The last 25 years have witnessed a profound transformation in the economic fortunes of low-income countries (LICs). A marked improvement in macroeconomic policies has resulted in improved fiscal performance, stronger external positions, and, most importantly, significant long-term increases in real GDP per capita growth and reductions in poverty. While some of the achievements occurred in the context of an unusually benign global environment, LICs continued to grow during the global financial crisis.
This paper assesses how the involvement of LICs in IMF-supported programs may have affected these economic developments. Chapter 2 examines the evolution of IMF-supported programs over the past quarter-century. During this period, the IMF has engaged in financial or nonfinancial arrangements with more than half of all LICs, and more than three-quarters of all IMF-supported programs have been with LIC members. The nature of IMF engagement has also undergone significant change over this time, evolving from more prescriptive structural adjustment programs toward support for country-led development agendas, in part reflecting changes in the LICs themselves. This paper presents a series of country case studies to highlight developments in the nature of IMF-supported programs.
Disentangling the specific impact of IMF support from broader economic and development trends in LICs is no easy task. The vast academic literature on this subject—which has typically focused on a mixed sample of LICs and middle-income economies—has found both positive and negative effects of IMF-supported programs on economic performance, depending on the econometric methodology and sample used (Chapter 3).
The fundamental methodological challenge in assessing the impact of IMF-supported programs is selection bias: countries that approach the IMF often do so because they are already facing economic difficulties or expect to experience problems in the near future. Thus, a simple comparison of performance of IMF-supported program countries with nonprogram countries can be misleading.
Another difficulty in evaluating IMF support is the vast differences in country characteristics and situations. The literature has typically used country samples that mix LICs and middle-income economies. These samples tend to overlook the particular characteristics of LICs as well as the distinct nature and objectives of Fund engagement in these countries. LICs face a number of challenges that differentiate them from other economies, including the following:
Nature of shocks. While emerging market economies may experience “sudden stop” types of capital account crises, LICs are more vulnerable to other domestic and external shocks that tend to occur more frequently and reflect the countries’ lack of economic development and diversification.
Access to financing. LICs have less access to domestic or external financing, making them dependent on donor assistance and, periodically, on IMF-supported programs that can help catalyze such assistance.
Longer-term challenges. IMF-supported programs with LICs tend to focus more on medium-or longer-term objectives that are important for poverty reduction and growth, and which tend to extend well beyond the duration of an individual program. In this context, these programs emphasize more capacity building and institution building rather than just provision of financing and short-term policy advice.
As a result of these factors, IMF-supported program engagement with most LICs has generally been less episodic than with other countries, and more continuous in nature. Consequently, analyzing the impact of IMF support by looking at snapshots of performance right before and after an individual program, as most studies do, tends to ignore the repeated nature of Fund engagement with most LICs and does not measure progress toward the longer-term objectives pursued under these programs (Figure 1.1).
Low-Income Countries: Number of Years of IMF-Supported Program Engagement, 1986–2011
Source: IMF staff calculations.Low-Income Countries: Number of Years of IMF-Supported Program Engagement, 1986–2011
Source: IMF staff calculations.Low-Income Countries: Number of Years of IMF-Supported Program Engagement, 1986–2011
Source: IMF staff calculations.A related limitation of the existing literature is that it has generally not differentiated IMF-supported programs by types of instruments. To tailor its support to member countries, the Fund offers a diverse range of instruments—medium-term support, episodic short-term and emergency financing, precautionary financing, and nonfinancial policy support. Economic objectives tend to differ under these instruments. In particular, medium-term instruments place greater emphasis on addressing entrenched imbalances and institutional weaknesses, while short-term instruments are more focused on financing and adjustment to shocks. These differences can have important implications for the examination of the impact of Fund engagement on macroeconomic outcomes.
In recent empirical work, the Fund staff has sought to shed light on the impact of IMF-supported programs in LICs, taking the above methodological challenges into account (IMF, 2012b; Mumssen and others, 2013). This empirical work breaks down IMF-supported programs with LICs into two subsets: those aiming to provide more prolonged support, and those aiming to provide short-term financing in response to shocks (Chapter 3). This paper also proposes a number of other refinements to the existing literature, including taking into account the implementation of IMF-supported programs and examining a wider range of macroeconomic and social outcomes using Propensity Score Matching (PSM) to correct for selection bias.
Using these techniques, our evidence suggests that longer-term IMF program support may indeed have helped LICs sustain economic growth and boost resilience by building fiscal buffers. The findings indicate that while the majority of LICs improved their longer-term macroeconomic performance, this tendency was more pronounced for those with longer-term IMF support (at least five years of program engagement per decade). Specifically, controlling for selection bias, the paper shows that between 1986 and 2010, IMF-supported LICs experienced, on average, significantly higher real per capita GDP growth, fiscal balances, foreign investment, and social spending compared to LICs without such support. Countries with longer-term IMF engagement also tended to attain significant reductions in poverty, income inequality, inflation, and growth volatility relative to their control group.
A further noteworthy finding is that, controlling for the presence of longer-term IMF engagement, the scale of Fund financing does not appear to be significant in determining outcomes over long time frames. The paper therefore considers how IMF engagement may have supported long-term growth and poverty reduction beyond the provision of finance, such as through the role that programs play in helping to develop a consistent policy framework, and through the impact of surveillance and technical assistance activities (Chapter 3).
This is not to suggest that concessional financial support from the IMF necessarily takes a back seat to policy support or other forms of assistance. During the global financial crisis, for example, the sharp increase in Fund disbursements helped relax liquidity constraints in LICs, which allowed many to preserve vital spending and facilitated a more rapid recovery than would otherwise have been the case. In this vein, this paper also presents evidence from a longer sample period that suggests that IMF financial support has the greatest impact when LICs are faced with substantial short-term imbalances or shocks. Specifically, after controlling for selection bias, stepped-up IMF financing through augmentations of existing programs or short-term and emergency facilities is positively associated with short-term growth and indicators of macroeconomic stability.
The final chapter of this paper reviews the implications of the findings for IMF engagement in LICs going forward, and suggests ways in which the Fund’s facilities will need to evolve further if the institution is to remain relevant to its LIC members. While the IMF has played a helpful, if ancillary, role in supporting the growth and development process in LICs over the last quarter-century, ongoing changes in LICs and in the broader global economy will require the Fund to become more responsive if it is to remain relevant for LICs in the quarter-century that lies ahead. By the end of that period, half of the current LICs should graduate out of concessional finance and into emerging market status.
