Repeated Structural Adjustment Loans of IMF and World and their effectiveness

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Repeated Structural Adjustment Loans of IMF and
World and their effectiveness

• A Presentation for Developmen Workshop by Emanuel
  Ules and Elisabeth Niendorf MADE Faculty of
  Economics University of Warsaw

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Outline

• What did structural adjustment adjust? The
  association of policies and growth with repeated
  IMF and World Bank adjustment loans William
  Easterly (2005)
• --------------------------------------------------
  --------------------------------
• Historical review Purpose of SAL
• Research question
• Approach
• Methodology
• Results and Criticism
• Alternative Approaches
• Conclusions
• Discussion

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I. Historical review Purpose of SAL SAL Good
Idea, but Bad Guys or the Other Way Round?

• Structural adjustment policies emerged from the
  IMF and the World Bank (Bretton Woods
  Institutions)
• originated due to a series of global economic
  disasters during the late 1970s
• Structural Adjustment Loan (SAL)
• Goal reducing the borrowing country's fiscal
  imbalances and guaranteeing growth
• For this, loans were/are given
• But nothing comes for free

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I. Conditionality of SALs

• Conditionality ensures that the money lent will
  be spent in accordance with the overall goals of
  the loan
• Few examples
• Cutting expenditures
• Devaluation of currencies
• Removing price controls and state subsidies
• Enhancing the rights of foreign investors
• Privatization
• Trade Liberalization

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I. Evolvment of World Bank Adjustment Loans
Source World Bank (2001)
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II. Research Question

• Does (repeated) structural adjustment lending
  succeed in adjusting macroeconomic policy and
  growth outcomes?
• Adjustment with growth ?
• Can we find evidence for possible reasons for
  repetition ?
• 1) first SAL was not effective
• 2) gradual improvement expected

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III. Approach

• How to evaluate a treatment ?
• 1) compare results to ex-ante benchmark
  (before-after)
• 2) compare with a control group (with-without)
• 3) counterfactual methodology (regression based)
• ? control for endogeneity due to self
  selection!
• What is missing?
• Accounting for the information inherent in
  repeated treatment
• Earlier studies treated SALs as independent
  events

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IV. Methodology1. Claim of SALs Promote ec.
growth good macroec. policies
Informative Statistics
1.Result disappointing results But not yet
evidence that SALs were ineffective How would the
outcomes look like without treatment?
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IV. MethodologyPerverse incentives through
prospect of debt relief ?

• Heavily Indebted Poor Countries (HIPEC) Initiative

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IV. Methodology2. claim of SALs Lead to
favorable policy reforms

• Focus econometric relationship between
  successive SALs and policy improvements
• If positive association evidence for the
  necessity of multistage treatment
• If negative treatment ineffective or
  inappropriately repeated
• Methodology pooled time series regression
  (cross-section longtitutional annual data from
  1980-99)

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IV. MethodologyHow to measure macroeconomic
distortions ?

• Dummy DISTORTION 1 if
• 1) inflation gt 40
• 2) Black Market Premium gt 40
• 3) Real Market Premium gt 40
• 4) Real Interest Rate lt -5

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IV. MethodologyContradiction ?

• On average proportion of adjustment lending
  countries around 50, independent of the
  cumulative of SALs
• Macroec. distortions persist despite a high
  of SALs

• Fraction of countries with macroec. distortions
  declines over time

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IV. MethodologyProbit regression of DISTORTION
on cum. adjustment loans

• Account for an exogenous time trend
• Alternative dummy composed by the former 4
  criteria
• budget balance/GDP (incl. grants) lt -5
• current account balance lt - 5
• Effect of explanatory variables on the response
  probabilty

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IV. MethodologyHas conditionality failed ?

• Once the time trend is controled for, an add.
  SAL/add. year with SAL does not reduce the
  probabilty of macroec. distortions
• The same pattern for probit of individual
  indicators of macroec. distortions and adjustment
  lending

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IV. MethodologyTesting for reverse causality

• cross-section regressions for macroeconomic
  outcomes on initial macro outcomes and number of
  cumulative adjustment loans, instrumenting for
  adjustment loans
• Most of the IVs proposed in the foreign aid and
  adjustment lending literature have
  cross-sectional, rather than time series variance

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IV. MethodologyWhy Testing for reverse causality?

• Simple example
• Y ß1 ß2X e
• Simultaneous causality bias (endogenous
  explanatory variables X causes Y , Y causes Y)
• An instrumental variable, is uncorrelated with
  the disturbance e but is correlated with X
• TRICK Isolate movements of X which are not
  correlated with e (via X) ? 2SLS

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IV. Instruments

• friends-of-donor variables
• Captures capturing political influences that
  affect whether a country receives bilateral
  foreign assistance
• Intuition strategic interests of powerful rich
  nations affect the number of adjustment loans a
  country receives
• For example
• percent of times that a country voted with the
  U.S., UK, France, Germany, and Japan at the UN14
• Colony dummies
• U.S. Military assistance over 198099 as an
  indicator of strategic importance to the U.S.

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V. Results Criticism

• Use the information inherent in frequent
  repetition of loans to the same country
• Attempt to put external conditions on
  governments behavior through SAL did not prove
  to be effective
• Neither adjustment, nor growth
• Methodology justifies those conclusions ?

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V. Results Criticism contd

• Measure of adjustment lending of loans time
  spent under IMF/WB program
• But what about the amount that was lend?
• One measure for all ?
• IMFs focus lender of last resort,
  macroeconomic and related structural areas
• World Banks focus social, structural, and
  sectoral issues

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V. Results Criticism contd

• Causality better instruments needed
• Barro Lee (2005) instrument IMF loan variables
  with predicted loan variables based on IMF quotas
  and staff shares, UN votes along as well as the
  intensity of trade shares with US and European
  countries
• What about compliance with conditions ?
• Countrys ec. performance depends on program
  implementation Dreher (2005/2006)

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VI. Alternative Approaches Account for
compliance - Dreher (2005)

• How can the IMF influence economic outcomes?
• So lets seperate those channnels
• Beyond selection bias decision to participate in
  the IMF program might have an influence on
  determinants of growth e.g. Policy instruments
  - Moral Hazard Problem

Conditions that come with

Policy advice
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VI. Alternative Approaches Account for
compliance - Dreher (2005)

• Findings negative relationship between IMF
  programs and economic growth
• On the other hand some evidence that compliance
  with IMF conditionality does increase growth
  rates
• and here comes the BUT the effect of compliance
  is quantitatively small compared to the overall
  reduction
• ? conditions imposed by outside actors might be
  circumvented

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VI. Alternative Approaches Methodological Issues
- Dicks-Mireaux et al. (2000)

• Methodology adapt a technique from labor
  training evaluation General Evaluation
  Estimator or modified control group (involves
  policy reaction functions estimated for countries
  that did not have support from IMF program)
• Finding Positive impact of IMF programs on
  growth
• But Panel covering countries with highly diverse
  circumstances
• serious limitations for obtaining
  reliable estimates of the independent effects of
  IMF programs

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VI. Alternative ApproachesRemoving binding
constraints by trial and error - Abbott Trap
(2008)

• 2 dominant and confromting views for the lack of
  success
• 1) one-size-fits-all approach - unsound and
  overly rigid
• 2) main problem incomplete compliance with
  conditionality
• Alternative to cross-country approach assess
  appropriateness of set of reforms
• Growth diagnostics and policy trialing !
• Not all constraints equally important set
  priorities
• Institutional and organizational reasons for
  policy rigidity ?
• Incentive structure for IMF staff against policy
  trialing and risk taking at country level ?
  Intellectual monoculture ?

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VII. Conclusions and Discussion

• No evidence for the effectivnes of repeated SALs
  on growth or policy adjustment
• Most studies are not in favour of IMF/ World
  Bank adjustment loans
• However, are the econometric methods suitable for
  assesing the effectivness
• Advanced estimation techniques e.g. SUR
• Microfocus on countryspecific circumstances
• ? Are policies appropriate (and not one size
  fits all)

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VIII. Discussion

• Please comment on 1 of issues below
• 1) Approach Repeated adjustment loans,
  conditionality, ...
• Is there somethings else we should take into
  consideration?
• 2 ) Methodology Are the results presented in
  literature robust? Did we already find an
  appropriate method to evaluate the in dependent
  effects of IMF/WB programs?
• 3) Organizational Reform Do we need better
  policy design or better instituions? Different
  programs/loans or changing IMFs/WBs approach?
• 4) Own oppinion feel free to give your own
  statement ?

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References

• Abbott, P. Tarp, F. (2008), IMF and Economic
  Reform in Developing Countries.