Stylized Facts Before IMF-Supported Macroeconomic Adjustment
Author: Julio A. Santaella1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Publication Date:
01 Jan 1996
eISBN:
9781451973440
ISBN:
9781451973440
Language:
English
Keywords:
SP; Visa credit cards; paper number; income; interest rate differential; priority mail delivery; target zone; Emerging and frontier financial markets; Managed exchange rates; Personal income; Exchange rates; Sub-Saharan Africa; Baltics; Global; Middle East; Eastern Europe; Africa; IMF arrangement; program episode; adjustment program; standard deviation; structural adjustment facility; International reserves; Domestic credit; Exports; Nominal effective exchange rate
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In the four decades following the introduction in 1952 by the International Monetary Fund (IMF) of the first facility recognizable as a standby arrangement, more than 800 regular IMF arrangements spanning 132 member countries have been approved. The use of IMF resources has changed substantially over the decades. What started as balance of payments support for industrial countries (the 1952 stand-by arrangement was with Belgium) gradually became destined to serve developing countries.1 After a timid beginning in the 1950s, developing countries were receiving the majority of the increasing number of IMF arrangements in the 1960s.

Abstract

In the four decades following the introduction in 1952 by the International Monetary Fund (IMF) of the first facility recognizable as a standby arrangement, more than 800 regular IMF arrangements spanning 132 member countries have been approved. The use of IMF resources has changed substantially over the decades. What started as balance of payments support for industrial countries (the 1952 stand-by arrangement was with Belgium) gradually became destined to serve developing countries.1 After a timid beginning in the 1950s, developing countries were receiving the majority of the increasing number of IMF arrangements in the 1960s.

In the four decades following the introduction in 1952 by the International Monetary Fund (IMF) of the first facility recognizable as a standby arrangement, more than 800 regular IMF arrangements spanning 132 member countries have been approved. The use of IMF resources has changed substantially over the decades. What started as balance of payments support for industrial countries (the 1952 stand-by arrangement was with Belgium) gradually became destined to serve developing countries.1 After a timid beginning in the 1950s, developing countries were receiving the majority of the increasing number of IMF arrangements in the 1960s.

The collapse of the Bretton Woods system in the 1970s temporarily interrupted the increasing trend in the use of IMF resources, but after the onset of the debt crisis in developing countries more than 250 financial arrangements were approved in the 1980s, committing in excess of SDR 60 billion of the IMF’s resources. This vigorous pace in the number of arrangements and amount of resources committed has continued in the 1990s with the restructuring of the centrally planned economies of Eastern Europe and the former Soviet Union into market-based systems.

As the IMF has adapted to the world’s changing circumstances, so have the modalities of its financial assistance. After the historic introduction of the stand-by arrangement in 1952, what would later become known as the compensatory and contingency financing facility (CCFF) was established in 1963 to provide financial assistance to members experiencing exogenous shortfalls in export earnings. In 1974 the extended Fund facility (EFF) was introduced to allow member countries to adopt a medium-term horizon in solving their balance of payments adjustment problems; in 1986 the structural adjustment facility (SAF) was established to provide financial assistance on concessional terms to low-income members, and one year later this concessional assistance was expanded through the enhanced structural adjustment facility (ESAF). In 1992 the systemic transformation facility (STF) was introduced to assist member countries in the transition toward a market-based system.2

After four decades of IMF financial arrangements, a conventional wisdom has emerged in circles of academics and practitioners alike regarding the economic situation of those countries that turn to the IMF. This conventional wisdom was initially influenced by the experience and the analytical methods that prevailed during the Bretton Woods period, when a system of fixed-but-adjustable par values provided the setting for the analysis, and then the conventional wisdom gradually incorporated new developments in both theoretical and applied economics. According to the conventional wisdom, there is the presumption of a dramatic deterioration in the economic conditions in the period prior to an IMF-supported macroeconomic adjustment program. Since a “balance of payments need” is a prerequisite for IMF financial assistance, it is not surprising that the requesting country faces critical conditions in the balance of payments. Another piece of the conventional wisdom is that the macroeconomic disequilibria prior to the approval of a financial arrangement can be characterized by high or rising inflation, real exchange rate appreciation, and low or declining growth in GDP.3 However, in spite of four decades of IMF arrangements, the evidence gathered to support or refute this conventional wisdom is scant and, at best, mixed.

In fact, the bulk of the analysis in the literature that studies IMF-supported programs has focused on the macroeconomic effects of the adjustment programs, and much less research has been done on the characteristics of countries that enter into IMF-supported programs. It would be no exaggeration to claim that despite the long experience with IMF-supported programs over the decades, much more is known about the ex post effects of IMF-supported programs than about the factors that lead up to the adoption of programs in the first place.4 The sparse literature that has dealt with the period before the adoption of an adjustment program has mostly focused on the “demand for” IMF arrangements.5 This study attempts to bridge this gap in the literature.

This paper studies initial conditions or stylized facts before macroeconomic adjustment supported by IMF financial arrangements is undertaken. It presents evidence from 104 IMF arrangements in 74 non-oil developing countries during the period 1973–91, and thus complements previous work by Knight and Santaella (1994) on the determinants of IMF arrangements. The paper also documents differences and similarities across decades in these stylized facts before the inception of IMF-supported macroeconomic adjustment. The choice of sample was made for both practical and conceptual reasons. On the practical side, data limitations precluded extending the sample to more countries or capturing earlier IMF arrangements. Conceptually, the time period under consideration corresponds to the post-Bretton Woods system, a period that has not been studied sufficiently and, given that the conventional wisdom was mostly forged during the Bretton Woods period, it has spurred many academic and policy making controversies.6 Nevertheless, the sample used in this investigation is quite representative since it covers a significant number of financial arrangements approved during this period. The methodological approach followed here is very basic, relying heavily on the use of simple descriptive statistics, and is similar to the empirical analysis of inflation and devaluation episodes of Harberger (1981 and 1988) and Edwards (1989), among others. This approach avoids the need to impose behavioral assumptions to analyze the empirical evidence, which contrasts with the approach of Knight and Santaella (1994), where explicit demand and supply of IMF arrangements were postulated in order to analyze the empirical determinants of IMF arrangements.

By documenting the initial macroeconomic conditions of IMF-supported macroeconomic adjustment, this paper addresses some important questions.7 First, better knowledge of the initial conditions would enhance the design of macroeconomic policies geared to tackle the macroeconomic disequilibria of IMF member countries. Second, a complete characterization of the stylized facts before adoption of IMF-supported macroeconomic adjustment would also improve the ex post evaluation of IMF programs. Solid evidence about the initial macroeconomic conditions would enhance the robustness of the results of a “before-after” type of evaluation, and would also document observable differences between program and nonprogram episodes in order to undertake a “with-without” type of evaluation.8 Third, such work would shed some light on the controversial subject of the origins of the macroeconomic imbalances that give rise to IMF-supported programs. At the risk of oversimplifying the issues, one can look at two extreme positions. One group of observers argues that macroeconomic imbalances before IMF-supported programs generally originate in the external conditions faced by the country in question, such as deterioration in the terms of trade, a slowdown of demand for the country’s exports, or adverse conditions in international financial markets. At the opposite end of the spectrum, another group of observers contends that imbalances are endogenous to the country and are brought about mostly by the government pursuing unsustainable macroeconomic policies. Reality, however, is rarely either black or white, and the case studies by Killick and Malik (1992) show that in most cases a combination of both external and internal factors have led to IMF arrangements.

The paper is organized as follows. Section I gathers the stylized facts that lead a country to seek a macroeconomic adjustment program supported by IMF financial arrangements. Empirical regularities are presented for a series of macroeconomic indicators in the three-year period preceding the approval of an “initial” IMF financial arrangement. As explained below, the analysis focuses only on the first of a possible sequence of IMF arrangements since this “initial” arrangement is taken to represent the beginning of the macroeconomic adjustment process. To obtain a clear idea of the extent of economic deterioration before the inception of IMF-supported adjustment programs, a control group of nonprogram observations is included as a benchmark. The comparison with a control group will allow explicit and precise identification of how the economic situation in program countries differs from the situation associated with normal economic conditions. Section II contains the statistical analysis and presents a series of nonparametric tests that are computed to study to what extent countries initiating a program are “significantly different” from the control group. This analysis is complemented by the use of discriminant analysis to ascertain which types of variables are most useful in distinguishing program episodes from non-program observations. Section III returns to the historical dimension of the paper by comparing the preprogram characteristics of countries undergoing macroeconomic adjustment supported by an IMF arrangement in the 1970s with those in the 1980s. Finally, Section IV concludes by summarizing the interpretation of the evidence.

I. The Three-Year Period Preceding IMF-Supported Macroeconomic Adjustment

This section examines the behavior of a selected group of macroeconomic variables in the three-year period before the initiation of macroeconomic adjustment supported by IMF financial arrangements. The evidence presented below shows a particularly feeble economic situation in member countries one year before the inception of initial IMF financial arrangements: weak balance of payments, low output growth rates, tough external conditions, and expansive financial policies. The economic situation is not as precarious three years before the outset of IMF-supported adjustment programs. Important deteriorations over this three-year period occur in the overall balance of payments, stock of international reserves, external current account, output growth, terms of trade, external indebtedness, fiscal stance, and credit expansion. These stylized facts conform only partially to the conventional wisdom.

The sample of IMF financial arrangements was obtained from a total population of 91 non-oil developing countries during the period 1973–91. Encompassing the four types of IMF financial arrangements that contain conditionality elements (stand-by arrangements in the upper credit tranches, EFF, SAF, and ESAF), 324 arrangements were approved by the IMF in support of adjustment programs for this population (Table 1). The vast majority of these arrangements were consecutive, with an initial arrangement followed by “successor” arrangements. These consecutive strings of arrangements can really be thought of as a single macroeconomic adjustment program. Since this paper focuses only on the initial conditions before the adjustment programs are undertaken, only the initial arrangement of a sequence was considered in the sample of program episodes. Inclusion of “successor” arrangements in the characterization of macroeconomic conditions before programs would have distorted the picture because they were already preceded by some macroeconomic adjustment. To capture only the outset arrangements, an arbitrary selection criterion was defined: arrangements would be included in the sample of program episodes if the member country had not been involved in any other arrangement during the previous three years. This criterion yielded 104 program episodes in 74 countries and for each of those programs annual data were covered for the three-year period preceding the outset arrangement.9

To assess the distinctive features of the program episodes, the behavior of the main economic variables is compared with a control group of observations. In studies of the ex post effects of IMF-supported programs, a control group is typically used to obtain a counterfactual; namely, assuming that the nonprogram countries share the same exogenous environment as the program countries, the control group provides an approximation of what would have happened in the absence of a program.10 The objective of a control group in this study is rather different: it is to capture the macroeconomic performance that predominates under “normal circumstances” in countries that do not enter into an IMF-supported program over an extended period of time. The control group thus includes countries that do not enter into IMF arrangements either because their economic conditions do not warrant one or because, in spite of having the need, they do not feel inclined to enter into one (Knight and Santaella (1994)). Given the obvious difficulty of disentangling these two types of countries in the control group, no attempt will be made here to separate them. However, countries that do not enter into an arrangement because they do not need one are likely to dominate the characteristics of the whole group, since it would be hard for a country in need of an arrangement to avoid a program indefinitely. This feature of the control group would make it a legitimate indicator of macroeconomic performance in “normal” or “noncritical” circumstances.

Table 1.

Program Episodes and Control Group Observations

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Key: UCT; Stand-by arrangement in upper credit tranches; EFF: extended Fund facility; SAF: structural adjustment facility; ESAF: enhanced structural adjustment facility. Black cells indicate program observations and shaded cells indicate control group observations.

Specifically, in this study the control group observations were selected from the same 91-country population during 1973–91 as the program country observations were selected from. The control group observations were defined as those country-year observations that did not have an IMF-supported program in place for at least the next three consecutive years. Three years without an IMF financial arrangement is an arbitrary but reasonable selection criterion that yields a sample of 693 observations spanning 84 different countries (see Table 1). In sum, of 1,729 potential observations in the population, 40 percent were classified as control group observations and 6 percent as program episodes; each of the latter comprises a period of three years prior to the adoption of an IMF financial arrangement.

In comparing the evolution of economic developments during the period preceding the adjustment program for program episodes with those for the control group, a distinction is made between the behavior of macroeconomic targets or outcome variables, external sector indicators, and domestic policy variables. This distinction is useful in dealing with the origins of the macroeconomic disequilibria that lead to an adjustment program. As a first step, the characteristics of the two sample groups are described, using some basic descriptive statistics. Next, in Section II, a formal statistical analysis is performed to test for the apparent differences in macroeconomic indicators between the two groups.

Macroeconomic Outcomes

Table 2 shows the evolution of the sample distribution of some macroeconomic indicators—the overall balance of payments, the current account, the stock of international reserves, the inflation rate, the growth of per capita GDP, the domestic investment rate, and the real effective exchange rate— over the three-year period before the inception of IMF-supported macroeconomic adjustment. Table 2 compares the distributions of these variables in the third, second, and first year before the initiation of the outset arrangement— labeled “t–3,” “t–2,” and “t– 1”—with the control group’s sample distribution. Figure 1 displays this evolution over time for the median program episodes against the first, second, and third quartiles of the control group.

The stylized facts that emerge from this evidence are promising. As expected, the most consistent pattern that can be inferred is that IMF-supported macroeconomic adjustment programs are preceded by a sharp deterioration in the country’s external accounts. Three years before the program, the median overall balance of payments is –0.4 percent of GDP, compared with a balance of 0.6 percent of GDP for the control group. The balance of payments of program episodes then worsens sharply to reach –2.4 percent of GDP in the year prior to the program, a larger deficit than the first quartile of the control group.

Table 2.

Macroeconomic Outcomes in Program and Control Groups: Distribution of Samples

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A minus sign (–) denotes a depreciation.

Sources: World Economic Outlook database; and author’s calculations.

The behavior of the balance of payments is almost mirrored by the evolution of the stock of international reserves: three years before the program the median stock of international reserves is 2.7 months of imports—in contrast to a median of 4.1 months of imports for the control group—and it falls to only 1.5 months of imports by the year prior to the adjustment program, below the 2 months of imports of the first quartile of the control group.

The external current account also shows a sharp deterioration before the inception of IMF-supported macroeconomic adjustment. It starts from a level similar to that observed in the control group: the median current account deficit in the program episodes is 3.4 percent of GDP three years before the arrangement, compared with the 3.2 percent for the control group. However, the median current account deficit in the program group falls to 6.1 percent of GDP one year before the outset arrangement.

Another important feature of the program episodes is that the dispersion of the stock of international reserves is substantially smaller (and centered around a lower level) for the program episodes than for the control group. Clearly, program episodes start from a weak balance of payments position that deteriorates markedly to almost unsustainable levels of foreign exchange reserves before the initial arrangement’s approval.

Figure 1.
Figure 1.

Economic Indicators Before Adjustment

Citation: IMF Staff Papers 1996, 003; 10.5089/9781451973440.024.A002

Source: Table 2.aA minus sign (–) indicates a depreciation.

The comparative behavior of the other macroeconomic outcome variables for program episodes and for the control group is less dissimilar. In fact, the behavior of inflation seems to be at variance with the conventional wisdom of accelerating inflation before the approval of an IMF arrangement. The median inflation rate is lower initially in program episodes than in the control group, although the difference is fairly small (10.8 percent per annum three years before the program versus 11.4 percent in the control group). Interestingly enough, the median inflation rate in the program episodes rises somewhat as the adjustment draws nearer but does not accelerate markedly: it reaches only 12.0 percent one year before the outset arrangement. The dispersion of inflation is, nevertheless, substantially higher in the program episodes than in the control group. In fact, high inflation program observations—such as those corresponding to the arrangements in the aftermath of hyperinflations in Bolivia and Nicaragua—drive the average inflation rate to well above the median inflation for this group, a feature that also appears in the growth rates of other nominal variables as described below.

The behavior of the real exchange rate is broadly compatible with the conventional wisdom of an exchange rate appreciation before IMF-supported macroeconomic adjustment is undertaken. The median real exchange rate of program episodes appreciates continuously as the program gets closer: about 1 percentage point per annum in each of the three years prior to the program, compared with only 0.6 percent per annum for the control group. However, looking at a central tendency figure can be misleading in this case, since program episodes also exhibit a more volatile real exchange rate than the control group, a volatility that rises as the outset arrangement approaches. This is evidenced by the larger dispersion one year before the adjustment’s inception. In fact, one year before the program almost half (46 percent) of the episodes in the program group were depreciating the real exchange rate, a close proportion to that observed in the control group (47 percent).

Also in line with the conventional wisdom, the median GDP per capita growth rate is substantially lower in the period prior to the programs than in the control group, and it deteriorates steadily from 1.3 percent in t— 3 to –0.4 percent in t— 1 (compared to a median growth of GDP per capita of 2.2 percent a year in the control group). Another interesting observation is that program episodes exhibit a fairly constant median rate of domestic investment of about 23 percent of GDP during the three-year period, much like that observed in the control group.

External Indicators

This subsection focuses on the following variables for the external sector: the terms of trade, growth of export markets, and external debt indicators. As can be seen from Table 3 and Figure 2, the median terms of trade deteriorates over time for the program group, falling a cumulative 5.8 percent over the three years prior to the arrangement—with the largest deterioration occurring one year before the outset arrangement—while for the control group there is a modest improvement in the terms of trade (0.6 percent per annum). Interestingly enough, both samples exhibit roughly the same degree of terms of trade variability according to the interquartile range and the standard deviation. The median growth rate of export markets is slightly higher for the program episodes three years before the program than for the control group (3.8 percent compared with 3.5 percent a year), but it deteriorates somewhat over time for the program group (3.3 percent one year before the outset arrangement).

Table 3.

External Indicators in Program and Control Groups: Distribution of Samples

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Sources: World Economic Outlook database; and author’s calculations.
Figure 2.
Figure 2.

External Environment Before Adjustment

Citation: IMF Staff Papers 1996, 003; 10.5089/9781451973440.024.A002

Source: Table 3.

Finally, both the external debt service and the total external debt ratios show sharp differences between the program episodes and the control group.11 Although these two variables are not entirely exogenous because they largely reflect policy decisions undertaken in previous periods, external debt service has an important exogenous component: the interest rate prevailing in international capital markets. The median external debt-service ratio for program episodes (17.3 percent of exports) is already close to that for the third quartile of the control group three years before the program. This ratio grows steadily over time, reaching 19.4 percent of exports in the year prior to the arrangement. Similarly, total external debt is substantially higher for program episodes than for the control group. The median debt-to-GDP ratio starts at 34.8 percent and rises over time to reach 43.1 percent of GDP one year before the outset arrangement, above the third quartile of the control group. Also evident from the data is the higher dispersion of these two variables for the program group than for the control group, reflecting the inclusion in the program episodes of some countries that at some point exhibited acute external debt problems, such as Brazil, Ecuador, Mexico, and Nicaragua, to name a few.

Policy Variables

The next piece of evidence deals with the behavior of economic policy variables—monetary, fiscal, and nominal exchange rate indicators. The overall picture that emerges is that program countries differ substantially from the control group with respect to their fiscal, credit, and exchange rate policy stances, but not so much with respect to the growth of their broad monetary aggregates.

The three fiscal policy indicators (the fiscal balance, the flow of net government borrowing from the banking system, and the rate of expansion of domestic credit to the government) show that the fiscal performance of program countries is substantially weaker than that prevailing in the control group. For example, the median fiscal deficit in program countries three years before the program is 5.1 percent of GDP, compared with 3.4 percent in the control group, while the median rate of growth of domestic credit to the government in program countries in the same period (t–3) is 22.7 percent a year compared with 15.9 percent in the control group (Table 4 and Figure 3). Moreover, the fiscal policy stance deteriorates markedly during the three-year period prior to the approval of the financial arrangement: the median fiscal deficit reaches a startling 6.9 percent of GDP and the median rate of growth of domestic credit to government surpasses 42 percent one year before the inception of the adjustment program.

The behavior of monetary policy in the program episodes is somewhat surprising. On the one hand, the growth rate of total domestic credit is initially only slightly higher in program episodes three years before the program than in the control group—22.0 percent a year versus 20.4 percent—and rises over time reaching 25.1 percent one year before the outset arrangement. On the other hand, a different picture is depicted by the growth rate of the broad money supply, which remains roughly constant during the three-year period prior to the adjustment program and just below the median growth rate of the control group (19.7 percent per annum). These two facts are consistent with the steady decline in international reserves documented above. In addition, the fact that the growth rate of credit to the government in program episodes is higher on average than the growth rate of total domestic credit implies that the government’s share of credit is growing over time.

Table 4.

Macroeconomic Policy in Program and Control Groups: of Samples Distribution

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A minus sign (–) indicates a depreciation.

Sources: World Economic Outlook database; and author’s calculations.

Finally, program episodes differ from the control group in the pattern displayed by exchange rate policy. Program countries depreciate more than the control group: the median annual percentage change in the nominal effective exchange rate is -0.9 percent three years before the program, against –0.1 percent for the control group. As time goes by, program countries allow some acceleration in the rate of depreciation, and by the year prior to the outset arrangement the median nominal effective depreciation rate is –1.2 percent a year. Not only do exchange rates depreciate more during program episodes, but they also exhibit greater dispersion, a feature also observed for the real exchange rate.

II. Statistical Analysis

The previous section provided a broad overview of a set of selected macroeconomic indicators distinguishing between program episodes and a control group. In this section a formal statistical analysis is carried out, with a twofold purpose. First, a series of nonparametric tests is performed in order to determine whether the apparent differences between program episodes and control group observations are statistically significant. Second, a discriminant analysis is presented to ascertain which variables are the most useful indicators in distinguishing program and nonprogram observations.

Figure 3.
Figure 3.

Economic Policy Before Adjustment

Citation: IMF Staff Papers 1996, 003; 10.5089/9781451973440.024.A002

Source: Table 4.aA minus sign (–) indicates a depreciation.

The evidence presented below supports some of the patterns reported earlier in this paper and also provides new insights. It shows that macroeconomic performance deteriorates markedly over time before the inception of an adjustment program supported by IMF financial assistance. In particular, three years before the outset arrangement, program episodes and the control group are only statistically different in a handful of their macroeconomic characteristics. However, one year before the program, the statistical differences become widespread and affect most of the macroeconomic indicators, with the exception of the rate of inflation, investment, real effective depreciation, the growth of export markets, and the expansion of a broad money aggregate. Moreover, the discriminant analyses suggest that some indicators—such as the stock of international reserves, the overall balance of payments, and the flow of credit to the government—appear to be quite powerful in detecting the incidence of IMF-supported programs.

Nonparametric Tests

Univariate nonparametric tests indicate in what precise sense program episodes are different from the control group observations. The nonparametric statistics used test the equality of medians (Wilcoxon rank-sum test), the equality of distributions (Kolmogorov-Smirnov test), and the equality of populations (Kruskal-Wallis test) of the two samples.12 It must be recalled that nonparametric statistical tests require fewer and weaker assumptions than parametric tests. In particular, nonparametric tests are better equipped to deal with samples made up of observations from different populations. Moreover, they are also less distorted by problems of measurement error. The traditional disadvantage of nonparametric tests—i.e., the “waste” of information reflected in a low power-efficiency ratio—can be overcome with sufficiently large samples, such as those used in this study.

The results of the nonparametric tests for the comparison of three years before the inception of macroeconomic adjustment supported by IMF arrangements and the control group are presented in Table 5. With respect to the macroeconomic outcome variables, the evidence is revealing. Three years before the outset arrangement, the Wilcoxon rank-sum test cannot reject equality of medians between program episodes and the control group for all indicators, except for the overall balance of payments and the stock of international reserves, cases in which program episodes displayed smaller medians. In addition to these two variables, the Kolmogorov-Smirnov test suggests that the current account three years before a program may also exhibit a different distribution from that of the control group. As time goes by, nearly all the nonparametric statistics increase continuously, indicating deepening differences in macroeconomic outcomes between the program episodes and the control group as the adoption of macroeconomic adjustment gets closer. One year before the inception of IMF-supported adjustment, many of the differences described in the previous section become statistically significant. In the case of the overall balance of payments, the balance in the external current account, the stock of international reserves, and the growth rate of per capita income, the Wilcoxon rank-sum test now rejects the null hypothesis that the program episode median is equal to that of the control group median in favor of the alternative of a smaller median for the program episodes; in the case of the inflation rate, investment, and the real effective depreciation rate, the null hypothesis of equality of medians is not rejected. The Kolmogorov-Smirnov and the Kruskal-Wallis tests confirm these results because they also reject, respectively, the null hypotheses of equality of sample distribution functions and equality of populations for the same macroeconomic outcome indicators.

The nonparametric tests also corroborate the stylized facts detected for the external sector indicators (terms of trade, export markets, and external debt variables). Three years before the program, the null hypotheses of equality of medians, equality of distributions, and equality of populations are all strongly rejected for the debt indicators. In the case of the set of external sector variables, differences between the program episodes and the control group also tend to increase as the program approaches, and one year before the program the behavior of the terms of trade and (only marginally) of export markets is also significantly different in program episodes from that in the control group.

Results that emerge from the nonparametric tests performed on policy variables are even more interesting. They confirm the observed differences between program and nonprogram observations in terms of fiscal, credit, and exchange rate policies, as well as the similarities with respect to monetary expansion. Three years before the outset arrangement, the stance of fiscal policy is weaker in program episodes than in the control group: the Wilcoxon rank-sum test rejects the equality of medians for the flow of net government borrowing, the fiscal balance, and the growth of domestic credit to the government, while the Kolmogorov-Smirnov and the KruskalWallis tests also reject equality of distributions and populations. However, the expansion of credit and the broad money supply, as well as the nominal effective depreciation rate three years before the program, are statistically similar to those of the control group. As adjustment gets closer, in addition to the dissimilarity of fiscal policy, differences also appear in the expansion of domestic credit and nominal effective depreciation, but not in the growth of the money supply. The null hypotheses of equality of medians, equality of distributions, and equality of populations between the program episodes and the control group are now strongly rejected for the growth of total domestic credit and for the rate of nominal effective depreciation. However, in the case of the growth of the money supply, it is clear that the groups are almost indistinguishable throughout the three-year period before a program: none of the null hypotheses is rejected at conventional significance levels.

Table 5.

Macroeconomic Differences Between Program Episodes and the Control Group: Nonparametric Statistical Analysis

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Note: Asterisks indicate whether the null hypothesis is rejected at the 10 percent (*), 5 percent (**), or 1 percent (***) confidence level.