On the Conditional Effects of IMF Program Participation on Output Growth

Abstract

The empirical evidence currently available in the literature regarding the effects of a country's IMF program participation on its output growth is rather mixed. To shed new evidence on this issue, in this paper we specify a state-dependent panel data model accounting in particular for program participation selection and the potential conditionality of the output growth effects of program participation on a country's degree of program implementation and institutional factors such as quality of governance, internal stability, health, and educational attainment. We find that the effects of IMF program participation on output growth vary systematically with the degree of program implementation as well as our index of institutional factors, and that these effects are positive only if the IMF program is implemented to a sufficient degree or if the program participation is coupled with sufficient progress in improving institutional quality.

Economic reform and political stagnation: The inconsistent patterns of institutional change

“…IMF loan‐to‐GDP ratio is used to test whether countries with high IMF loans are more likely to follow the world trend. This is because countries with high IMF loan participation are more likely to adopt structural adjustment programmes and experience institutional change (Binder & Bluhm, 2010). In line with the extant literature, the initial quality of economic institutions tests whether countries with poor economic institutions are initially more likely to be influenced by the world factor (Savoia & Sen, 2016).…”

To default or not? The aftermath of sovereign defaults and IMF programs in economic crises

“…Few other issues can affect our main findings. The role of the IMF changed quite drastically during the currency crises of Latin American countries in the 1980s and after the fall of the Soviet Bloc, which started in 1989 and forced the IMF to lend to a wider range of countries and diversify its portfolio of lending (Binder & Bluhm, 2017; Bird, 2007). Rich countries have a highly developed financial sector, and they usually have more resources, which makes them more robust to economic shocks.…”

“…IMF programmes were originally constructed to help countries during balance‐of‐payment crises. In time, and especially after the fall of the Soviet Union, the IMF was forced to change its role quite drastically and diversify its portfolio of lending (Binder & Bluhm, 2017; Bird, 2004). Countries apply to IMF programmes mostly because they provide emergency funding, technical and financial assistance and enforce unpopular but often necessary economic reforms during crises (Chapman et al, 2017; Krueger, 2003; Polak, 1991; Przeworski & Vreeland, 2000).…”

“…Sovereign default eases the debt burden of a government, but it also tends to lead to capital market exclusions forcing the government to balance its budget (Cruces & Trebesch, 2013). If the country seeks financial support from the International Monetary Fund (IMF), unsustainable national debt is usually restructured, but financial support is usually conditional on austerity (Binder & Bluhm, 2017;Krueger, 2003; Polak, 1991). Thus, although they can ease the financial burden of a country, both defaults and IMF programmes tend to lead to austerity, which may hamper economic recovery.Despite their long history, very little is known about the effects of defaults on the real economic performance of a country experiencing an economic crisis.…”

“…4 The drawback of an IMF programme is that the conditionalities attached to them may diminish economic performance while the country remains in the programme (see, e.g. Dreher, 2006;Przeworski & Vreeland, 2000), but this negative effect may depend on the quality of the institutions in participating the country (Binder & Bluhm, 2017). 5 Next, we briefly introduce the three main forms of economic crises.…”