic stigma that may prevent eligible countries from entering into an FCL arrangement is unwarranted. Conversely, the apparent link of FCL participation with US interests is not conducive to overcoming political stigma.
The Economic Impact of Short-term IMF Engagement in Low-Income Countries
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Citation Excerpt :
Bird (2007) and Steinwand and Stone (2008) provide comprehensive surveys. Early research emphasized the economic determinants (Conway, 1994; Joyce, 1992; Knight & Santaella, 1997; Santaella, 1996). While most studies agreed on the significant positive association of program participation with low levels of reserve holdings, previous participation in IMF programs, and low levels of income, the evidence was at best mixed on a range of other economic covariates.
This study estimates the economic impact of IMF-supported programs addressing policy and exogenous shocks in low-income countries (LICs) using the propensity score matching approach. Focusing on a more homogenous group of financing events greatly improves the specification and predictive power of the selection model as compared to earlier studies, which is the key requirement to control for selection bias. This paper looks into a wide range of potential economic and political determinants of participation. Lower reserve coverage, deterioration in the current account balance, a weaker real GDP growth, increased macroeconomic instability (evident in higher fiscal deficits, inflation and exchange market pressures), and lagged elections would increase the probability of participation, i.e., propensity scores. Moreover, global conditions, including changes in real oil and non-oil commodity prices and world trade, are also significant; therefore, adverse global shocks could create cycles in demand for IMF financing. The short-term IMF engagement is positively associated with a wide range of macroeconomic outcomes. Notably, the impact on the short-term growth is the greatest and becomes significant only for LICs facing substantial macroeconomic imbalances or large exogenous shocks. When matching accounts for propensity scores and institutional quality, program countries in this group have changes in growth 1.5 and 3.5 percentage points higher than the control group.
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The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of both domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics warrant appropriate models.
Models of dynamic inconsistency in monetary policy and the need for central bank independence and commitment to nominal targets apply even more strongly to developing countries. But because most developing countries are price-takers on world markets, the small open economy model, with nontraded goods, is often more useful than the two-country two-good model. Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch. The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s. After the currency crises of 1994–2001, the conventional wisdom anointed inflation targeting as the preferred monetary regime in place of exchange rate targets. But events associated with the global crisis of 2007–2009 have revealed limitations to the choice of CPI for the role of price index.
The participation of emerging markets in global finance is a major reason why they have by now earned their own large body of research, but it also means that they remain highly prone to problems of asymmetric information, illiquidity, default risk, moral hazard and imperfect institutions. Many of the models designed to fit emerging market countries were built around such financial market imperfections, and few economists thought this inappropriate. With the global crisis of 2007–2009, the tables have turned: economists should now consider drawing on the models of emerging market crises to try to understand the unexpected imperfections and failures of advanced-country financial markets.
Exchange Rate Regimes in Developing and Emerging Economies and the Incidence of IMF Programs
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The global economic crisis will compel many countries to revise key economic policies, including their exchange rate regime. The International Monetary Fund will have significant influence on their choices, and has exhibited a bias against intermediate regimes. We examine the link between exchange rate regimes and IMF program use and find no evidence that countries with intermediate exchange rate regimes require more frequent IMF assistance. Rather they appear somewhat less dependent, especially when compared to fixed exchange rates. Our results suggest that intermediate regimes should remain a viable and possibly desirable exchange rate choice for some countries.
Geopolitics and international organizations: An empirical study on IMF facilities
2009, Journal of Development Economics
There is growing awareness that the distribution of IMF facilities may not be influenced only by the economic needs of borrowers. This paper focuses on the fact that the IMF may favour geopolitically important countries in the distribution of IMF loans, differentiating between concessional and non-concessional facilities. To carry out the empirical analysis, we construct a new database that compiles a wide array of proxies for geopolitical importance for 107 IMF countries over 1990–2003, focusing on emerging and developing economies. We use a factor analysis to capture the common underlying characteristic of countries' geopolitical importance as well as a potential analysis since we also want to account for the geographical situation of the loan recipients. While controlling for economic and political determinants, our results show that geopolitical factors influence notably lending decisions when loans are non-concessional, whereas results are less robust and in opposite direction for concessional loans. This study provides empirical support to the view that geopolitical considerations are an important factor in shaping IMF lending decisions, potentially affecting the institution's effectiveness and credibility.

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^☆: I would like to thank Richard Cooper and Catherine Mann for their constructive comments; responsibility for any errors lies solely with the author.

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The economic characteristics of IMF program countries☆

Abstract

World Development

Economics Letters

Carnegie-Rochester Conference Series on Public Policy

Journal of Banking and Finance

Macroeconomic performance and adjustment under fund-supported programs: The experience of the seventies

IMF Staff Papers