Abstract

The Fund’s Articles of Agreement make it clear (Article I) that promoting the growth of output and trade is a primary objective of economic policy and that eliminating payments disequilibria should be sought in accordance with this objective. Fund-supported adjustment programs consequently have to be designed to achieve a viable balance of payments within the context of improved long-term growth performance and price stability.1 Nevertheless, Fund policies and programs have come under mounting criticism in recent years in the press, as well as in certain academic circles, for failing to encourage economic growth.2 Indeed, it has been frequently argued that rather than fostering the growth of output, Fund programs tend to cause a slowdown in economic activity, increased unemployment, and a general worsening of living standards.

The Fund’s Articles of Agreement make it clear (Article I) that promoting the growth of output and trade is a primary objective of economic policy and that eliminating payments disequilibria should be sought in accordance with this objective. Fund-supported adjustment programs consequently have to be designed to achieve a viable balance of payments within the context of improved long-term growth performance and price stability.1 Nevertheless, Fund policies and programs have come under mounting criticism in recent years in the press, as well as in certain academic circles, for failing to encourage economic growth.2 Indeed, it has been frequently argued that rather than fostering the growth of output, Fund programs tend to cause a slowdown in economic activity, increased unemployment, and a general worsening of living standards.

This paper addresses some aspects of this criticism and brings to bear the empirical evidence available in the literature on the subject, emphasizing the results for developing countries. The paper focuses exclusively on existing evidence; no attempt is made to provide any new empirical results. The evidence is largely indirect, since in most cases the studies from which it is obtained were not necessarily undertaken with the express intention of illuminating the strengths and weaknesses of Fund programs. The conclusions drawn from this body of empirical evidence accordingly do not provide definitive answers to the criticism cited above and are in any event tentative. The survey does, however, furnish information about the current state of empirical knowledge of the issue and identifies gaps that need to be filled if the validity of the criticisms of Fund programs is to be properly assessed.

The plan of this paper is as follows. Section II defines the approach taken to analyze the empirical evidence on Fund programs and economic growth. It discusses the circumstances in which member countries typically seek Fund assistance, the specific objectives of Fund programs, the policy content of a typical program, and the criteria that affect the choice between demand-side and structural, or supply-side, measures in programs. It then describes issues that arise with respect to the effect of programs on growth, the empirical approach necessary to examine these issues properly, the type of evidence available, and finally the approach adopted in this paper in interpreting this evidence.

The empirical evidence that can be used to infer the effects of Fund programs on growth is examined in the next two sections of the paper. Section III looks at the evidence produced by econometric models on the effects of individual policy measures. These measures include monetary policy, fiscal policy, supply-side policies, and exchange rate policy. Section IV, on the other hand, surveys the evidence on the effects of complete policy packages based on cross-country analyses undertaken both within the Fund—in connection with reviews of programs—as well as outside the institution. As these two sections emphasize, both the model-based and cross-country approaches involve different problems; furthermore they do not yield results that are totally consistent with each other. An attempt is made in Section V to reconcile the conflicting evidence produced by the two approaches by using illustrative simulation experiments. These simulations also indicate how alternative combinations of demand-side and supply-side measures can be expected to influence the rate of growth of output in the short term. Finally, Section VI summarizes the conclusions that may legitimately be drawn from the empirical evidence available at present and points out where additional efforts would likely yield a better understanding of the relationship between Fund programs and economic growth. The model used for the simulation analysis is contained in the Appendix.

  • Aghevli, Bijan B., and Mohsin S. Khan, “Credit Policy and the Balance of Payments in Developing Countries,” in W.L. Coats, and D. R. Khatkhate, (eds.), Money and Monetary Policy in Less Developed Countries (Oxford: Pergamon, 1980), pp. 685 –711.

    • Search Google Scholar
    • Export Citation
  • Balassa, Bela, Exports and Economic Growth: Further Evidence,Journal of Development Economics (Amsterdam),Vol. 5 (June 1978),pp. 181 –89.

    • Search Google Scholar
    • Export Citation
  • Balassa, Bela, The Process of Industrial Development and Alternative Development Strategies, Essays in International Finance No. 141 (Princeton, New Jersey: Princeton University, 1980).

    • Search Google Scholar
    • Export Citation
  • Barro, Robert J., “Money and Output in Mexico, Colombia, and Brazil,” in J. Behrman, and J. A. Hanson (eds.), Short-Term Macroeconomic Policy in Latin America (Cambridge, Massachusetts: National Bureau of Economic Research, 1979), pp. 177 –200.

    • Search Google Scholar
    • Export Citation
  • Bhagwati, Jagdish N., and T. N. Srinivasan, “Trade Policy and Development,” in Rudiger Dornbusch and Jacob A. Frenkel (eds.), International Economic Policy: Theory and Evidence (Baltimore: Johns Hopkins University, 1979), pp. 1 –35.

    • Search Google Scholar
    • Export Citation
  • Blejer, Mario I., and Roque B. Fernandez,The Effects of Unanticipated Money Growth on Prices and on Output and Its Composition in a Fixed-Exchange Rate Open Economy,Canadian Journal of Economics (Toronto), Vol. 13 (February 1980), pp. 82 –95.

    • Search Google Scholar
    • Export Citation
  • Blejer, Mario I., Mohsin S. Khan,Government Policy and Private Investment in Developing Countries,Staff Papers, International Monetary Fund (Washington), Vol. 31 (June 1984), pp. 379 –403.

    • Search Google Scholar
    • Export Citation
  • Bond, Marian E., Agricultural Responses to Prices in Sub-Saharan African Countries,Staff Papers, International Monetary Fund (Washington), Vol. 30 (December 1983), pp. 703 –26.

    • Search Google Scholar
    • Export Citation
  • Branson, William H., Stabilization, Stagflation, and Investment Incentives: The Case of Kenya, 1979—80, Woodrow Wilson School of Public and International Affairs Discussion Papers in Economics No. 89 (Princeton, New Jersey: Princeton University, 1985).

    • Search Google Scholar
    • Export Citation
  • Cline, William R., Sidney Weintraub, eds., Economic Stabilization in Developing Countries (Washington: The Brookings Institution, 1981).

  • Connors, Thomas A., The Apparent Effects of Recent IMF Stabilization Programs, International Finance Discussion Papers, No. 135 (Washington: U. S. Board of Governors of the Federal Reserve System, International Finance Division, April 1979), pp. 1 –15.

    • Search Google Scholar
    • Export Citation
  • Cooper, Richard N., Currency Devaluation in Developing Countries, Essays in International Finance No. 86 (Princeton, New Jersey: Princeton University, 1971).

    • Search Google Scholar
    • Export Citation
  • Crockett, Andrew D., Stabilization Policies in Developing Countries: Some Policy Considerations,Staff Papers, International Monetary Fund (Washington), Vol. 28 (March 1981), pp. 54 –79.

    • Search Google Scholar
    • Export Citation
  • Diaz-Alejandro, Carlos, Exchange Rate Devaluation in a Semi-Industrialized Economy: The Experience of Argentina 1955–1961 (Cambridge, Massachusetts: Massachusetts Institute of Technology, 1965).,

    • Search Google Scholar
    • Export Citation
  • Diaz-Alejandro, Carlos, IMF Conditionality: What Kind?”PIDE Tidings (Islamabad), No. 4 (January–February 1984), pp. 7 –9.

  • Donovan, Donal J., Real Responses Associated with Exchange Rate Action in Selected Upper Credit Tranche Stabilization Programs,Staff Papers, International Monetary Fund (Washington), Vol. 28 (December 1981), pp. 698 –727.,

    • Search Google Scholar
    • Export Citation
  • Donovan, Donal J., Macroeconomic Performance and Adjustment Under Fund-Supported Programs: The Experience of the Seventies,Staff Papers, International Monetary Fund (Washington), Vol. 29 (June 1982), pp. 171 –203.

    • Search Google Scholar
    • Export Citation
  • Dornbusch, Rudiger, Open Economy Macroeconomics (New York: Basic Books, 1981).

  • Ebrill, Liam P., The Effects of Taxation on Labor Supply, Savings, and Investment in Developing Countries: A Survey of the Empirical Literature” (unpublished, Washington: International Monetary Fund, April 1984).

    • Search Google Scholar
    • Export Citation
  • Edwards, Sebastian (1983a),The Short-Run Relation Between Growth and Inflation in Latin America: Comment,American Economic Review (Nashville, Tennessee), Vol. 73 (June 1983), pp. 477 –82.

    • Search Google Scholar
    • Export Citation
  • Edwards, Sebastian (1983b),The Relation Between Money and Growth Under Alternative Exchange Rate Arrangements: Some Evidence from Latin-American Countries,” paper presented at the Econometric Society Meetings, San Francisco, December 1983.

    • Search Google Scholar
    • Export Citation
  • Fry, Maxwell J., Saving, Investment, Growth and the Cost of Financial Repression,World Development (Oxford), Vol. 8 (April 1980), pp. 317 –27.,

    • Search Google Scholar
    • Export Citation
  • Fry, Maxwell J., Saving, Investment, Growth and the Terms of Trade in Asia(February 1984), unpublished, Irvine, California.

  • Giovannini, Alberto, The Interest Elasticity of Savings in Developing Countries: The Existing Evidence,World Development (Oxford), Vol. 11 (July 1983), pp. 601 –07.

    • Search Google Scholar
    • Export Citation
  • Guitian, Manuel, The Effects of Changes in the Exchange Rate on Output, Prices, and the Balance of Payments,Journal of International Economics (Amsterdam), Vol. 6 (February 1976), pp. 65 –74.,

    • Search Google Scholar
    • Export Citation
  • Guitian, Manuel, Fund Conditionality: Evolution of Principles and Practices, IMF Pamphlet Series No. 38 (Washington: International Monetary Fund, 1981).

    • Search Google Scholar
    • Export Citation
  • Gylfason, T., Credit Policy and Economic Activity in Developing Countries: An Evaluation of Stand-By Programs, 1977–79,” Institute for International Economic Studies, Seminar Paper No. 268 (Stockholm: University of Stockholm, December 1983).,

    • Search Google Scholar
    • Export Citation
  • Gylfason, T., Michael Schmid, Do Devaluations Cause Stagflation?” Institute for International Economic Studies, Seminar Paper No. 201 (Stockholm: University of Stockholm, April 1982).

    • Search Google Scholar
    • Export Citation
  • Hanson, James A., The Short-Run Relation Between Growth and Inflation in Latin America,American Economic Review (Nashville, Tennessee), Vol. 70 (December 1980), pp. 972 –89.,

    • Search Google Scholar
    • Export Citation
  • Hanson, James A., Contractionary Devaluation, Substitution in Production and Consumption, and the Role of the Labor Market,Journal of International Economics (Amsterdam), Vol. 14 (February 1983), pp. 179 –89.

    • Search Google Scholar
    • Export Citation
  • Harberger, Arnold C., Sebastian Edwards, Causes of Inflation in Developing Countries: Some New Evidence,” paper presented at the American Economics Association Meetings, December 1982.

    • Search Google Scholar
    • Export Citation
  • Kelly, Margaret R., Fiscal Adjustment and Fund-Supported Programs, 1971–80,Staff Papers, International Monetary Fund (Washington), Vol. 29 (December 1982), pp. 561 –602.

    • Search Google Scholar
    • Export Citation
  • Khan, Mohsin S., Import and Export Demand in Developing Countries,Staff Papers, International Monetary Fund (Washington), Vol. 21 (November 1974), pp. 678 –93.,

    • Search Google Scholar
    • Export Citation
  • Khan, Mohsin S., and Malcolm D. Knight, Stabilization Programs in Developing Countries: A Formal Framework,Staff Papers, International Monetary Fund (Washington), Vol. 28 (March 1981), pp. 1 –53.,

    • Search Google Scholar
    • Export Citation
  • Khan, Mohsin S., and Malcolm D. Knight, Some Theoretical and Empirical Issues Relating to Economic Stabilization in Developing Countries,World Development (Oxford), Vol. 10 (September 1982), pp. 709 –30.

    • Search Google Scholar
    • Export Citation
  • Khan, Mohsin S., and Malcolm D. Knight, Determinants of the Current Account Balances of Non-Oil Developing Countries in the 1970s: An Empirical Analysis,Staff Papers, International Monetary Fund (Washington), Vol. 30 (December 1983), pp. 819 –42.

    • Search Google Scholar
    • Export Citation
  • Killick, TonyThe Impact of Fund Stabilization Programs,” Chapter 6 in T. Killick (ed.), The Quest for Economic Stabilization: The IMF and the Third World (London: Heinemann, 1984), pp. 227 –69.

    • Search Google Scholar
    • Export Citation
  • Killick, Tony and others,Towards a Real Economy Approach,” Chapter 7 in T. Killick (ed.), The Quest for Economic Stabilization: The IMF and the Third World (London: Heinemann, 1984), pp. 270 –320.

    • Search Google Scholar
    • Export Citation
  • Krueger, Anne O., others (eds.), Trade and Employment in Developing Countries: Vol. I—Individual Studies (Chicago: University of Chicago, 1981).

    • Search Google Scholar
    • Export Citation
  • Krugman, Paul, and Lance Taylor,Contractionary Effects of Devaluation,Journal of International Economics (Amsterdam), Vol. 8 (August 1978), pp. 445 –56.

    • Search Google Scholar
    • Export Citation
  • Leiderman, Leonardo, On the Monetary-Macro Dynamics of Colombia and Mexico,Journal of Development Economics (Amsterdam), Vol. 14 (May 1984), pp. 183 –201.

    • Search Google Scholar
    • Export Citation
  • Lipschitz, Leslie, Domestic Credit and Exchange Rates in Developing Countries: Some Policy Experiments with Korean Data,Staff Papers, International Monetary Fund (Washington), Vol. 31 (December 1984), pp. 595 –635.

    • Search Google Scholar
    • Export Citation
  • McDonald, Donogh, “The Determinants of Saving Behavior in Latin America” (unpublished, Washington: International Monetary Fund, April 1983).

    • Search Google Scholar
    • Export Citation
  • Michalopoulos, Constantine and Keith Jay, Growth of Exports and Income in the Developing World: A Neoclassical View,” U.S. AID Discussion Paper No. 28 (Washington: U.S. Agency for International Development, November 1973).

    • Search Google Scholar
    • Export Citation
  • Nashashibi, Karim, A Supply Framework for Exchange Reform in Developing Countries: The Experience of Sudan,Staff Papers, International Monetary Fund (Washington), Vol. 27 (March 1980), pp. 24 –79.

    • Search Google Scholar
    • Export Citation
  • Nowzad, Bahram, The IMF and its Critics, Essays in International Finance No. 146 (Princeton, New Jersey: Princeton University, 1981).

  • Nugent, Jeffrey B., Constantine Glezakos,Phillips Curves in Developing Countries: The Latin American Case,Economic Development and Cultural Change (Chicago), Vol. 30 (January 1982), pp. 321 –34.

    • Search Google Scholar
    • Export Citation
  • Reichmann, Thomas M., Richard T. Stillson, Experience with Programs of Balance of Payments Adjustment: Stand-By Arrangements in the Higher Tranches 1963–72,Staff Papers, International Monetary Fund (Washington), Vol. 25 (June 1978), pp. 293 –309.

    • Search Google Scholar
    • Export Citation
  • Robinson, ShermanSources of Growth in Less Developed Countries: A Cross-Section Study,Quarterly Journal of Economics (Cambridge, Massachusetts), Vol. 85 (August 1971), pp. 391 –408.

    • Search Google Scholar
    • Export Citation
  • Sundararajan, V., Subhash Thakur, Public Investment, Crowding Out, and Growth: A Dynamic Model Applied to India and Korea,Staff Papers, International Monetary Fund (Washington), Vol. 27 (December 1980), pp. 814 –55.

    • Search Google Scholar
    • Export Citation
  • Taylor, Lance, “IS/LM in the Tropics: Diagrammatics of the New Structuralist Macro Critique,” in W. R. Cline and S. Weintraub (eds.), Economic Stabilization in Developing Countries (Washington: The Brookings Institution, 1981), pp. 465 –502.

    • Search Google Scholar
    • Export Citation
  • Taylor, Lance, Jeffrey A. Rosensweig, “Devaluation, Capital Flows and Crowding-Out: A Computable General Equilibrium Model with Portfolio Choice for Thailand” (unpublished, Washington: International Bank for Reconstruction and Development, November 1984).

    • Search Google Scholar
    • Export Citation
  • Tun Wai, U., and C. Wong,Determinants of Private Investment in Developing Countries,Journal of Development Studies (London), Vol. 19 (October 1982), pp. 19 –36.

    • Search Google Scholar
    • Export Citation
  • Tyler, William G., Growth and Export Expansion in Developing Countries: Some Empirical Evidence,Journal of Development Economics (Amsterdam), Vol. 9 (August 1981), pp. 121 –30.

    • Search Google Scholar
    • Export Citation
  • United Nations Conference on Trade and Development, “Survey of Commodity Demand and Supply Elasticities,” Research Memorandum No. 48 (Geneva: UNCTAD, March 1974).

    • Search Google Scholar
    • Export Citation
  • van Wijnbergen, Sweder, Stagflationary Effects of Monetary Stabilization Policies: A Quantitative Analysis of South Korea,Journal of Development Economics (Amsterdam), Vol. 10 (April 1982), pp. 133 –69.

    • Search Google Scholar
    • Export Citation
  • Williamson, John, ed., IMF Conditionality (Washington: Institute for International Economics, 1983).