Assessing IMF Program Effectiveness

• Author: Rodney Ramcharan
• Pages: 1-7

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IMF-supported programs are probably the institution's most visible activity and affect a wide range of countries. Over the last decade, with the decline in communism and the deepening of economic crises in many emerging market economies, some 90 countries have become involved in various IMF-supported economic adjustment programs.

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Assessing IMF Program Effectiveness

However, despite the prevalence of these programs, their effectiveness is still being debated in a number of respects. Why does the performance of many countries that have participated in a series of IMF-supported programs remain relatively weak?¹ How do we know the extent to which these programs work? Can patterns that emerge from past experience help improve program effectiveness in the future?

A large body of empirical research conducted within and outside the IMF has sought to assess IMF program effectiveness (Haque and Khan, 1998), but this research agenda faces three major methodological hurdles. First, IMF programs tend to be remarkably varied across countries, making meaningful cross-country comparisons difficult (Mussa and Savastano, 2000). Second, IMF programs are inherently complex constructs with multiple economic objectives spread over varying time horizons. As a result, the appropriate definition of IMF program effectiveness is not entirely clear. That said, much of the empirical literature has focused on the impact of IMF programs on macroeconomic aggregates such as growth and inflation. Third, neither a country's decision to seek an IMF program nor the IMF's decision to agree to a program is random; thus, selection bias is a challenge to accurate estimation. Hence, because of these methodological difficulties, most of the results are tentative. On the whole, the evidence suggests that IMF programs lower inflation and improve the balance of payments; their impact on growth is less clear.

Issues of selection bias arise because countries "demand" IMF programs in times of economic difficulties. Bird (1996) notes that adopting an IMF-supported program is generally linked to a low level of reserves, increased debt, and an overvalued exchange rate. Hence, comparisons between countries that do not enter into IMF-supported programs and those that do are difficult (Krueger, 1998). An appropriate measure of program effectiveness would compare outcomes under an IMF program with those that would have...