Borrowing from the IMF: The policy implications of recent empirical research

Pergamon

World Development, Vol. 24, No. 11, pp. 1753-1760,1996 Copyright 0 1996 Elsevier Science Ltd

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SO305-750X(96)00153-0

Borrowing from the IMF: The Policy Implications of

Recent Empirical Research

GRAHAM BIRD* University of Surrey, Guildford, Surrey, U.K.

Summary. - At a time when the future of the International Monetary Fund is being widely debated, a number of relevant and important studies have been published which advance our knowledge of the factors which determine borrowing from the Fund. There has heen little attempt however, to put this recent empirical research into context, or to extract from it appropriate policy conclusions. While dissent remains over some issues, them is an emerging consensus on others which provides a tirrn empirical foundation for policy formulation. Unfortunately the policy stance adopted by the G7 is, in many ways, at odds with much of the recent empirical research. Copyright 0 1996 Elsevier Science Ltd

1. INTRODUCTION

There are now a number of studies which attempt to move away from anecdotal evidence on individual member countries’ borrowing experiences toward empirical investigation of the factors that are in gen- eral associated with countries drawing (or indeed not drawing) resources from the International Monetary Fund (IMF). A range of methodologies and data sets have been used, and there have been differences in the results. In a recent paper, Knight and Santaella (1994) provide both a summary of existing work and a useful addition to it, by using Rrobit analysis to estimate the probability that a financial arrangement will be approved for a given country in a given year. Their analysis seeks to distinguish between those factors which cause countries to request financial assistance from the Fund (the demand side) and those that are associated with the Fund’s response (the supply side). A feature of the research is the large data set used: a pooled sample of annual observations on major economic variables for 91 developing countries over 1973-91. In another important study covering 76 developing countries Conway (1994) uses Probit and Tobit analysis to explain participation in Fund-backed programs over 1976-)36.

Relative to the research that has been done on the effects of Fund-backed adjustment programs the question of what factors lead to their initial adoption has remained rather neglected over the years. This is

unfortunate since, in an important sense, Fund-backed programs should surely be endeavouring to rectify the circumstances which cause countries to borrow in the first place. After all, the Fund’s Articles envisage it providing only temporary support.

From the research available it is probably legiti- mate to claim that we now have a reasonable under- standing of the overall effects of Fund-backed programs.’ But is there a similar degree of consensus about the characteristics of user countries? It there is, what conclusions may be drawn with respect to future policy involving the Fund? Although both studies cited above make a significant contribution towards answering the first of these questions, they side-step the second. At a time when the role of the IMF is under close scrutiny, this is an unfortunate omission. This brief article seeks to address both issues in order to advance the policy debate.

Section 2 puts the Knight-Santaella and Conway studies in the context of earlier research on the characteristics of user countries including Bird and Orme (1981), Cornelius (1987), and Joyce (1992) and iden- tifies areas where a consensus is emerging. Section 3 discusses issues where significant disagreement remains. Section 4 examines the policy implications

*Final revision accepted: May 29,1996.

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of some of the more robust findings, and section 5 offers some concluding remarks, as well as a brief critical analysis of recent policy developments in the light of the empirical work reviewed.

2. CIRCUMSTANCES SURROUNDING FUND ARRANGEMENTS: AREAS OF CONSENSUS

Underlying theory suggests that the demand for Fund credits will vary positively with the size and incidence of balance-of-payments deficits and nega- tively with the availability of alternative means of financing. Balance-of-payments deficits may themselves result from a number of interdependent causes, including adverse movement in the terms of trade, excessive inflation (which may in turn be the consequence of domestic fiscal and monetary mismanage- ment or increased import prices), overvalued real exchange rates, (which are either caused by excess domestic inflation or by a decline in the sustainable real equilibrium exchange rate), and* high levels of external debt. Financing may come from the decumu- lation of international reserves, or from international borrowing. Given these factors, as well as the demand for Fund credit as a demand for technical assistance, and the notion of the Fund as a lender of last resort, borrowing from the Fund may also be expected to be inversely related to the level of economic development.

All studies of the demand for Fund credit have adopted a similar theoretical framework, but they have differed in the precise range of explanatory variables included and the empirical proxies used. Neither Knight-Santaella (KS) nor Conway depart from con- vention, although the list of the demand-side factors used in the KS study is quite lengthy and incorporates the existence of a previous Fund arrangement. KS also include the domestic investment ratio, arguing that countries with a low investment ratio are more likely to turn to the Fund since this indicates limited access to international capital markets, limited imports of capital and intermediate goods, and distorted domestic credit markets. In terms of previous Fund arrangements, they claim that countries that have had arrangements with the Fund in the past are more likely to enter into subsequent arrangements since they are further along their learning curve in terms of negotiating with the Fund.

Neither Conway nor KS however, attempt to explain the demand for Fund credits in terms of variations in conditionality (although KS introduce this indirectly in the context of the supply side), or in terms of any difference between the rate of charge on Fund resources and interest rates in private international capital markets. They do not, therefore, examine demand as a function of the implicit price of Fund credit.

In principle, Fund arrangements could reflect the interplay between the demand for them, as a positive unction of the degree of concessionality and a negative function of the degree of conditionality, and the supply of them, as a positive function of both the rate of charge on the use of Fund resources and the degree of conditionality. To the extent that borrowing from the Fund is largely demand-determined, a widening excess of commercial interest rates over and above the rate of charge on Fund resources, along with a perceived relaxation in conditionality, would be expected to result in an increasing number of Fund arrangements. Concessionality and conditionality provide the Fund with mechanisms for managing the demand for its credits, with a public choice approach suggesting that there would be institutional pressures to use such mechanisms to ensure that the demand for resources is sufficient to justify expanding the Fund’s size of operations.

The results discovered by KS and Conway are in many ways in line with those of earlier studies, allow- ing us to claim that there is indeed some consensus on the economic dete~inants of the demand for Fund credits.

Taking the results of both bivariate and univariate probit procedures, KS find that the stock of intema- tional reserves, the real effective exchange rate, the external debt-service ratio, the growth rate of per capita GDP, the investment ratio, the level of per capita GDP, and the dummies for previous Fund arrangements are all empirically significant and have the “expected’ sign. But, coefficients on the overall balance of payments, the inflation rate, the terms of trade, and non-Fund financial resources are insignificant and have the “wrong” sign.

Conway finds that exogenous factors have a pre- dictable and signi~c~t effect on p~icipation. Improved terms of trade lower it, while a rising debt burden increases it. He also finds that variations in the “international climate” influence participation, as does prior macroeconomic performance, with rapid economic growth in the previous year reducing the time spent in Fund programs. P~icipation in a program in one year is found to make future p~icipation less likely but only after a three-year lag. Meanwhile, a higher ratio of foreign reserves to imports reduces the duration of participation.

Which of these results tally with those of earlier studies? Broad consensus exists on the following issues. First, the Fund is a more important source of finance for relatively poor countries, demand for Fund credit is inversely related to economic growth and development which can, as a result, wean countries away from the Fund. Second, the probability that a country will demand credit is, in the short run, positively related to its previous involvement with the Fund, although programs phased over a longer time span seem to be more effective at reducing future

BORROWING FROM THE IMF 1755

participation. Other studies of IMF lending have drawn attention to the strong tendency for the Fund to have programs in an enduing set of developing countries, even to the extent that it has a quasi-per- manent presence in some of them.2 Third, the availability of non-Fund sources of external finance is, at the aggregate level, insignificantly associated with the use of Fund credits, although the sign of the coefficient varies across studies (Bird, 1994). This suggests that private external financing is neither clearly a substitute for nor a complement to borrowing from the IMF. Fourth, exchange rate overvaluation on the other hand significantly and positively affects the demand for Fund resources. KS found that this is associated with external factors which lower the equilib~um exchange rate rather than with domestic inflation which causes the real exchange rate to appreciate.

Fifth, although some studies have failed to identify a significant relationship, the consensus is that international reserve holdings have a significant negative effect on the demand for Fund arrangements. A similar consensus exists that, while all countries turning to the Fund have a necessary balance-of-payments (Bo.P.) need, neither a current account nor an overall balance of payments deficit provides sufficient motivation for seeking Fund support. The mere existence of a BoP deficit does not, in itself, make it probable that a country will demand resources from the Fund.

3. AREAS OF DISSENSION AND DEBATE

Clearly there are broad areas of agreement which are reinforced by the KS and Conway studies. Where then are the areas of dissension? The first relates to the terms of trade, for, while KS find them to have an insignificant effect (and the wrong sign), Conway and others have found their impact to be both significant and to work in the way that theory predicts. Detailed empirical studies of the circumstances under which developing countries turn to the Fund have also found adverse movements in the terms of trade to be an irn~~ant factor (Killick, Malik and Manuel, 1992).3 More recent research within the Fund (Santaella, 1995) has also found external factors such as the terms of trade to exert a significant influence over the demand for Fund resources, and the KS result is therefore left as something of an outlier.

A second area of dissension relates to the effects of external debt on the demand for Fund credit. While Bird and Orme (1981),and Joyce (1992),discovered a negative but insignificant effect, KS endorse Conway’s finding that external debt (particularly short-term debt in the case of Conway’s study), is significantly and positively associated with drawings on the Fund.

A third question which remains open is the extent

to which the demand for financial arrangements with the Fund may be explained by economic factors alone. Many of the early studies based on ordinary least squares (OLS) regression had a low coefftcient of determination, and the models had poor predictive qualities (Bird and Orme, 198 1, and Cornelius, 1987). This feature was also true of the study by Joyce (1992) which used logit analysis. The challenge, therefore, seemed to be to explain the residual variation which was unexplained by economic characteristics.

As noted earlier, KS do not attempt to estimate a demand function for Fund credit as such; instead they try to explain Fund arrangements in terms of a conflu- ence of demand-side and supply-side variables. Supply-side constraints could, in principle, explain the tendency that earlier models had to overpredict crowing from the Fund. It would certainly be interesting to know to what extent the Fund passively responds to the demand for arrangements from its members or actively rations its credits. Beyond this, if there is credit rationing, upon what basis does the Fund ration?

Unfortunately, it is in its treatment of the supply side that the KS study is least compelling method- ologically. The principal difficulty comes from its attempt to proxy ex ante intentions by ex post outcomes.4This would be acceptable if there was a close positive correlation between the two. But many studies of the effects of Fund-backed programs catalogue their poor implementation record (Edwards, 1989, Killick, Malik and Manuel, 1992, and Conway, 1994) and, in these circumstances, the procedure is illegiti- mate. Somewhat surprising therefore are the statistically significant results that KS achieve on both government revenue and expenditure, as well as, to a lesser degree, the growth of real domestic credit. More meaningful would have been a detailed quantitative analysis of “letters of intent” and “prior actions”; after all, it is a country’s willingness to make commitments that may be expected to influence the Fund’s willingness to agree a loan.5 In any event, to discover, as they do, that the Fund is likely to favor exchange rate devaluation, and fiscal and Monet restraint, is no more than would have been expected, given existing research.

Even with its methodological problems however, the KS discussion of the supply side remains interesting. Without doubt the Fund has made important modifications to its conditionality over recent years, paying greater attention to structural problems and the costs of adjustment on vulnerable groups. But there has been a lively debate about the extent to which the hard core of programs has changed as a consequence (Killick, 1995). Has the reaiity matched the rhetoric? Implicitly KS provide both qualitative and quantitative insights into this important question. They claim that because of the changes to condit~on~ity,


. . . the design of programs supported by Fund financial arrangements (has become) much more complex and comprehensive than it was in earlier years , . Nevertheless, since a balance of payments deficit usually reflects an excess of aggregate domestic demand relative to domestic supply, Fund programs . must emphasise measures of demand restraint. The policy instrument variables included in our empirical model are therefore intended to reflect these essential demand-management elements of a stabilisation program (Knight and Santaella, 1994,~. 18).

This implies qualitatively that the hard core of Fund-backed programs has not, in their view, changed, and that fiscal and monetary restraint com- bined with exchange rate devaluation remain absolutely central. Had there been a significant change in conditionality, the model used by KS should surely have yielded rather poor results, or, at the very least, should have yielded less good results in more recent years. In fact KS offer some recognition of the intertemporal dimension by including a dummy to reflect the “clustering” of approvals since 1979, but they do not interpret this as reflecting changes in conditionality over time. They find that their arrangement-supply equation has good overall explanatory power. Although the discovery of empirical support for their model is surprising given the evidence on poor implementation, to the extent that it holds, it provides quantitative support for those who argue that the changes in conditionality have been more cosmetic than real.

The KS finding that adjustments in government rev- enues and expenditure and in exchange rates are more significant than those in domestic credit creation is less surprising given that earlier studies of the effects of Fund programs have also found them to have an insignificant or weak impact on monetary variables.

Conway also finds that the effects of Fund programs are not uniform either across intermediate policy instruments or across ultimate performance targets. In terms of policy, the most significant influence is felt on the budgetary balance where public investment declines. No significant impact is discovered on either the exchange rate (unlike other studies that have found it to be the area where the Fund exerts greatest effect, Killick, Malik and Manuel, 1992) or domestic credit creation. This is interesting given the conventional caricature of Fund programs as focusing on the exchange rate and domestic credit creation. Indeed with other research (Santaella, 1995) also finding little empirical evidence of the Fund exerting an effect on either the exchange rate or monetary aggregates, a reasonable question is, what is left of IMF conditionality?

In terms of economic performance, Conway finds two significant effects: an improvement in the current account ratio and a decline in the investment ratio. Both inflation and economic growth decline in the short run, but the effects are not statistically signifi-

cant. Over the longer run, however, economic growth rises significantly. These results generate plenty of fascinating questions. By what mechanism is the improvement in the current account achieved in the absence of an effect on the exchange rate? It would appear that fiscal contraction must be sufficient to drive down the demand for imports. But again this is surprising given the insignificant effects of programs on inflation, and the fact that other studies have shown that the current account improvement tends to be shared between import compression and export expansion (Killick, Malik and Manuel, 1992).

Furthermore, there is an inconsistency between the decline in the investment ratio and the lagged increase in economic growth, given that Conway (1994) acknowledges “the importance of domestic investment to the future growth prospects of developing economies” (p. 381). Is it that there is a sharp rise in the marginal productivity of capital, and is this sufficient to sustain growth in the face of a falling investment ratio?

Returning now to the predictive qualities of the KS and Conway models, how do these compare with previous studies? Early failures to explain drawings on the Fund in terms of purely economic variables led to suggestions that negotiating a Fund arrangement was as much a political event as an economic one. The recidivist nature of Fund borrowing could then be seen as reflecting the idea of a “threshold”. Countries might resist borrowing from the Fund even if their economic circumstances warranted it because of a perceived political cost. The political cost could be interpreted, however, as a quasi-fixed cost which, once incurred, would not affect further marginal decisions to borrow. The tendency for economic models to overpredict drawings on the Fund was interpreted as revealing this perceived political cost.

By incorporating the supply side in negotiating Fund arrangements, KS implicitly introduce another potential political factor in terms of the Fund’s own political preferences. Concentrating explicitly on exclusively economic variables, however, the KS and Conway studies are much more successful in predicting outcomes than the earlier research has been. The KS study’s predictions with respect to approvals and non-approvals vary according to the use of the bivariate or univariate model, but the correct answer is gen- erated in at least 80% of cases. Conway claims a 90% success rate in predicting participation. The interesting feature is that the KS model is better at predicting non- approvals than approvals, which it tends to underpre- diet. KS try to explain the tendency of their model to produce “false negatives in terms of the willingness of the Fund to use (and members to accept) structural conditionality. This would be relevant either if, in some cases, structural conditionality susbstituted for (rather than merely complemented) conventional conditionality, or if member countries gained positive util-


ity from Fund ~on~tion~i~ and preferred to have more of it rather than less. These conditions are met neither in principle nor in practice, however, and the KS explanation is therefore unconvincing.

A less contrived explanation may perhaps be found in terms of political economy. Some observers have claimed that, particularly in the immediate aftermath of the post-1982 debt crisis, the Fund relaxed its conditionality and became prepared to agree to arrangements in circumstances where it would previously have rejected them (Finch, 1989). The claim was that political pressures were eroding the Fund’s financial standards. The KS result could be interpreted as providing some empirical support for this claim, although it should also be noted that empirical studies that have set out to test for it have found little evidence of any systematic political bias (Rowlands, 1994).

Moreover, the institutional explanation of Fund activity has received mixed empirical support. While Vaubel(l991) has claimed to have found evidence of its existence, not least in the context of the IMF “hurrying up” lending in advance of quota reviews, others have argued that changes in the degree of concessionality have been principally associated with variations in world interest rates. Moreover, evidence pointing to the substantial continuity in the design of conditionality at the same time as there have been large variations in the availability of external finance from commercial banks and private capital markets suggests that the public choice approach is largely misplaced (Bird, 1995). In any case the “good results” that KS and Conway achieve on the basis of economic characteristics alone appear to leave less scope for a political explanation of Fund borrowing and lending than was previously thought to exist.

4. POLICY IMPLICATIONS: RECIDIVISM, CONDITIONALITY, GROWTH AND

GRADUATION

Although clearly some questions remain to be answered, the results of the recent studies by Knight and Santaella and by Conway, in conjunction with those of earlier studies, provide sufficient foundation upon which to build fairly robust policy conclusions. Policy should focus on these areas of consensus, while future research is seeking to resolve the remaining areas of disagreement.

Attention was drawn earlier to the strong elements of recidivism that have been noted in studies of IMF lending (Goreux, 1989, Killick, Malik and Manuel, 1992, Bird, 1995). KS confm this redicivist tendency, but include previous arrangements with the Fund in their model with an “expected” positive sign.

A positive sign only makes sense however, as an indicator of success in the context of a political explanation of Fund a~gements, and KS reject such an

explanation. “Learning” in terms of negotiating with the Fund, the explanation that KS offer, could perhaps be sustained as a success indicator were the tendency to return to the Fund interspersed with periods when there was no involvement, but this is not what the evidence shows. Indeed, Conway’s results suggest that the probability of future referral declines after a three- year lapse. Moreover, countries can “learn” about negotiating with the Fund without “doing” it. An equally effective route would be for governments to hire negotiators who had previously worked for the Fund and who were therefore well informed about its operations.

Given the Fund’s Articles of Agreement, and the notion of Fund financial support as being temporary and revolving, recidivism should more ~listically be seen as an indicator of failure. The Fund fails if it does not design and effectively encourage the implementation of programs that improve economic performance to the extent required to make unnecessary further referrals to the Fund.

But why is there a recidivist tendency? Is it that, even though programs are usually fully implemented, the necessary improvement in macroeconomic performance fails to materialize? Such an explanation would point to deficiencies in the design of conditionality, the sheer size of the initial macroeconomic disequilib- ria that have to be corrected, or the incidence of exogenous shocks that push economies off course. Or, is it that countries fail to implement the agreed conditions? Is it only the noncomplie~ that turn out to be recidivists? If so, how can noncompliance be explained? It may be that inadequate attention has been paid to the political economy of implementation in the design of the program. It is certainly overly sim- plistic to view noncompliance simply as evidence of a “lack of political will”. Instead, the reasons why governments reach the decisions that they do need to be understood, and attempts made to include these factors in designing policy reform.

It may also be that the failure to realize targets reflects overambition in setting them. This could be explained by political as well as by economic factors, with both the country and the Fund sides in negotia- tions having a mutual desire to strike a deal that will be supported by the Executive Board.

Of course, if it is the noncomplying countries that are the recidivists, another question is why should the Fund continue to lend to countries that have ignored its advice in the past. To the extent that countries have opted not to implement agreed policies (rather than tried and failed), the Fund could eliminate recidivism and raise the incentive to implement agreed policies by refusing to make new loans. Indeed by offering them, the Fund opens itself to a moral hazard criticism that it is effectively encouraging countries to perpetu- ate their economic problems in order to gain access to Fund finance. The difficulty is in discerning adjust-


ment effort, as distinct from achievement, since the Fund would not wish to penalize countries in which the failure to achieve targets is associated with factors largely beyond the control of the government.

While this is an area where there are probably more questions than answers there is some evidence upon which to draw. First and unambiguously, the majority of programs which are supported by the Fund are not completed, with most of the.noncompletion reflecting noncompliance with the quantitative com- ponents of the program. Second, but more ambigu- ously, there seems to be little statistically significant difference between the macroeconomic performance of noncompliers as compared with compliers (Killick, Malik and Manuel, 1992), although Conway finds that compliance does have a significant positive effect on some aspect of future performance. Clearly where compliance has no significant impact on performance, recidivists would be just as likely to be compliers as noncompliers, and recidivism could be as much a reflection of the content of program design as the political economy of implementation.

But why do so many programs remain incomplete? Part of the answer may lie in the findings of Knight and Santaella which accentuate the orientation of Fund arrangements toward aggregate demand. The short-term compression of aggregate demand clearly generates greater political and social unrest than the longer term expansion of aggregate supply. Governments may therefore seek to escape these costs as soon as possible either as the current account of the balance of payments improves or as capital inflows materialize. The attempt to escape however, may be premature in terms of economic fundamentals, with the result that economic performance deteriorates, private capital flows evaporate, and the government is forced to turn again to the IMF. The puzzle is how to break away from this vicious circle of recidivism toward a virtuous one which offers graduation from the Fund.

A robust finding across all studies is that the demand for Fund assistance is inversely related to economic growth and development. It is by encouraging economic growth that countries can break away from the habitual use of Fund resources. Fund-supported programs need, therefore, to have a strong growth orientation. KS capture the growth motivation for borrowing from the Fund by including the investment ratio in the demand side of their model, and suggest that its empirical significance, “is consistent with the view that the ultimate reason for seeking a Fund arrangement is to improve a country’s longer-term investment and growth prospects” (p. 24). But do Fund arrangements have this effect? Studies that have concentrated on the near-term effects of Fund programs have generally concluded that they have little effect on economic growth one way or the other, but that they may have an adverse short-term effect. More

recent research (including the studies by Conway, and by Killick, Malik and Manuel, 1992) has tried to allow for lagged effects and has discovered a positive effect after about three years, which is interestingly also the period of time after which Conway finds a negative effect of current programs on the probability of future programs. This lagged effect on growth may be consistent with a number of explanations. First, the Fund claims that it is by encouraging macroeconomic stabi- lization that its programs create the necessary pre- requisites for economic growth, and might therefore argue that the evidence now supports this. The difficulty here is that the empirical research on the effects of Fund-backed programs finds little evidence that they induce macroeconomic stability. Second, to the extent that Fund programs are associated with policies that reduce aggregate demand relative to aggregate supply and create spare productive capacity rather than reduce inflation, the relaxation of such policies would be expected to result in a temporary increase in the rate of economic growth as this capacity is brought back into use. But where this is the case, there is little reason to believe that the increased rate of economic growth will be sustained unless investment increases.

What does seem to be well established empirically, however, is that Fund programs are associated with a significant decline in investment ratios (Edwards, 1989, Khan, 1990, Killick, Malik and Manuel, 1992, and Conway, 1994).

From a theoretical point of view this is unsurpris- ing. If the purpose of a program is to strengthen the balance of payments in the near term through the management of aggregate demand, then the brunt of adjustment will fall on domestic expenditure, of which investment is a component. Indeed short-term political considerations are likely to lead governments to favor policies which reduce investment in prefer- ence to consumption and government current expenditure. Similarly, since balance-of-payments deficits reflect domestic investment over domestic saving, unless saving can be increased, payments adjustment will require a decline in investment. But while for a time the adverse effects of falling investment may, to some extent, be offset by increasing the productivity of capital, it remains of concern that investment should fall in circumstances where a key reason for seeking Fund assistance is to increase the rate of economic growth.

The apparent dilemma may be overcome by down- playing short-term aggregate demand management, and by extending the time frame of programs to accom- modate an aggregate supply-side approach. This was in part the purpose behind the Fund’s move towards structural adjustment lending during the 1980s but, as KS’s empirical evidence implies, the changes in practice have been minimal, if not indiscernible.

Research by Khan and Knight (1985) has shown how the adverse growth effects of Fund-backed

programs may be reduced by changing their orientation toward supply-side measures. A shift in emphasis of this type would, however, put greater strains on the iinancing capacity of the Fund which would need to respond either by being more selective in terms of those countries that it supported - effective selectivity would incidentally reduce the degree of recidivism - or by securing increases in its own resources. There is evidence that an increase in Fund financing per program would also encourage greater commitment to implement programs, with Killick, Malik and Manuel (1992) finding that as the amount of finance provided by the Fund, expressed as a percentage of the initial balance of payments, increased, so also the chances of completion increased. If this strategy were to be successful, the increased demand for Fund resources would only be temporary, as enhanced economic performance wouid reduce the probability that countries would demand financial support from the Fund in the future. This is an area where success breeds success. Just as it is poor economic performance that traps

countries into returning to the Fund again and again, and prevents them from securing financial support from private international capital markets, so economic success would increase their access to private capital markets and would, as a consequence, reduce their demand for resources from the IMF. Until Fund- backed programs can be made more effective, it is unlikely that they will generate the catalytic effect that the Fund claims to exist but which empirical studies have generally failed to identify (Bird, 1995).

5. CONCLUDING REMARKS

At the same time as the future of the Fund is being widely debated a number of relevant and important

empirical studies have been published which have advanced our knowledge concerning the factors which determine IMF lending and the effects of Fund- backed programs. There is little indication however, that this empirical evidence is being used to inform the policy debate.

For as long as Fund-backed programs fail to effectively encourage economic growth as a top priority, many developing countries will remain Fund recidivists and the Fund’s resources will not be temporary and revolving as required by its Articles of Agreement. The attempt to reduce recidivism and encourage graduation from the Fund requires a fun- damental rethinking of its role in developing countries. This does not imply a departure from the basic idea of the Fund as a b~ance-of-payment agency, but it does imply a stronger ~o~itment to viewing the balance of payments in a longer term perspective, acknowledging in the design of programs that the long-term sustainability of the balance of payments depends upon success in raising the rate of economic growth. Urging the Fund, as the G7 is doing, to con- centrate on its “core concern” of macroeconomic stability and therefore implicitly encouraging it to move away from structural adjustment threatens the small and hard-won improvements in the design of IMF conditionality that have been achieved over recent years.

In a situation where the World Bank is not anxious to expand structural adjus~ent lending, greater emphasis on short-term macr~conomic s~bilization through managing aggregate demand will mean that Fund programs continue to have negative effects on investment, and will do little to help secure the enhanced growth performance which will enable developing countries to reduce their reliance on the Fund for financial support in the future.


NOTES

1. Useful surveys are Khan (1990) and Killick, Malik and Manuel (1992), and Kiliick with Malii (1992).

2. Bird (1995) overviews the evidence on this. Goreux (1989) shows how low-income countries in particular find it difficult to disengage themselves from the Fund, having once turned to it for financial assistance. Some low-income countries have had outstanding credit from the Fund for almost 30 consecutive years. Indeed, Goreux discovered that 21 countries had credit outstanding from the Fund for in excess of 14 years. Such continuous Fund involvement clearly challenges one of the basic tenets of its operations. But is prolonged financial support by the Fund limited to low-income countries? An analysis of the number and time duration of IMF stand-by arrangements during 1985-90 shows that during this period 47 countries negotiated stand- bys. Of these, 25 had only one stand-by, but the remaining 22 bad at least two and sometimes three. In some of the cases

where only one stand-by was arranged, drawings on the Fund were also made under other facilities. Mexico, for example, while having only one stand-by covering the end of 1986, 1987 and the beginning of 1988, also had extended arrangements which covered 1984-85 and 1989-92. Mexico was therefore involved with the Fund throughout almost the entire period. Indeed, of the 25 countries that had only one stand-by, five also drew resources from the IMF under its other facilities. Of the 10 countries that had three stand-by arrangements during 1985-90, six were low-income countries, but four were not.

This evidence seems to confirm that the image of the Fund coming into a country, offering swift financial support, helping to turn the balance of payments around, and then get- ting out, is purely and simply wrong. Moreover, a relationship that spans a number of years is not purely a feature of the Fund’s dealings with low-income countries, it also applies to better-off developing countries.


Further evidence of a long-run and effectively on-going involvement by the Fund in many developing countries is presented by Killick with Malik (1992), with this being a feature of its dealings with about 70% of those developing countries with which it agreed programs over 1979-89.

In the KS study the existence of a previous Fund arrangement is included as a dummy variable, and emerges from their estimation with a positive coefficient of 0.7755, a stan- dard error of 0.120 and a t-ratio of 5.49.

3. Earlier studies of the causes of balance-of-payments deficits in part of the period covered by KS also discovered

adverse movements in the terms of trade to be significant (Khan and Knight, 1983).

4. KS acknowledge this difficulty but understate it by noting that, “to the extent that these actual values differ from program targets some estimation problems may arise”

(P. 20).

5. An interesting issue which KS do not raise is the extent to which the Fund’s willingness to make an arrangement depends on a country’s previous track record in implement- ing agreed programs.

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Borrowing from the IMF: The policy implications of recent empirical research

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