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IMF and University of Cincinnati, respectively. We would like to thank Burkhard Drees and Andrew Feltenstein for useful comments on a previous version. All remaining errors are our own.
See IMF (2002) for a detailed definition of prolonged use and for the list of countries identified as prolonged users of IMF resources.
Bird, Hussain, and Joyce (2000); and IMF (2002, 2003a) contain detailed discussions of the drawbacks of prolonged use. IMF (2003b) offers guidance on how to avoid inappropriate prolonged use of IMF resources.
See, for instance, the IMF’s Articles of Agreement, especially Article I (v).
The experience with reforms in some countries of the Commonwealth of Independent States in the 1990s is a particularly good example of the resistance of special interests to reforms. During the early years of transition, “red directors” and other special interests used their political influence to evade taxes, obtain subsidies, strip the assets of state enterprises, and extract other special privileges. The international financial institutions provided assistance to pro-reform governments while being aware of the need of reformers to stay in power.
In an alternative political-economy model formulated in Drazen (2002), the government contends with veto players—that is, with constitutional actors that influence policymaking from within the government.
It is implicitly assumed that the capital created in the recipient economy with the assistance funds does not depreciate over time.
Note that the initial period’s choice of ωo indirectly influences later-periods choices of ωg.