Imf and economic growth – the effects of programs, loans and compliance with conditionality

1. Imf and economic growth – the effects of programs, loans and compliance with conditionality

2. Content: • Introduction • Implementation of IMF Conditionality • IMF and Economic Growth • Channels For the Impact of the IMF on Economic Growth • Method and Data • Empirical Estimates • Conclusion

3. IMF channels to influcence economic growth, among others : • Money disbursed under its programs • Advice to policy makers • Conoditionality

4. INTRODUCTION • author tries to separate their effects • using panel data for 98 countries, period between 1970.-2000. • Analysis- if the involvement of IMF influences economic growth in program counties

5. IMPLEMENTATION OF IMF CONDITIONALITY • measuring is not straightforward • Numerous experts conducted studies on implementation of conditions

6. Beveridge and Kelly 1980. • Out of 105 counties which implemented upper credit-tranche programs, only 60% achieved the target for the overall fiscal deficit and 54% complied with credit ceiling

7. Haggard 1985. • Extremely low rates of compliance with contitions under the EFF during 1974.-84. • Of the 30 cases studied, 16 were cancelled and 8 more were not implemented in their original form

8. problem with interruption • Mecagni 1999. • evaluated 36 countires • 28 of them interrupted their programs 51 times in total ( 17 had more than one interruption) • 33 interuptions were caused by slippage on conditionality

9. Mercer, Blackman and Unigovskaya • Compliance in countries in trasition to market economies • used data on comliance with conditionality provided by IMF itself • of the 33 countries, only 17 implemented more than 50% of the structural benchmarks included in their program

10. the worst impementation rates were found for conditions related with • Privatization • Social security system • Public enterprise reforms • Program implementation depends primarly on political constellation in the borrower country ( Ivanova, Mayer, Mourmouras and Anayiotos, 2003)

11. Killick- employed IMF loans that were agreed but left undrawn at program expiration as an indicator of preformance under a program • Joyce – duration of political regime, trade openess and degree of politican openess are significant for program implementation

12. IMF AND ECONOMIC GROWTH • economic growth as policy objective • three methods of evaluation if IMF influences economic growth • Befor and after • With-without • Regression analysis

13. The existing studies do not provide a clear answer as to whether IMF programs affect growth and if so, whether they increase or reduce growth rate • non of them adequately separates the effects of the IMF’s advice and compliance with conditionality from money disbursed

14. CHANNELS FOR THE IMPACT OF THE IMF ON ECONOMIC GROWTH • 1. money - governments persue inappropriate policies longer - moral hazard hypotesis • 2. conditions - from one side : inappropriate conditons which reduce growth - from other side : frequent interruptions and non-compliance->no effect on economic outcome • 3. Advice – influence in a log run

15. METHOD AND DATA • the regression is a pooled time-series crosssection analysis • the data are averages over five years • the analysis covers the time period 1970–2000 and extends to 98 developing countries • the dependent variable is the average five year growth rate of per capita GDP • a dummy for each country and each of the five-year periods is included in all regressions

16. METHOD AND DATA • the analysis should cover only thosearrangements that were in effect over much ofthe year in question • sincethe dataarefive-yearaverages,the participationindex varies continuously betweenzero and one, measuring the fraction of eachperiod that a country operates under an IMFprogram • following Barro and Lee(2005), were included only Stand-By and ExtendedFund Facility arrangements

17. VARIABLE ESTIMATE • one instrument typically employedin the literature is a variable measuringvoting in the UN General Assembly • author constructed a variable reflecting whetherthe borrowing country votes in line with theaverage of the G7 countries • G7countries’votesareweightedwiththeir quota in the Fund to take their votingpower into account • votes in agreement withthe G7 are coded as 1 and votes in disagreementas 0—the resulting numbers are thendivided by the total number of votes in eachyear • in addition to the UN voting variable,potential instruments are derived from thegeneral-to-specific approach described above.

18. EMPIRICAL ESTIMATES

19. EMPIRICAL ESTIMATES

20. EMPIRICAL ESTIMATES

21. EMPIRICAL ESTIMATES

22. EMPIRICAL ESTIMATES • in summary, there is considerable evidencethat participation in IMF programs reduceseconomic growth • there is also evidence thatcompliance with conditionality reduces thisnegative effect, although the overall impact remainssubstantially negative • the negative result would lead to the conclusionthat the IMF’s concept of economic reformsis flawed and in the longer run, even • whenconditionalityisnotimplemented,reducesgrowth • technical explanation:theinstrumentsemployedmightnotadequatelycapture the underlying crises, so that the effectof the IMF is outweighed by the effects of thecrises. • the proxies for compliancemight be too crude to actually capture trueimplementation of conditionality

23. CONCLUSION • there is some evidence thatcompliance with IMF conditionality does increase • growth rates once sample selection istaken into account • the effect ofcompliance is quantitatively small comparedto the overall reduction • the results have implications for the designof conditionality • The empirical results have shown that the impact of compliance with conditionality on growth is quantitatively small • In order to lend more effectively, it would therefore be most important for the IMF to detect factors influencing ownership and thus the willingness to reform • arguably, if the IMF would support reform-minded governments, its loans might make a difference (even if its advice might not)

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