IMF programs: who is chosen and what are the effects?

Abstract

IMF loans react to economic conditions but are also sensitive to political-economy variables. Loans tend to be larger and more frequent when a country has a bigger quota and more professional staff at the IMF and when a country is more connected politically and economically to the United States and other major shareholding countries of the IMF. These results are of considerable interest for their own sake. More importantly for present purposes, the results provide instrumental variables for estimating the effects of IMF loan programs on economic growth and other variables. This instrumental estimation allows us to sort out the economic effects of the loan programs from the responses of IMF lending to economic conditions. The estimates show that a higher IMF loanparticipation rate reduces economic growth. IMF lending also lowers investment but raises international openness. In addition, greater involvement in IMF programs tends to lower the rule of law and democracy. We conclude that the typical country would be better off economically if it committed itself not to be involved with IMF loan programs. Show more