An Appraisal of IMF Supported Programs in Developing Countries

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• An Appraisal of IMF Supported Programs in
  Developing Countries
• Presentation by
• Thomas Barnebeck Andersen
• (Based on joint work with Phil Abbott and Finn
  Tarp)
• June 10, 2008

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Outline of presentation

• This presentation will
• argue that as a first step IMF programs should be
  evaluated with respect to their economic growth
  effects
• discuss IMF program evaluations (direct approach)
• compare the thinking behind IMF programs with
  recent research on economic reform (indirect
  approach)
• policy implications
• This presentation will not probe into any
  specific IMF policy conditionality

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Why focus on growth?

• Fostering growth is the primary objective of IMF
  programs
• Consider the following statement by former IMF
  Managing Director Michael Camdessus Our primary
  objective is growth. In my view, there is no
  longer any ambiguity about this. It is toward
  growth that our programs and their conditionality
  are aimed.
• A recent evaluation of structural
  conditionality by the IEO emphasizes that
  Fund arrangements are designed to support
  members effort to achieve medium-term external
  viability and to foster sustainable growth.

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Program effectiveness versus economic growth

• IEO defines program efficiency with respect to
  whether structural conditionality is effective
  in bringing about follow-up structural reforms as
  well as whether reforms are sustained over time
• However, this notion of effectiveness is of
  second-order importance only
• Even if countries consistently comply with the
  IMF structural conditions, this would only be
  desirable if structural conditionality is
  effective in fostering economic growth
• Hence, a focus on growth is appropriate

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The consensus view in academic literature

• IMF programs have failed to foster economic
  growth
• This conclusion is based on a number of studies
  using sophisticated statistics
• but methodological problems are deep
• selectivity correction
• appropriate growth models

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Why have IMF programs failed to deliver a growth
dividend?

• Two rival explanations
• Policy conditionality per se
• Lack of compliance with policy conditionality

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Statistical studies provides no resolution

• Since almost no studies control for compliance,
  failure to demonstrate a positive effect does not
  allow us to discriminate in favor of either of
  the two aforementioned views
• Both views can claim that no effect of IMF
  programs is consistent with their diagnosis

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Turning to the thinking behind structural
conditions

• An indirect way of investigating whether IMF
  programs are good for growth involves assessing
  the thinking behind IMF programs against the
  consensus view in economics on matters of
  economic reform

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Institutions rule

• Policies are different from institutions
• Policy reform is swift
• Institutional reform is slow
• Institutions dominated policies
• Easterlys seminal observation
• Data on national economic policies are available
  for the period 1960 onwards
• This is also the period in which countries had
  independent governments involved in the making of
  macroeconomic policy
• Consequently, if policies affect the growth rate
  of income per capita, this ought to show up in
  the data for this period
• However, the bulk of relative country performance
  over this period is explained by their initial
  position reached in 1960, suggesting that
  post-1960 policies can only have had a rather
  limited impact on the welfare of nations

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Poor policies are symptoms of weak institutions

• Countries with poor macroeconomic policies have
  suffered more macroeconomic volatility and grown
  more slowly during the postwar period
• But countries with poor macroeconomic policy
  records also have weak institutions
• In fact, once one controls for the causal effect
  of institutions economic performance,
  macroeconomic policies no longer play a direct
  role

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Macroeconomic conundrum

• The above findings suggest that macroeconomic
  policy reform without supporting institutional
  reform is not likely to change much
• This is reinforced by a macroeconomic conundrum
  Why has improved macroeconomic stability not led
  to the expected growth payoff?
• Insufficient institutional reform may hold the
  answer

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Structural conditionality as a tool for
institutional change

• The upshot of this is that structural
  conditionality, which calls for improvements in
  the institutional environment, is in accord with
  mainstream economics
• However, this may be changing slowly

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Towards a new consensus

• Critics hold that the type of institutional
  reforms pursued by the IMF is tilted towards a
  best-practice model
• This model presumes that it is possible ex ante
  to settle on a unique set of appropriate
  institutional arrangements (best-practices), and
  that convergence towards these institutional
  arrangements is attractive

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The importance of reform priority

• The best-practice model ignores both the
  existence of binding constraints, and, by
  implications, a sense of reform priority
• Some reforms are likely to be more important than
  others
• Example the role of corruption as a binding
  constraint in Bangladesh and Chad

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• We need to get away from formulae and the search
  for elusive best practices and rely on deeper
  economic analysis to identify the binding
  constraints on growth. (World Bank, 2005)
• A fully fledged growth strategy would identify
  which of these binding constraints demands
  immediate attention and which can be deferred.
  (Growth Commission, 2008)

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The new idea

• Removal of a small number of key constraints will
  have a larger impact on growth than the
  traditional approach based on a longer list of
  reforms
• This strategy is supported by several empirical
  studies
• so-called growth accelerations are mainly caused
  by idiosyncratic, and often small-scale, changes

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Policy implications

• Not a recipe for growth more a way of
  discovering binding constraints
• Hausmann-Rodrick-Velasco
• To the extent that searching for binding
  constraints is a process of trial and error,
  originality in program design becomes important
• Perhaps the incentive structure facing IMF staff
  needs a patch up?