IMF-Supported Programs in Low Income Countries: Economic Impact over the Short and Longer Term

Abstract

This paper studies the short and longer-term impact of IMF engagement in Low-Income Countries (LICs) over nearly three decades. In contrast to earlier studies, we focus on a sample composed exclusively of LICs and disentangle the different effects of IMF longer-term engagement and short-term financing using a propensity score matching approach to control for selection bias. Our results indicate that longer-term IMF support (at least five years of program engagement per decade) helped LICs sustain economic growth and boost resilience by building fiscal buffers. Interestingly, the size of IMF financing has no significant impact on economic growth, possibly pointing to the prominent role of IMF policy advice and institutional capacity building in the context of longer-term engagement. We also present evidence that the short-term IMF engagement through augmentations of existing programs or short-term and emergency facilities is positively associated with a wide range of macroeconomic outcomes. Notably, the IMF financial support has the greatest impact on short-term growth when LICs are faced with substantial macroeconomic imbalances or exogenous shocks.

IMF-Supported Programs and Income Convergence in Low-Income Countries

“…Also, this model considers different levels of nested clusters of random effects, which are useful for modeling within-level type correlation; for instance, countries in the same region of the world are correlated because they share common region-level random effects and thus are more similar than economies in other regions. Note: Arellano-Bond GMM estimates for the long-term growth effects of extended participation in IMFsupported programs comparable to the results shown in Table 3 of Mumssen et al, (2013). We find statistically significantly positive program impact, robust to varying specifications.…”

“…They find that such programs have positive impacts on growth, which were observed (relative to non-program countries) for up to two years after the start of the program. Similarly, estimating the short-and long-term impact of IMF-supported programs on economic growth, specifically in LICs, Mumssen et al, (2013) highlight that longer-term (5 years or more) IMF assistance contributes to sustained growth and economic resilience. The program impact is the highest for countries that have a substantially imbalanced macroeconomy or are experiencing severe macro shocks.…”

IMF-Supported Programs and Sovereign Debt Crises

“…Some previous studies deal with these issues by employing a version of Heckman ( 1979 ) two-step estimator or an instrumental variable approach (Przeworski and Vreeland 2000 ; Hardoy 2003 ; Barro and Lee 2005 ; Conway 2006 ; Jorra 2012 ). Other studies also use conventional matching methodologies (Mumssen et al 2013 ; Gündüz 2016 ).…”