## 1. Back-to-Back GRA-Supported Programs

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### Scope and sample
- Coverage period: 2002-11.
- Sample definition: Fund-supported programs initiated during March 2002 - September 2011.
- Sample composition for GRA-supported programs: 67 programs in 44 countries.
- Crisis program subset: 37 programs started on or after September 15, 2008 (categorized as “crisis programs”).
- Exclusions: Non-upper-credit tranche financial support under EPCA, ENDA, RCF; staff-monitored programs (SMP); FCL and PCL programs.
- PRGT-supported sample: 83 programs in 54 LICs (March 2002 PRGF for Cote d’Ivoire to June 2011 ECF for Kyrgyz Republic); 28 categorized as crisis programs (starting on or after September 15, 2008).

### Objectives and analytical approach
- Primary objectives:
  - GRA-supported programs: achieve macroeconomic and external stability; reduce current account deficits to sustainable levels and reconstitute reserves consistent with Fund and other official financing.
  - PRGT-supported programs: promote growth and poverty reduction while maintaining external viability; stabilization less often the primary issue.
- Multi-pronged assessment strategy:
  - Descriptive analysis: path of key variables before, during, and after programs.
  - Threshold analysis: share of program countries achieving satisfactory levels for growth, inflation, and fiscal balances.
  - Debt dynamics analysis: whether programs stabilize or reduce external and public debt in the medium term.
  - Control-group comparisons: evolution of macroeconomic variables versus similar non-program countries using propensity-score matching (five nearest neighbors baseline).
  - Succession assessment: need for successor programs within one year of expiry.
- Data sources: most data from the September/October 2011 release of the World Economic Outlook (WEO); Fund, MONA and Fund staff estimates used for debt analyses.

### Methodology and timing assumptions
- Period t denotes year of program start.
- GRA-supported programs:
  - Pre-program: t-2 and t-1.
  - Program period: t to t+2.
  - Post-program: t+3 and t+4.
- PRGT-supported programs:
  - Pre-program: t-2 and t-1.
  - Program period: t to t+3.
  - Post-program: t+4 and t+5.
- Growth timing sensitivity: analysis considers effects if programs affect growth in year t or only from t+1.
- Note on projections: WEO projections for 2011 (September/October 2011 releases) incorporate observations for January – August 2011; projections for 2012 and later may be more revision-prone. Appendix III finds averages including and excluding projections generally do not change dramatically.

### Key findings — macroeconomic and social outcomes (general)
- Most Fund-supported programs in the sample appear to have helped member countries improve macroeconomic and social conditions, particularly where programs included substantial fiscal and external accommodation during the recent global crisis.
- In a large majority of GRA- and PRGT-supported programs, appropriate stabilization was achieved and pre-existing difficulties were largely resolved.
- Comparative improvements in GRA-supported programs:
  - Economic conditions improved often by more than in control group countries, particularly for inflation, fiscal balances, and international reserves.
  - Social spending in GRA-supported programs was largely safeguarded (finding pertains to programs started during 2002-11).
- PRGT-supported program outcomes:
  - On average, PRGT-supported programs do not show a pronounced improvement across key macroeconomic variables over the course of a typical program period, aside from improvements in debt ratios.
  - PRGT programs focus on resolving long-term balance of payments problems while supporting growth and poverty reduction.
  - Over 1985-2009, PRGT-supported programs helped raise social spending; initial evidence links higher social spending to improved social outcomes.

### Descriptive average outcomes (GRA programs, 2002–11)
- Pre-program typical profile:
  - Sharp growth slowdown and some increase in unemployment.
  - Increasing inflation in the high single digits.
  - Fiscal deterioration and rising debt burden.
  - Deterioration of the current account.
- After Fund support (on average):
  - Growth generally rebounded.
  - Unemployment and inflation declined gradually.
  - Fiscal balances improved with social spending largely safeguarded.
  - Debt burden fell.
  - Current account improved.
  - Reserve coverage improved (reserves include Fund credit; reserves increase also when Fund credit is excluded, albeit more gradually).
- Programs preceded by deep recessions:
  - Growth rebounded already in t+1 and approached program-country average by end of post-program period.
  - Fiscal consolidation typically started in t+1.
  - Debt levels typically rose throughout program and post-program periods but in most cases eventually stabilized at below 60 percent of GDP.
- Data availability caveats:
  - Government social spending series available for 64 percent of sample; unemployment available for 78 percent.
  - One program omitted due to data issues: the 2002 EFF for Serbia and Montenegro.

### Crisis programs (2008–11) — aggregate and subgroup patterns
- Crisis program countries (on average) prior to start:
  - Even sharper growth slowdown than other program countries.
  - Substantially weaker fiscal and current account balances with rapidly growing government debt.
  - Many experienced sharp decline in private capital inflows.
- After program start (on average for crisis programs):
  - Growth recovered quickly.
  - Inflation fell.
  - Fiscal balances improved while social spending was largely safeguarded.
  - Reserves increased; current accounts improved.
  - Debt ratios stabilized at a high level.
  - Private capital inflows continued to decline overall, indicating longer-term challenges in some countries.
- Chronological heterogeneity:
  - Wave 1 (2008–mid 2009; 20 economies) generally saw favorable developments.
  - Wave 2 (late 2009 on; 13 economies) faced more difficult initial conditions and larger fiscal sustainability challenges.
  - Euro area program countries (Greece, Ireland, Portugal) expected to see growth below GRA-program average and elevated unemployment; public debt expected to remain well above program-country average for years.

### Threshold analysis (static assessment of stabilization)
- Static thresholds judged three years after program start:
  - Growth: above 3 percent per year.
  - Fiscal deficit: below 5 percent of GDP.
  - Inflation: below 10 percent per year.
- Findings by year t+3 (GRA sample):
  - Large majority of program countries had growth above 3 percent, inflation below 10 percent, and fiscal deficits below 5 percent of GDP.
  - Program countries in weakest pre-program quartile typically reached thresholds in the 70 – 80 percent range.
  - Weakest-quartile criteria for GRA programs during 2002-11: growth below 1.2 percent; inflation above 10.8 percent; fiscal balance weaker than -6.2 percent of GDP.
- PRGT/LIC threshold results by t+4:
  - By the fourth year after program initialization most outcomes were: fiscal deficits below 5 percent of GDP; inflation below 10 percent; growth above 3 percent.
  - PRGT pre-existing weakness criteria: growth below 2.4 percent; inflation above 10.1 percent; fiscal balance weaker than -5.0 percent of GDP.
- Cross-sample medians during 2002-11:
  - Median annual real GDP growth in LICs: 5.0 percent.
  - Median annual real GDP growth in emerging and advanced countries excluding the G8: 4.2 percent.
  - Median fiscal deficits: LICs 2.4 percent of GDP; other countries 1.8 percent of GDP.
  - Median inflation: LICs 6.7 percent per year; other countries 3.9 percent per year.

### Debt dynamics analysis
- Approach: compare actual/post-program balances to debt-stabilizing balances (computed as –d*g/(1+g), where d is debt stock in percent of GDP and g is growth rate of the U.S. dollar value of GDP in percent per year).
- Findings:
  - Programs generally aim to help countries reduce high debt over time; for countries with debt exceeding 100 percent of GDP most programs aim to put countries on track to reduce debt (programs lie above horizontal zero line in Figure 5).
  - Upward-sloping regression lines indicate programs aimed at having more highly indebted countries reduce their debt quicker.
  - Debt restructuring featured in several programs: Antigua and Barbuda, Dominica, Jamaica, Maldives, Seychelles and St. Kitts and Nevis cited as explicit examples.
- Sensitivity:
  - Results sensitive to growth assumptions. Baseline assumes medium-term growth equals that observed during the ten years preceding the program; varying the assumption to immediate post-program growth leads to deterioration of debt dynamics in a number of high-debt countries (notably euro area programs).
  - Using nominal GDP growth in local currency for public debt analysis does not change overall picture for GRA programs and improves it for PRGT programs (slope turns positive, mainly due to large depreciations against the U.S. dollar in a few high public-debt countries).
- Data plotting notes:
  - Blue denotes non-crisis programs, green wave 1 crisis, red wave 2 crisis.
  - Euro area countries denoted with a triangle; non-euro area with a circle.
  - Ireland program excluded from current account charts as an outlier (coordinates: 944; 82).

### Comparative macroeconomic outcomes — control-group results (GRA 2002-11)
- Control-group construction:
  - Propensity to request a program estimated econometrically using a panel probit; baseline control group chooses five non-program countries with closest probability in the same year (nearest-neighbor propensity score matching).
  - Marginal effects from probit significant variables: Real GDP Growth (t-1) = -0.18***; ln(nominal GDP per capita) (t-1) = -0.03***; Inflation (t-1) = 0.20**; Inflation (t-2) = -0.16**; FDI/GDP (t-1) = -0.15**; External Debt/GDP (t-1) = 0.01**; Current account/GDP (t-1) = -0.18**; region dummies included; Constant = 2.23***; Χ2 = 42.52.
- Main comparative findings:
  - Growth: if program effects on growth begin in t+1, program countries show substantially stronger growth acceleration than control group, with growth exceeding non-program countries by end of program period; if effects assumed from year t, strong initial growth decline in t can turn effect negative.
  - Inflation: pre-program inflation higher in program countries; disinflation proceeded faster than in control group and ended at similar mid-single-digit inflation.
  - Fiscal balances and debt: fiscal balances in program countries improved substantially faster than in non-program countries; social spending remained broadly unchanged as share of GDP during program period; debt ratios first stabilized then fell below levels in non-program countries.
  - Reserves and external: reserves coverage increased substantially in program countries versus gradual decline in non-program countries; current account balances improved at similar average pace to control group.
  - Robustness: variations in control group methodology have little impact; alternative neighbor counts and matching windows produce similar results.
- Successor program analysis:
  - Only about one in four GRA-supported programs were followed by another program within one year of expiry.
  - Successor programs typically further consolidated gains in growth and fiscal balances; almost half also lowered inflation further; many successor programs were unable to extend external balance gains.

### PRGT-supported programs (LICs) — outcomes and patterns
- Typical goals: address long-term balance of payments problems while supporting growth and development; more gradual adjustment expected than under GRA programs.
- Descriptive outcomes (2002–11):
  - With exception of a decline in debt levels, key variables show no clear trend during and immediately after PRGT programs.
  - After program start: slight upward growth trend; gradual increase in FDI; recovery in private capital flows after initial fall; gradual disinflation to mid-single digits; moderate initial fiscal consolidation; reserves increase gradually; current accounts remained in fairly high deficit.
  - Pronounced trend: drop in government debt ratios, in part due to HIPC and MDRI debt relief (close to 60 percent of countries with PRGT programs saw debt ratios drop thanks to HIPC and MDRI).
- Crisis-era PRGT programs (2008–11):
  - Initial conditions weaker: lower growth, higher inflation, larger fiscal and current account deficits.
  - After program initiation: growth strengthened, inflation fell, fiscal and external balances remained fairly stable, reserves increased; average debt ratios continued to fall largely thanks to debt relief.
  - Some PRGT crisis programs resembled GRA crisis programs in addressing temporary external shock effects.
- Comparator analysis limitations:
  - Control-group methods less suitable for PRGT programs due to frequent periodic Fund involvement and high susceptibility to shocks among LICs.
  - Comparisons to all non-program LICs indicate program countries performed as well as non-program LICs in full and crisis samples.
  - Most pronounced short-term gain from PRGT programs: strongly declining debt burdens.

### Fiscal and external accommodation during the recent crisis and Fund financing
- Many programs provided substantial fiscal accommodation in 2009:
  - Wave 1 AM and EM programs reduced growth of primary spending only gradually, accepting temporary fiscal deterioration to provide stimulus amid weak foreign demand.
  - LICs allowed fiscal deficits to increase temporarily, protecting social and infrastructure expenditure.
  - Overall, fiscal deficits increased more in AM, EM, and LIC programs in 2009 than during past crisis years.
- Some recent programs (notably euro area) included ambitious consolidation beginning in 2010; in at least one case (Greece) growth fell more than expected and debt dynamics worsened relative to projections.
- Fund financing and burden sharing:
  - The 2009 reform of GRA and PRGT facilities enabled scale-up: lending to AMs and EMs about 35 percent higher than otherwise; LIC lending increased from an average of SDR 440 million in five years up to 2008 to SDR 2.5 billion in 2009.
  - Median disbursements in percent of GDP for crisis-start programs broadly in line with past crises for AMs, EMs, and LICs.
  - Share of commitments (selected European countries): Average: IMF 40.7, WB 2.2, EU 51.9, Other 5.3. Country examples: Latvia IMF 23.7, Hungary IMF 60.9, Romania IMF 68.9, Iceland IMF 44.5, Greece IMF 27.3, Ireland IMF 25.9, Portugal IMF 33.9.

### Social spending and social outcomes
- Over 1985-2009, social spending increased faster in program countries, particularly LICs, than in non-program countries:
  - Over a 10-year horizon these increases translated into cumulative rises in education and health spending of 0.4 and 0.3 percentage points of GDP, respectively.
  - In LICs, per capita education and health spending rose at about 4 percent per annum in program countries versus about 2½ percent in LICs without programs.
- Econometric long-term effects on social spending (1985-2009, percent of GDP):
  - Education Spending: Year 1 = 0.22; Year 3 = 0.57; Year 5 = 0.82.
  - Health Spending: Year 1 = 0.27; Year 3 = 0.69; Year 5 = 0.98.
- Interpretation:
  - A 5-year consecutive period of Fund-supported programs would raise education and health spending by 0.6–0.7 percent of GDP by year 3 and by 0.8–1.0 percent of GDP by year 5.
  - No statistically significant effect of Fund-supported programs on social spending found outside LICs.
- Links between social spending and outcomes (cross-country averages 2004-08):
  - Gross secondary enrollment rate: Education spending (percent of GDP) coefficient 1.333**.
  - Under-5 mortality rate: Health spending (percent of GDP) coefficient -5.927***.
- Since 2002, social outcome indicators in developing countries have improved at least as fast under Fund-supported programs as in non-program countries (education intake and measles immunization examples cited).
- Policy implication: improve efficiency and targeting of social spending and public expenditure management to strengthen link between spending and outcomes.

### Selection, estimation strategy, and robustness
- Selection into programs: countries are more likely to request programs after severe declines in growth and/or balance of payments deterioration; political economy variables (political proximity to major shareholders, domestic politics) also matter.
- Methods reviewed in literature: instrumental variables, Heckman selection, matching methods; results across studies remain diverse and sensitive to selection specification and sample periods.
- Probit estimation for program request probability (GRA baseline) used a general-to-specific approach; significant predictors included lagged real GDP growth, ln(nominal GDP per capita), lagged inflation (t-1 and t-2), lagged FDI/GDP, lagged change in external debt/GDP, lagged current account/GDP, and region dummies.
- Probit marginal effects reported exactly:
  - Real GDP Growth (t-1): -0.18***
  - ln(nominal GDP per capita) (t-1): -0.03***
  - Inflation (t-1): 0.20**
  - Inflation (t-2): -0.16**
  - FDI/GDP (t-1): -0.15**
  - External Debt/GDP (t-1): 0.01**
  - Current account/GDP (t-1): -0.18**
  - Constant: 2.23***
  - Χ2: 42.52
  - P Actual (percent): 4.4%
  - P Predicted (percent): 2.7%
  - P Error (percent): -1.7%
- Control-group robustness checks: alternative numbers of neighbors (3 nearest), wider time windows (±2 years), probability cut-offs, and growth-decline matched controls produced little change in main findings.
- Methodological caveats:
  - Constructing counterfactuals is intrinsically uncertain; matching methods require larger samples and may not fully remove bias from unobserved factors.
  - Programs that went off track but were not cancelled remain in sample, possibly biasing results toward underestimating benefits.

### Overall interpretation and policy implications
- Evidence suggests Fund-supported programs generally helped countries stabilize macroeconomic conditions and protect social spending, with notable improvements in inflation, fiscal balances, reserves, and debt trajectories in many cases.
- Growth effects are sensitive to timing assumptions and heterogeneous across programs; stronger medium-term growth is especially important for stabilizing debt in high-debt countries (sensitivity highlighted for euro area programs).
- Fiscal and external accommodation during the recent crisis, enabled in part by the 2009 GRA and PRGT reforms, likely helped mitigate the growth impact of the crisis; however, wave 2 and euro area programs show slower recoveries and elevated debt risks.
- Policy needs emphasized:
  - Strengthen growth to improve debt dynamics, particularly in highly indebted countries.
  - Improve efficiency and targeting of social spending and public expenditure management to translate spending into better social outcomes.
  - Continue careful monitoring of ongoing programs and follow-up assessment, given reliance on projections and heterogeneity of outcomes.

*Source: IMF staff background paper (sections provided).*

### 1. Back-to-Back GRA-Supported Programs ............................................................................23

### 1. Back-to-Back GRA-Supported Programs

### Scope and sample
- Coverage period: 2002-11.
- Sample definition: Fund-supported programs initiated during March 2002 - September 2011.
- Sample composition for GRA-supported programs: 67 programs in 44 countries.
- Crisis program subset: 37 programs started on or after September 15, 2008 (categorized as “crisis programs”).
- Exclusions noted: Non-upper-credit tranche financial support under EPCA, ENDA, RCF; staff-monitored programs (SMP); FCL and PCL programs.

### Objectives and analytical approach
- Primary objectives:
  - For GRA-supported programs: achieve macroeconomic and external stability; reduce current account deficits to sustainable levels and reconstitute reserves consistent with Fund and other official financing.
  - For PRGT-supported programs: promote growth and poverty reduction while maintaining external viability; stabilization less often the primary issue.
- Multi-pronged assessment strategy:
  - Descriptive analysis: path of key variables before, during, and after programs.
  - Threshold analysis: share of program countries achieving satisfactory levels for growth, inflation, and fiscal balances.
  - Debt dynamics analysis: whether programs stabilize or reduce external and public debt in the medium term.
  - Control-group comparisons: evolution of macroeconomic variables versus similar non-program countries.
  - Succession assessment: need for successor programs within a short span of time.
- Data sources: most data from the September 2011 release of the World Economic Outlook.

### Key findings: macroeconomic and social outcomes
- General assessment:
  - Most Fund-supported programs in the sample appear to have helped member countries improve macroeconomic and social conditions, particularly where programs included substantial fiscal and external accommodation during the recent global crisis.
- Stabilization and resolution of pre-existing difficulties:
  - In a large majority of GRA- and PRGT-supported programs, appropriate stabilization was achieved and pre-existing difficulties were largely resolved.
- Comparative improvements (GRA-supported programs):
  - Economic conditions in GRA-supported program countries improved often by more than in control group countries, particularly for inflation, fiscal balances, and international reserves.
  - Social spending in GRA-supported programs was largely safeguarded (finding pertains to programs started during 2002-11).
- PRGT-supported program outcomes:
  - On average, PRGT-supported programs do not show a pronounced improvement across key macroeconomic variables over the course of a typical program period, aside from improvements in debt ratios.
  - PRGT programs focus on resolving long-term balance of payments problems while supporting growth and poverty reduction.
  - Over the longer period 1985-2009, PRGT-supported programs helped raise social spending, with initial evidence that higher social spending aided social outcomes.
- Crisis response and accommodation:
  - Fiscal and external accommodation in many program countries during the recent global economic crisis was somewhat larger than in previous crisis periods and likely helped many countries weather the crisis better.
  - The 2009 reform of GRA and PRGT lending facilities facilitated the Fund providing substantial parts of financing needed for that accommodation.

### Risks, heterogeneity, and limitations
- Heterogeneous outcomes:
  - Some recent program countries, notably in the euro area and some Caribbean countries, faced weak growth and challenging public debt dynamics.
  - In Greece, Portugal, and Ireland during 2009-10, fiscal space vanished rapidly due to high starting debt levels, output contraction reducing revenue, and/or bank restructuring adding to debt; data revisions and credit crunch effects also contributed to worse-than-projected debt dynamics in Greece.
  - Fund-supported programs initiated in 2010-11 aimed at fiscal consolidation and structural reforms; in at least one case economic activity fell and the debt burden rose more than projected.
- Reliance on projections:
  - Analysis of recent programs relies in part on projected outcomes for 2011 and later.
  - Appendix III notes that averages including and excluding projections generally do not change dramatically and BP2 finds no evidence of bias in macroeconomic projections during the sample period.
  - Full assessment of ongoing programs (for example, those in the euro area) requires future follow-up as outcomes may yet surprise in either direction.
- Methodological challenges:
  - Constructing counterfactuals to identify program effects is intrinsically uncertain; no consensus exists on the causal effects of Fund-supported programs.
  - Control-group methodology applied for GRA-supported programs is not applicable to PRGT-supported programs.
  - Programs that “went off track” but were not cancelled remain in the sample; this may bias results toward underestimating program benefits.

### Structure of the paper (sections covered)
- Section II: Outcomes of GRA-supported programs.
- Section III: Outcomes of PRGT-supported programs.
- Section IV: Fiscal and external accommodation in recent crisis programs.
- Section V: Impact of programs on social spending and social outcomes.
- Appendices cover previous studies, conditionality reviews, methodological details, and the impact of the 2009 reform of Fund facilities.

*Source: IMF staff background paper (sections provided).*

### 11.      The analysis defines pre-program, program, and post-program periods annually

### 11.      The analysis defines pre-program, program, and post-program periods annually

### Methodology and timing assumptions
- Period t denotes the year of program start.
- For GRA-supported programs:
  - Pre-program period: years t-2 and t-1.
  - Program period: years t to t+2.
  - Post-program period: years t+3 and t+4.
- Assumes programs affect most variables already in the year of program start, but acknowledges that:
  - Programs can start at any time in the year and policy effects take time to be implemented and show effect.
  - Slow-moving variables (e.g., GDP growth) might show small effects in the year of program start.
- The analysis considers alternative assumptions about the timing of program effects on growth (either in the year of program start or only in the following year).
- Note: WEO projections used (September 2011 release) are less likely to be revised substantially for 2011 (incorporate observations for January – August 2011); projections for 2012 and later could be revised more substantially.

### Descriptive analysis: average outcomes across programs (2002–11)
- Prior to seeking Fund assistance (typical program country experienced):
  - Sharp growth slowdown and some increase in unemployment.
  - Increasing inflation in the high single digits.
  - Fiscal deterioration and a rising debt burden.
  - Deterioration of the current account.
- After receiving Fund support (on average):
  - Growth generally rebounded.
  - Unemployment and inflation declined gradually.
  - Fiscal balances improved with social spending largely safeguarded (social spending series: WEO series code CGES; consists of social security benefits, social assistance benefits, and employer social benefits).
  - Debt burden fell.
  - Current account improved.
  - Reserve coverage also improved (reserves include Fund credit; reserves increase also when Fund credit is excluded, albeit more gradually).
- Programs preceded by deep recessions:
  - Typically saw a quick growth rebound with gradual fiscal consolidation.
  - Growth rebounded already in the second program year (t+1) and approached the program country average by end of post-program period.
  - Unemployment increased initially but typically started to decline during the program period.
  - Fiscal consolidation typically started in the second program year (t+1).
  - Social spending was largely protected.
  - Debt levels typically rose throughout program and post-program periods but in most cases eventually stabilized at below 60 percent of GDP.
- Data notes:
  - Most data used from WEO October/September 2011 releases.
  - Data availability for government social spending and unemployment is limited to 64 and 78 percent of the sample, respectively.
  - One program omitted due to data issues: the 2002 EFF for Serbia and Montenegro.

### Crisis programs (2008–11): aggregate and subgroup patterns
- Crisis program countries (on average) prior to program start:
  - Faced an even sharper growth slowdown than other program countries.
  - Showed substantially weaker fiscal and current account balances with rapidly growing government debt.
  - Many experienced a sharp decline in private capital inflows (characteristic of capital account crises).
- After program start (on average for crisis programs):
  - Growth recovered quickly.
  - Inflation fell.
  - Fiscal balances improved while social spending was largely safeguarded.
  - Reserves increased.
  - Current account balances improved.
  - Debt ratios stabilized at a high level.
  - Private capital inflows continued to decline overall, indicating longer-term challenges in some countries.
- Caution: assessment of post-program outcomes for recent crisis programs relies more on projected outcomes.
- Heterogeneity across crisis programs:
  - Chronological split:
    - "Wave 1" (2008–mid 2009): generally favorable developments (with some limitations).
    - "Wave 2" (late 2009 on): more challenging developments.
  - Wave 2 countries faced more difficult initial conditions; in many, the crisis created or exacerbated fiscal sustainability challenges.
  - Euro area program countries (Greece, Ireland and Portugal) are expected to see growth below the GRA-supported program country average and elevated unemployment for some time; public debt in euro area countries is expected to remain well above the program country average for a number of years.
- Definitions:
  - Wave 1 countries listed include 20 economies (e.g., Armenia, Iceland, Latvia, Romania, Ukraine, etc.).
  - Wave 2 countries listed include 13 economies (e.g., Greece, Ireland, Portugal, Jamaica, Maldives, etc.).

### Threshold analysis (static assessment of stabilization)
- Static thresholds used to judge outcomes three years after program start:
  - Growth: above 3 percent per year.
  - Fiscal deficit: below 5 percent of GDP.
  - Inflation: below 10 percent per year.
- Rationale and limitations:
  - Thresholds are one-size-fits-all and neglect country- and program-specific circumstances.
  - Growth threshold of 3 percent implies positive per capita income growth in most countries.
  - Fiscal threshold of -5 percent of GDP chosen as likely not to jeopardize sustainability in a typical emerging market experiencing 3 percent real GDP growth and moderate inflation from a sustainable debt position.
  - Inflation threshold of 10 percent reflects evidence that inflation in excess of about 10 percent hinders growth in developing countries; for advanced markets, a lower threshold would be preferable.
  - No uniform external equilibrium threshold applied.
- Findings:
  - By the third year after program initialization, a large majority of program countries:
    - Had growth above 3 percent.
    - Had inflation below 10 percent.
    - Had fiscal deficits below 5 percent of GDP.
  - Program countries with pre-existing weaknesses (defined as being among the weakest quartile in the year before program initiation) also usually exceeded the static thresholds, with shares in the 70 – 80 percent range reaching threshold values.
  - For GRA-supported programs during 2002-11, the weakest-quartile criteria were:
    - Growth below 1.2 percent.
    - Inflation above 10.8 percent.
    - Fiscal balance weaker than -6.2 percent of GDP.
  - Appendix IV analysis: by the third year after program start most programs with pre-existing weaknesses performed almost as well as program countries without such weaknesses.

### Debt dynamics analysis (debt-stabilizing balances)
- Approach:
  - Assess whether programs left (or are projected to leave) countries with stable or declining debt burdens by comparing actual balances to debt-stabilizing balances.
  - Left-hand panel of Figure 5: plots public and private external debt (post-program average of t+3 and t+4) on the horizontal axis versus the difference between the actual and the debt-stabilizing current account balance in the post-program period on the vertical axis.
  - Right-hand panel: analogous plot for fiscal debt and the actual versus debt-stabilizing fiscal balances.
  - Data are WEO observations (or WEO projections for 2011 and later) except medium-term growth, which is uniformly assumed equal to that observed during the ten years preceding the program.
  - Programs above the horizontal zero line have current account or fiscal balances higher than needed to stabilize debt in relation to GDP and thus reduce their debt burdens over time; programs below the line see their debt burdens rise.
  - A positive slope of the regression line reflects faster debt reduction at higher levels of debt.
- Data and plotting notes:
  - Sources: Fund, MONA and WEO databases; and Fund staff estimates.
  - In Figure 5 plotting:
    - Blue denotes non-crisis programs, green denotes wave 1 crisis programs, red denotes wave 2 crisis programs.
    - Euro area countries denoted with a triangle, non-euro area countries denoted with a circle.
    - Iraq programs dropped due to data availability.
    - The Ireland program is not displayed in the current account charts because it is an outlier (Coordinates: 944; 82).

*Source: WEO October 2011; IMF staff analysis as presented in the chapter text.*

### 20.      Findings are mixed but suggest that programs generally aim at helping countries

### _061812c - 20.      Findings are mixed but suggest that programs generally aim at helping countries

### Debt dynamics and program aims
- Programs generally aim at helping countries reduce high levels of debt over time.
- For countries with high debt (exceeding 100 percent of GDP) most programs aim to put countries on track to reduce their debt (these programs lie above the horizontal axis at zero).
- Upward sloping regression lines in Figure 5 indicate programs aimed at having more highly indebted countries reduce their debt quicker than other countries.
- In addition to macroeconomic policies focused on stabilizing and reducing debt, debt restructuring was part of the program strategy in several countries.
  - Explicit examples cited: Antigua and Barbuda, Dominica, Jamaica, Maldives, Seychelles and St. Kitts and Nevis.
  - Note: In March 2012 private creditors agreed to write down 75 percent of their Greek government bond holdings (outside the period under examination).

### Sensitivity to growth assumptions
- Results are sensitive to growth assumptions.
- Assumption used: medium-term growth equals that observed during the ten years preceding the program.
  - This assumption may be optimistic, particularly for recent crisis programs because financial crises raise the risk of a sustained period of lower growth.
- Varying the growth assumption by assuming medium-term growth to equal that achieved during (or projected for) the immediate post-program leads to a deterioration of debt dynamics in a number of countries with high debt (Figure 6).
  - This deterioration is particularly evident for the euro area programs.
- Implication: importance of strengthening growth in these countries over the medium term.
- Footnote on debt-stabilizing balances: computed as –d*g/(1+g), where d is the post-program public and private external debt stock or the public debt stock (in percent of GDP); and g is the growth rate of the U.S. dollar value of GDP (in percent per year). Using nominal GDP growth in local currency terms for public debt analysis instead does not change the overall picture for GRA-supported programs and improves it for PRGT-supported programs (with the slope turning positive, mainly owing to large depreciations against the U.S. dollar in a few countries with high public debt).

### Comparator analysis and counterfactuals
- The effects of Fund-supported programs are assessed relative to a counterfactual constructed via "control groups" of non-program countries with similar probability to request and obtain a Fund-supported program.
- Propensity to request a program was estimated econometrically for program and non-program countries.
- For each program initialization, a baseline control group was established by choosing the five non-program countries whose probability of requesting a program in that year was as close as possible to the program country.
- Several alternative control groups were assembled, including one based on similar pre-program growth decline as seen in program countries.
- Strengths of the control group approach:
  - Fairly straightforward.
  - Allows comparisons across many variables.
- Weaknesses:
  - Implicit assumption that for countries with similar estimated probabilities, the request decision is not correlated with any omitted variable that might influence future paths of variables of interest — a strong assumption.

### Comparative macroeconomic outcomes (GRA-supported programs, 2002-11)
- Overall suggestion: programs helped countries lower inflation, fiscal deficits and debt, and strengthen reserves; growth effects are uncertain.
- Growth, capital flows, and inflation:
  - If programs affected growth only from the first year after program start (t+1), programs had a substantial positive effect on output.
  - Compared to baseline control group countries, program countries saw a substantially stronger growth acceleration starting in t+1, and growth exceeded that in non-program countries by the end of the program period.
  - Larger capital inflows in program countries may have helped the better growth performance.
  - If programs affected growth already in the year of program start, the strong growth decline in this year turns the above positive growth effect into an overall negative one.
  - Pre-program inflation was higher in program countries and disinflation proceeded faster than in control group countries but ended at about the same mid-single digits level of inflation as in control group countries.
  - The moderate pace of disinflation and avoidance of very low inflation rates likely helped avoid unnecessary output costs of stabilization.
- Fiscal balances and debt:
  - Fiscal balances in program countries improved substantially faster than in non-program countries.
  - Despite strong fiscal improvement under programs, social spending remained broadly unchanged as a share of GDP during the program period.
  - The fiscal improvement during the program therefore did not rely on cuts in social spending.
  - Debt ratios in program countries first stabilized and then fell to below the level in non-program countries.
- Current account, reserves, and exchange rates:
  - Current account balances in program countries improved at a similar average pace as in control group countries.
  - Reserves coverage increased substantially in program countries, compared to a gradual decline in non-program countries, suggesting programs help build buffers against future external shocks.
  - Program effects on real effective exchange rates are small.
- Robustness:
  - Variations in control group methodologies have little impact on these findings (Appendix V).
  - Varying the number of control group countries in the probability matching procedure makes little difference.

### Crisis-era programs (2008-11)
- Findings for programs started during the recent global economic crisis are similar to those for the full sample.
- Main difference: current account improvement in crisis program countries was somewhat faster than in control group countries.

### Successor program analysis
- Only about one in four GRA-supported programs were followed by another program within one year of expiry of the initial program.
  - Interpretation: majority of programs were successful in resolving the issues they were meant to address.
- Successor programs typically further consolidated gains made under initial programs:
  - After initial programs had achieved improvements in growth, inflation, current account balances and fiscal balances, the majority of successor programs achieved further progress on growth and fiscal balances (Table 1).
  - Almost half of successor programs also succeeded in lowering inflation further.
  - Many successor programs were unable to extend previous gains on external balances.

### PRGT-supported programs (LICs) — sample and context
- Sample: 83 programs in 54 LICs, beginning with the March 2002 PRGF-supported program for Cote d’Ivoire and ending with the June 2011 ECF-supported program for the Kyrgyz Republic.
- One third of the sample (28 programs) were categorized as "crisis programs" starting on or after September 15, 2008.
- Timing assumptions:
  - Programs assumed to affect growth either in the year of program start or the following year, and all other variables in the year of program start.
  - Program period for PRGT-supported programs taken to last one year longer than for GRA analysis.
  - For PRGT programs: pre-program period = t-2 and t-1; program period = t to t+3; post-program period = t+4 and t+5.

### Goals and observed outcomes of PRGT-supported programs
- PRGT-supported programs typically aim at addressing long-term balance of payments problems while supporting countries’ growth and development objectives (PRGF/ECFs); more gradual adjustment is expected compared with GRA-supported programs.
- In PSIs, countries may have already achieved a degree of stabilization; further fiscal and current account adjustment may not be desirable and an increase in fiscal and current account deficits may be possible or necessary to support higher public and private investment.
- Consistency with other research:
  - Fund research (IMF 2009a, replicated in section V) suggests LICs with longer-term program engagement over the past two decades saw significant improvement in growth and other macro aggregates.
  - Similar findings for fragile states (IMF 2011).
  - Other work suggests most LIC programs provided room for a counter-cyclical fiscal response during the recent global crisis, with spending continuing to rise in 2009.
  - Many LIC programs maintained social and infrastructure expenditure in absolute terms, changing the structure of spending in favor of these items during the crisis (IMF 2009b and 2010).
  - BP2 assesses LIC programs during 2006-11 and finds that initial projections at program start for growth, inflation, fiscal and current account balances, and reserves do not show optimistic bias; on the whole these programs met their macroeconomic objectives well.
- Descriptive outcomes (Figure 9):
  - With the exception of a decline in debt levels, key variables do not show clear trends during and immediately after PRGT-supported programs.
  - Prior to program start LICs tended to see a generally less pronounced deterioration in key macroeconomic variables than emerging market and advanced countries that request Fund support.
  - Following program start:
    - Slight upward trend in growth.
    - Gradual increase in FDI.
    - Recovery in private capital flows following an initial fall.
    - Fairly gradual disinflation to the mid-single digits on average.
    - Moderate initial fiscal consolidation that offsets previous deterioration.
    - Reserves increase gradually, helping to rebuild buffers.
    - Current accounts remained in a fairly high deficit.
  - Pronounced trend: drop in government debt ratios, thanks in part to HIPC and MDRI debt relief.
  - Outcomes vary substantially across PRGT-supported programs and include more extreme observations compared to GRA-supported programs.

*Italic source: _061812c - 20.      Findings are mixed but suggest that programs generally aim at helping countries*

### 34.      The lack of clear trends in key variables within the span of a typical program

### _061812c - 34.      The lack of clear trends in key variables within the span of a typical program

### A. Lack of clear medium-term trends across LIC programs
- About 60 percent of LICs had a Fund-supported program during at least half of the period 2002-11.
- Many LICs face longer-term balance of payments needs and therefore receive sustained Fund support, including during calmer times to support investment and growth.
- Implication: A universal trend towards reduced current account and fiscal deficits cannot be assumed in the medium term.
- Previous analysis suggests that over longer time spans, countries with Fund-supported programs see larger improvements in economic performance than others.

### B. Macroeconomic outcomes of PRGT-supported crisis programs (2008–11)
- Overall pattern for PRGT-supported crisis programs initiated in the recent crisis:
  - Initial growth was weaker on average.
  - Inflation was higher initially.
  - Fiscal and current account deficits were larger initially than in the larger period 2002-11.
  - After program initiation: growth strengthened, inflation fell, fiscal and external balances remained fairly stable, and international reserves increased.
  - Average debt ratios continued to fall largely thanks to debt relief.
- Interpretation: Some PRGT-supported crisis programs resembled GRA-supported programs in aiming to resolve temporary difficulties caused by an external shock (the global crisis).

### C. Threshold analysis — performance relative to policy-relevant benchmarks
- By the fourth year after program initialization, outcomes in most cases were:
  - Fiscal deficits below 5 percent of GDP.
  - Inflation below 10 percent.
  - Growth above 3 percent.
- Benchmarks and context:
  - Growth threshold set at 3 percent (implies positive per capita income growth in most countries).
  - Fiscal threshold set at -5 percent of GDP (consistent with sustainability in a typical LIC experiencing ~3 percent real GDP growth and moderate inflation, from a sustainable debt position).
  - Inflation threshold set at 10 percent (inflation in excess of about 10 percent hinders growth in developing countries).
- Cross-sample medians during 2002-11:
  - Median annual real GDP growth in LICs: 5.0 percent.
  - Median annual real GDP growth in emerging and advanced countries excluding the G8: 4.2 percent.
  - Median fiscal deficits: LICs 2.4 percent of GDP; other countries 1.8 percent of GDP.
  - Median inflation: LICs 6.7 percent per year; other countries 3.9 percent per year.
- Programs with pre-existing weaknesses generally performed well against corresponding thresholds.
  - Pre-existing weakness criteria for PRGT-supported programs during 2002-11:
    - Growth below 2.4 percent per year.
    - Inflation above 10.1 percent.
    - Fiscal balance weaker than -5.0 percent of GDP.

### D. Debt dynamics in PRGT-eligible countries
- Improvements in debt sustainability relied in part on debt relief through HIPC and MDRI:
  - Close to 60 percent of countries with a PRGT-supported program saw their debt ratios drop thanks to HIPC and MDRI initiatives.
- Many PRGT-supported programs initiated during 2002-11 did not require medium-term reductions in external and public debt through fiscal and/or external adjustment (i.e., programs appear below zero in Figures 12 and 13).
- Explanation and caveats:
  - Widespread debt relief and anticipation of relief likely influenced program design.
  - Some LICs temporarily scaled up fiscal spending to remove infrastructure bottlenecks.
  - Results are sensitive to medium-term growth assumptions.
  - Data include observations both before and after debt relief; several high initial debt-ratio countries (including post-conflict countries such as Burundi and Sierra Leone) saw debt decline in follow-up arrangements.

### E. Comparator analysis — program vs. non-program LICs
- Control-group methods less suitable for PRGT-supported programs:
  - High incidence of periodic Fund involvement makes many countries ineligible to serve as non-program controls for several years, limiting counterfactual construction.
  - Larger-than-average susceptibility of LICs to shocks complicates assessment of program effects.
- Comparisons to all non-program LICs indicate:
  - Countries under PRGT-supported programs performed as well as non-program LICs in both the full sample and the crisis-period sample.
  - Macroeconomic variable paths are sometimes less smooth in program countries, but improvements over the entire program and post-program period are generally as strong as in non-program countries.
  - Capital inflows fall temporarily in program countries but recover toward the end of the program period.
  - The most pronounced short-term gain from programs is strongly declining debt burdens.

### F. Fiscal and external accommodation in recent crisis programs (context and patterns)
- Many programs provided substantial fiscal accommodation when the crisis hit:
  - “Wave 1” AM and EM programs reduced growth of primary spending only gradually, unlike earlier crises when spending cuts were swift and deep.
  - These countries accepted substantial temporary fiscal deterioration, providing stimulus amid weak foreign demand.
  - LICs also allowed fiscal deficits to increase temporarily, reflecting protection of social and infrastructure expenditure.
  - Overall, fiscal deficits increased more in AM, EM, and LIC programs in 2009 than during past crisis years.
- Some recent programs (notably in the euro area) included ambitious fiscal consolidation:
  - Wave 2 programs cut fiscal deficits sharply starting in 2010.
  - In several euro area cases, consolidation was paired with growth-enhancing structural reforms to reverse unfavorable debt dynamics.
  - In at least one case (Greece), growth fell more than expected and debt dynamics evolved less favorably than hoped, with macroeconomic and fiscal data revisions and a credit crunch contributing to weaker-than-projected outcomes.
  - Going forward, generating growth will be key for stabilizing debt; the speed and effectiveness of planned structural reforms remain uncertain.
- External accommodation:
  - Many programs allowed for substantial external accommodation.
  - Comparison of current account balances in 2009 and 2007 shows that in the recent crisis:
    - Program AMs and EMs tended to show somewhat smaller current account adjustment than during previous crises.
    - Current account adjustment in LICs proceeded more gradually than in the past.

*Source: IMF staff analysis (excerpts from section on PRGT-supported programs and crisis-period comparisons).*

### 44.      So far the evidence suggests that the overall greater fiscal and external

### 44. So far the evidence suggests that the overall greater fiscal and external accommodation than in the past may have helped minimize the growth impact of the recent crisis

### Growth and recovery in program and non-program countries
- Evidence indicates that greater fiscal and external accommodation may have helped minimize the growth impact of the recent crisis.
- In program AMs and EMs the growth decline was less pronounced than in previous crises; in LICs the growth decline was similar to previous crises but started from a higher pre-crisis level, leaving LIC growth higher than in past crises.
- Most program countries have recovered well, yielding an overall smaller and less painful growth impact than in the past.
- Developments are less favorable in wave 2 countries, particularly in euro area programs, where recovery has been noticeably slower, with growth in 2012 projected to remain substantially below pre-crisis levels.

### Debt dynamics in crisis programs
- The evolution of government debt appears manageable in most crisis program countries where a solid recovery of growth was achieved, with some exceptions.
- In AM and EM program countries:
  - Debt developments are mixed.
  - Debt loads have not increased much and have started to stabilize in wave 1 countries.
  - Debt ratios have grown substantially in wave 2 countries, similar to developments seen in past crises.
  - Debt ratios have been surging particularly in the euro area program countries.
- In program LICs:
  - Even after stripping out the impact of debt relief, debt ratios increased only little and have since stabilized.

### Fund financing and burden sharing
- The Fund contributed substantial parts of the financing necessary for external accommodation.
- Although the number of countries seeking Fund assistance grew rapidly during the recent crisis period, median disbursements in relation to GDP were broadly comparable to those provided during previous crises.
- In relation to LICs’ financing needs, Fund disbursements tended to be somewhat greater than in past crises.
- Substantial variation across programs: in recent European programs the Fund provided more than a half of commitments for some EMs, while providing a third or less for AMs.
- Table 2 (selected European countries — Share of Commitments, in Percent):
  - Latvia: IMF 23.7, WB 5.6, EU 69.3, Other 1.4
  - Hungary: IMF 60.9, WB 5.2, EU 33.9, Other 0.0
  - Romania: IMF 68.9, WB 4.2, EU 26.9, Other 0.0
  - Iceland: IMF 44.5, WB 0.0, EU 40.7, Other 14.7
  - Greece: IMF 27.3, WB 0.0, EU 72.7, Other 0.0
  - Ireland: IMF 25.9, WB 0.0, EU 53.3, Other 20.7
  - Portugal: IMF 33.9, WB 0.0, EU 66.1, Other 0.0
  - Average: IMF 40.7, WB 2.2, EU 51.9, Other 5.3

### GRA and PRGT reforms and lending scale-up
- The reform of the GRA and PRGT lending facilities in 2009 enabled the Fund to scale up its financing to hard-hit countries.
- The reforms allowed lending to AMs and EMs to be about 35 percent higher than it would have been otherwise.
- The reform helped lending to LICs to increase from an average of SDR 440 million in the five years up to 2008 to SDR 2.5 billion in 2009.
- Median Fund disbursements in percent of GDP for programs started during the recent global crisis were broadly in line with past crises for AMs, EMs, and LICs.

### Social spending and social outcomes (1985–2009; and 2002–09 analyses)
- Poverty reduction and protection of social spending are core objectives of Fund-supported programs, particularly for LICs (PRGF from 1999; MDRI in 2005; indicative social targets/floors on priority spending since 2009).
- During 1985-2009, social spending increased faster in countries with programs, particularly in LICs, than in non-program countries:
  - Over a 10-year horizon these increases translated into a cumulative rise in education and health spending of 0.4 and 0.3 percentage points of GDP, respectively.
  - In LICs, per capita education and health spending rose at about 4 percent per annum in LIC program countries, compared to about 2½ percent in LICs without programs.
- Econometric results (Table 3) — Long-Term Effects of Fund-Supported Programs on Social Spending, 1985-2009 (in percent of GDP):
  - Education Spending: Year 1 = 0.22; Year 3 = 0.57; Year 5 = 0.82
  - Health Spending: Year 1 = 0.27; Year 3 = 0.69; Year 5 = 0.98
- Interpretation of econometric results:
  - In the first year, Fund-supported programs raise education and health spending by 0.22 percent of GDP and 0.27 percent of GDP, respectively, in LICs.
  - A 5-year consecutive period of Fund-supported programs would raise education and health spending by 0.6–0.7 percent of GDP, respectively, by the third year after the program started, and by 0.8–1 percent of GDP by the fifth year.
  - Programs also raise education and health spending as a share of total government outlays by about 1 and ½ percent in the first year, respectively.
  - No statistically significant effect of Fund-supported programs on social spending was found outside of LICs.
- Link between social spending and social indicators (Table 4; cross-country averages 2004-08):
  - Dependent variable: Gross secondary enrollment rate
    - Education spending (percent of GDP): 1.333** (0.672)
    - GDP per capita (PPP GDP, in log): 21.11*** (1.266)
    - Constant: -116.3*** (10.38)
    - Number of obs.: 117
    - R-squared: 0.698
  - Dependent variable: Under-5 mortality rate (per 1000)
    - Health spending (percent of GDP): -5.927*** (1.878)
    - GDP per capita (PPP GDP, in log): -36.17*** (3.133)
    - Constant: 379.0*** (26.42)
    - Number of obs.: 139
    - R-squared: 0.589
  - Note: ***/** indicate significance levels of 99 percent and 95 percent, respectively.
- Since 2002, social outcome indicators in developing countries have improved at least as fast under Fund-supported programs as in non-program countries:
  - Education outcomes (gross intake rate in first grade) and education spending: program countries have overtaken non-program countries after 2008.
  - Health outcomes (measles immunization for children 12–23 months) and health spending: health spending grew faster and health outcomes improved more in program countries than in non-program countries.
- The link between social spending and outcomes is complex:
  - Social spending remains pro-rich in many developing countries.
  - Lack of proper incentives for social service providers may weaken the link between spending and outcomes.
  - Country examples:
    - Burkina Faso: education spending increased mostly during the second PRGF and primary school completion rate improved.
    - Uganda: education spending was stagnant under the PSI, yet primary school completion improved significantly (possibly reflecting better allocation of resources and emergence of private providers).

### Policy implications and needs
- Efforts to improve the efficiency and targeting of social spending are needed to ensure faster improvements in social outcomes.
- Improvements in public expenditure management can help ensure that funds are spent as intended and improve the effectiveness of social spending.

### Literature and previous studies on program outcomes
- Numerous studies have examined macroeconomic outcomes of Fund-supported programs; methods evolved from before/after comparisons to econometric methods controlling for selection.
- Early studies (reviewed by Ghosh et al. 2005) generally found mixed effects on growth, some positive short-term effects and some negative; balance of payments outcomes generally improved and inflation declined during programs.

*Source: IMF staff analysis (excerpts from the provided chapter text).*

### 58.      Recent focus on selection. While the issue of selection into Fund-supported programs

### Recent focus on selection. While the issue of selection into Fund-supported programs

### Nature of selection into Fund-supported programs
- Selection can take many forms: countries in difficult economic situations (for example declining growth, worsening current account balances, and/or lower capital inflows) are more likely to enter Fund-supported programs; political economy factors (political or economic proximity to countries with more decision making power at the Fund, or domestic political factors) can also drive participation.
- Recent studies generally find that a country requests a Fund-supported program after experiencing a severe decline in growth and/or a strong deterioration in the balance of payments.
- Among political economy variables, studies generally found that political proximity to the United States and major European countries, as well as domestic political factors, matter for the decision to enter Fund-supported programs.

### Methods used in recent studies to account for selection
- Instrumental variables
  - Barro and Lee (2005) used an instrumental variable approach to measure outcomes of 156 programs during 1970-2000.
  - In the first selection step they found growth of GDP per capita and the level of net international reserves in relation to imports to be statistically significant explanatory macroeconomic variables of program participation.
  - They also observed political economy variables, including political proximity to the United States and major European countries as indicated by intensity of bilateral trade (and to a lesser extent an indicator of UN voting patterns), to be significant.
  - Using these significant variables as instruments in the second step, Barro and Lee concluded that Fund-supported programs depressed growth and had no statistically significant impact on investment, inflation, or government consumption.
- Heckman selection
  - Przeworski and Vreeland (2000) measured outcomes in 226 programs during 1951-1990.
  - They found participation was determined by the need for a loan following an economic crisis and domestic political factors (the need to impose discipline on policies from outside).
  - They observed that Fund-supported programs lowered growth. Other studies (Easterly (2005); Dreher (2006); Vreeland (2003)) found similar effects using more recent data.
  - Bas and Stone (2011) argued there was adverse selection into Fund-supported programs with countries most likely interested in participating the least likely to have good growth outcomes; accounting for adverse selection, they noted positive effects of Fund-supported programs on growth.
- Matching methods
  - Hutchison (2004) measured outcomes using different matching methods during 1975-1997 and found positive effects on growth when Fund-supported programs were compared with appropriate controls.
  - Hardoy (2003) used matching methods and data for 1970-1990 and observed no effect on growth.
  - Atoyan and Conway (2005) investigated outcomes of 95 programs during 1993-2002 using both instrumental variable and matching methods; in the selection step they found statistically significant effects for GDP growth and change in growth, the current account balance, and previous program participation. On outcomes, they noted programs improved fiscal and current account balances as well as growth and found similar results using different methods.

### Overall assessment of selection and program impact
- Selection matters, but impact on outcomes remains inconclusive.
  - The wide range of results across recent academic studies reinforces that the impact of Fund-supported programs on macroeconomic outcomes is not well understood despite efforts to account for selection.
  - Results appear sensitive to the specification of the selection process.
  - Diversity in results may also be driven by different sample periods used (with a number of studies relying on data that pre-dates the sample period in this paper) and the type of programs included in the sample.

### Conclusions from previous Reviews of Conditionality (Appendix II)
- Two RoCs over the past two decades studied outcomes of Fund-supported programs: the 1995 review (EBS/94/84) and the 2004 Review.
  - The 1995 review studied outcomes of SBA and EFF Fund-supported programs for first-time users, distinguishing between programs based on the existence and nature of nominal anchors.
  - The 2004 Review investigated outcomes of both GRA and PRGT-supported programs, distinguishing between current account focused programs and capital account focused programs; programs for countries in transition were analyzed separately.
  - Neither review attempted to establish a counterfactual; their results are narrative and not fully comparable to the 2011 RoC conditionality analysis.
- GRA-supported programs (1995 and 2004 reviews)
  - Both reviews observed a drop in real GDP growth subsequent to program initialization followed by a recovery.
  - The 1995 review found growth recovered quickly and exceeded pre-program levels within two years; the 2004 review found growth recovered to pre-program levels only after three years.
  - Both reviews noted little impact of programs on inflation.
  - Both found a temporary improvement in the general government fiscal balance at program initialization followed soon thereafter by fiscal deterioration; the 2004 review found fiscal balance returned to pre-program levels only at time t+3.
  - Both observed an increase in net international reserves and an improvement in the current account balance.
- PRGT-supported programs (2004 review)
  - The 2004 RoC found a positive effect on growth and inflation that was sustained throughout the program period.
  - The review noted fiscal and current account balances weakened during programs, possibly reflecting program-induced inflows of foreign financing.
  - Supported by a finding of a positive effect of programs on reserves, the review concluded PRGT-supported programs helped put the balance of payments on a sustainable path.

### Role of program projections and subgroup performance (Appendices III–IV)
- Appendix III: Inclusion of projections in ongoing programs is unlikely to affect analysis substantially.
  - Blue lines show averages including projections while red lines show averages excluding projections; differences are generally of moderate size and outcomes including projections are slightly more favorable in some cases and slightly less favorable in others.
- Appendix IV: Macroeconomic adjustment in programs with pre-existing weaknesses
  - By the third year after program start, program countries with pre-existing weaknesses (low growth, high inflation, or high fiscal deficits) performed almost as well as program countries without such weaknesses.
  - A pre-existing weakness is defined as a value in the worst quartile of program countries at t-1.

### Methodology of control group comparisons (Appendix V)
- Purpose: compare macroeconomic outcomes of program countries with counterfactual outcomes inferred from non-program countries with similar characteristics and economic conditions.
- Four steps to assemble control groups and compare outcomes:
  1. Apply a filter to determine which countries can serve as control group countries for programs started in any given year during 2002-11:
     - Countries that never had a program qualify.
     - Countries that had a program also qualify as long as there is no overlap between their program and the program for which they are to serve as control group country; also no overlap between a larger period including pre-program and post-program periods.
     - Only non-PRGT eligible countries excluding members of the G7 were allowed to enter the control group for GRA-supported programs.
  2. For each member country, estimate the probability of requesting a Fund-supported program in any given year using a set of explanatory variables.
  3. For each program initialization in any country-year, establish a control group by choosing the five non-program countries whose probability of requesting a program in the same year was as close as possible to the probability for the program country (nearest neighbor propensity score matching with five neighbors).
  4. Compare average macroeconomic outcomes in program countries with average outcomes in control group countries.
- Notes and robustness considerations:
  - The control group approach accounts for bias from countries entering programs under adverse economic conditions; it may not fully account for adverse selection based on unobservable country characteristics, which would likely lead to underestimating program benefits.
  - Some non-program countries may appear in multiple control groups; the procedure recognizes this and notes it is unclear whether this is a drawback.
- Estimation details for the selection probability:
  - A panel probit model was used where the dependent binary variable equals one at time t when country i starts a Fund-supported program and zero otherwise; explanatory vector reflects country characteristics and economic conditions.
  - Maximum likelihood estimation used WEO data at annual frequency for the period 2000-11 (including to take account of lags of up to two periods).
  - As noted in the main text, "requesting a program" is used to mean "requesting and obtaining a program."

*Italic: Source — _061812c - 58. Recent focus on selection. While the issue of selection into Fund-supported programs*

### 67.      A general-to specific-estimation strategy was pursued, starting with a large set of

### A general-to specific-estimation strategy was pursued, starting with a large set of

### Estimation strategy and selected variables
- A general-to-specific estimation strategy was pursued, starting with a large set of political economy and macroeconomic variables, including those used by Barro and Lee (2005).
- After step-by-step elimination of statistically insignificant variables, the following variables were found significant for GRA-supported programs:
  - Lagged real GDP growth and lagged log of GDP per capita.
  - Lagged inflation (both t-1 and t-2).
  - Lagged ratio of foreign direct investment to GDP.
  - Lagged change in ratio of external debt to GDP.
  - Lagged ratio of the current account balance to GDP.
  - Region dummies.
- The model was estimated using a population averaged panel probit method. Estimation results are broadly robust to alternative methods, including a random effects probit, a standard probit allowing for within country correlation in the error term and a standard probit.
- Economic and political economy control variables considered (both first and second lags for many) included: inflation, net international reserves (in months of imports), log GDP per capita, log GDP, FDI (as percent of GDP), real GDP growth, government debt (as percent of GDP), government overall balance (as percent of GDP), external debt (as a percentage of GDP), current account balance (as a percent of GDP), trade volume with the United States (as percent of GDP), trade volume with France, Germany, and the United Kingdom (as percent of GDP), a dummy for the presence of a fixed exchange rate regime; voting pattern overlap with the United States, France, Germany, and the United Kingdom in the UN General Assembly; total percentage of economists from the member country; Fund quota share; outstanding Fund credit as a percentage of the total quota; foreign bank claims from the United States (as a percentage of GDP), France, Germany, and the United Kingdom (as a percentage of GDP); direct foreign aid from the United States, France, Germany, and the United Kingdom (as a percentage of GDP); and dummies for a currency union and OECD membership.

### Probit estimation results (Appendix V, Table 1)
- Dependent Variable: Dummy Denoting Initialization of a Fund Supported Program.
- Marginal effects reported. Example interpretation: if real GDP is higher by 1 percentage point, the probability of initializing a GRA program is lower by 0.18 percentage points.
- Estimated coefficients (marginal effects):
  - Real GDP Growth (t-1): -0.18***
  - ln(nominal GDP per capita) (t-1): -0.03***
  - Inflation (t-1): 0.20**
  - Inflation (t-2): -0.16**
  - FDI/GDP (t-1): -0.15**
  - External Debt/GDP (t-1): 0.01**
  - Current account/GDP (t-1): -0.18**
- Region Dummies: Yes
- Constant: 2.23***
- Χ2: 42.52
- P Actual (percent): 4.4%
- P Predicted (percent): 2.7%
- P Error (percent): -1.7%
- Stars denote significance at * (10%) ** (5%) and *** (1%).

### Interpretation of coefficients and substantive findings
- All variables enter with the expected signs:
  - Lower growth and lower FDI inflows, higher inflation, higher external debt, and larger current account deficits are associated with a higher probability that a country will request and obtain a Fund-supported program.
  - Higher GDP per capita is associated with a lower probability of requesting and obtaining a program during the sample period.
  - A lower probability for countries in the Asia-Pacific region to enter Fund-supported programs is noted and may reflect lingering stigma effects from the late 1990s Asian crisis (not shown).

### Robustness checks and alternative control-group specifications
- Robustness checks conducted:
  - Re-introduction of each eliminated control one at a time into the baseline specification: in a model with region dummies, none of the previously eliminated controls were statistically significant; final specification had the highest overall statistical significance (Pearson’s Chi Squared) and accuracy (p-error).
  - Alternative control groups examined:
    - Different number of control group countries: the three non-program countries with the closest propensities of requesting a Fund-supported program in the same year as the program country (3 nearest-neighbor match).
    - Wider time-window: the five non-program countries with the closest propensities in a time window of plus and minus two years around the year of program start.
    - Different probability cut-off: all non-program countries with above-average probabilities of requesting a program in the same year as the program country.
    - Growth-decline matched control: all non-program countries that experienced a cumulative growth decline of at least two percent during the two years leading up to the program start in the program country.
- Data notes in figures:
  - Solid lines indicate program country averages; dashed lines indicate control group country averages.
  - Data availability for government social spending and unemployment is limited to 64 and 78 percent of the sample, respectively.
- Sample size limitation: the dataset contains only 67 GRA-supported programs, which may limit the effectiveness of matching methods.

### Methodological caveats and limitations
- Matching methods require fairly large datasets; with only 67 programs the requirement may be only partially satisfied.
- Potential omitted variable bias: differences in which countries with the same estimated propensity actually requested a program may be due to unobserved factors.
- Identical estimated propensities can arise through different underlying channels (e.g., low growth versus large current account deficit), limiting similarity between matched countries.

### Appendix VI (impact of 2009 reform of Fund facilities) — summary
- Rules used to compute reform impact for GRA-supported programs:
  - Countries that had normal access (up to the normal cumulative access limit of 600 percent of quota) would have had access at the pre-reform normal cumulative access limit (300 percent of quota).
  - Countries that had exceptional access (no limit) would have had the same access unless they had limited access to capital markets, in which case they would have obtained access at the pre-reform normal access limit.
  - Countries with precautionary access would have had the same access.
- Appendix VI, Table 1 reports country-level access comparisons and notes "As of end-September 2011" and "In percent of GDP" where applicable.

*Source: IMF (text excerpt provided).*

### References

### References

### Evaluations of IMF Programs and Program Effects
- Atoyan, R. and P. Conway, 2005, ―Evaluating the Impact of IMF Programs: A Comparison of Matching and Instrumental-Variables Estimation,‖ The Review of International Organizations, Vol. 1 (2), pp. 99-124.
- Barro, R. and J. W. Lee, 2005, ―IMF Programs: Who is Chosen and What are the Effects?‖ Journal of Monetary Economics, Vol. 52 (7), pp. 1245-69.
- Conway, P., 1994, ―IMF Lending Programs: Participation and Impact,‖ Journal of Development Economics, Vol. 45 (2), pp. 365-91.
- Dreher, A., 2006, "IMF and Economic Growth: The Effects of Programs, Loans, and Compliance with Conditionality," World Development, Vol. 34 (5), pp. 769-88.
- Dicks-Mireaux, L., M. Mecagni, and S. Schadler, 2000, ―Evaluating the Effect of IMF Lending to Low-Income Countries,‖ Journal of Development Economics, Vol. 61 (2), pp. 495-526.
- Przeworski, J. A. and J. Vreeland, 2000, ―The Effect of IMF Programs on Economic Growth,‖ Journal of Development Economics, Vol. 62 (2), pp. 215-76.
- Steinwand, M. and R. Stone, 2008, ―The International Monetary Fund: A Review of Recent Evidence,‖ Review of International Organizations, Vol. 3 (2), pp. 123-49.
- Hutchison, M., 2004, Selection Bias and Output Costs in IMF Programs, EPRU Working Paper 04-15, http://www.econ.ku.dk/epru/files/wp/wp-04-15.pdf.
- Barro, R. and J. W. Lee, 2005, ―IMF Programs: Who is Chosen and What are the Effects?‖ Journal of Monetary Economics, Vol. 52 (7), pp. 1245-69.

### Selection, Conditionality, and Endogeneity / Methodological Issues
- Bas, M. and R. Stone., 2011, If Life Sends you Lemons: Adverse Selection and Growth under IMF Programs, http://www.rochester.edu/College/PSC/stone/working_papers/IMFGrowth3.pdf
- Conway, P., 2003, Endogenous IMF Conditionality: Theoretical and Empirical Implications, www.unc.edu/~pconway/dload/ec_conway.pdf.
- Goldstein, M. and P. Montiel, 1986, ―Evaluating Fund Stabilization Programs with Multi-Country Data: Some Methodological Pitfalls,‖ IMF Staff Papers, Vol. 33 (2), pp. 304-44.
- Cerutti, E., 2007, IMF Drawing Programs: Participation Determinants and Forecasting, IMF Working Paper No. 07/152 (Washington: International Monetary Fund).
- Hutchison, M., 2004, Selection Bias and Output Costs in IMF Programs, EPRU Working Paper 04-15, http://www.econ.ku.dk/epru/files/wp/wp-04-15.pdf.
- Hardoy, I., 2003, Effect of IMF Programmes on Growth: A Reappraisal Using the Method of Matching, paper presented at the European Economic Association, Stockholm, August 20-24, 2003.
- Atoyan, R. and P. Conway, 2005, ―Evaluating the Impact of IMF Programs: A Comparison of Matching and Instrumental-Variables Estimation,‖ The Review of International Organizations, Vol. 1 (2), pp. 99-124.

### Social Spending, Health, and Education in IMF-Supported Programs
- Baldacci, E., B. Clements, S. Gupta, and Q. Cui, 2008, ―Social Spending, Human Capital, and Growth in Developing Countries,‖ World Development, Vol. 36, pp. 1317-41.
- Center for Global Development, 2007, ―Report of the Working Group on IMF Programs and Health Spending:  Does the IMF Constrain Health Spending in Poor Countries? Evidence and an Agenda for Action‖ (Washington: Center for Global Development).
- Clements, B., S. Gupta, and M. Nozaki, 2011, What Happens to Social Spending in IMF-Supported Programs? IMF Staff Discussion Note No. 11/15.
- Davoodi, H., E. Tiongson, and S. Asawanuchit, 2010, ―Benefit Incidence of Public Education and Health Spending Worldwide: Evidence from a New Database,‖ Poverty And Public Policy, Vol. 2, p. 5-52.
- Gupta and others, 2000, Social Issues in IMF-Supported Programs, IMF Occasional Paper 191 (Washington: International Monetary Fund).
- Gupta, S., M. Verhoeven and E. Tiongson, 2002, ―The Effectiveness of Government Spending on Education and Health Care in Developing and Transition Economies,‖ European Journal of Political Economy, Vol. 18, pp. 717-37.

### Crisis, Capital Flows, and Currency/Financial Stability
- Cavallo, E. and J. Frankel, 2008, "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Journal of International Money and Finance, Vol. 27 (8), pp. 1430-52.
- Ghosh, A., T. Lane, M. Schulze-Ghattas, A. Bulir, J. Hamann, and A. Mourmouras, 2002, IMF-Supported Programs in Capital Account Crises, IMF Occasional Paper 210 (Washington: International Monetary Fund).
- Dreher, A., and S. Walter, 2010, Does the IMF help or hurt? The effect of IMF programs on the likelihood and outcome of currency crises, KOF Working Paper No. 08-186, http://www.kof.ethz.ch/publications/science/pdf/wp_186.pdf.
- Eichengreen, B., K. Kletzer and A. Mody, 2006. "The IMF in a World of Private Capital Markets," Journal of Banking & Finance, Vol. 30(5), pp. 1335-1357.
- Donovan, D., 1981, ―Real Responses Associated with Exchange-Rate Action in Selected Upper Credit Tranche Stabilization Programs,‖ IMF Staff Papers, Vol. 28, pp. 698-727.
- Donovan, D., 1982, ―Macroeconomic Performance and Adjustment under Fund-Supported Programs: The Experience of the Seventies,‖ IMF Staff Papers, Vol. 29, pp. 171-203.

### IMF Reports, Operational Guidance, and Technical Notes
- IMF, 2004, Fund-supported Programs: Objectives and Outcomes, (Washington: International Monetary Fund), http://www.imf.org/external/np/pdr/2004/eng/object.htm.
- IMF, 2009a, The Fund’s Facilities and Financing Framework for Low-Income Countries—Supplementary Information (Washington: International Monetary Fund), http://www.imf.org/external/np/pp/eng/2009/031309.pdf.
- IMF, 2009b, Creating Policy Space—Responsive Design and Streamlined Conditionality in Recent Low-Income Country Programs (Washington: International Monetary Fund), http://www.imf.org/external/np/pp/eng/2009/091009a.pdf
- IMF, 2009c, Review of Recent Crisis Programs (Washington: International Monetary Fund), http://www.imf.org/external/np/pp/eng/2009/091409.pdf
- IMF, 2009d, The Implications of the Global Financial Crisis for Low-Income Countries (Washington: International Monetary Fund), http://www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdf
- IMF, 2009e, GRA Lending Toolkit and Conditionality-Reform Proposals (Washington: International Monetary Fund), http://www.imf.org/external/np/pp/eng/2009/031309a.pdf
- IMF, 2009f, A New Architecture of Facilities for Low-Income Countries (Washington: International Monetary Fund), www.imf.org/external/np/pp/eng/2009/062609.pdf.
- IMF, 2010, Emerging from the Global Crisis: Macroeconomic Challenges Facing Low-Income Countries (Washington: International Monetary Fund), http://www.imf.org/external/np/pp/eng/2010/100510.pdf
- IMF, 2011, Macroeconomic and Operational Challenges in Countries in Fragile Situations (Washington: International Monetary Fund), www.imf.org/external/np/pp/eng/2011/061511a.pdf

### Fiscal Adjustment, Public Debt, and Debt Restructuring
- Independent Evaluation Office of the International Monetary Fund, 2003, Evaluation Report: Fiscal Adjustment in IMF-Supported Programs (Washington: International Monetary Fund).
- Mauro, P. (editor), 2011, Chipping away at Public Debt: Sources of Failure and Keys to Success in Fiscal Adjustment (London: J. Wiley and Sons, Inc.)
- Escolano, J., 2010, A Practical Guide to Public Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates, Technical Notes and Manuals, Fiscal Affairs Department (Washington: International Monetary Fund).

### Regional and Historical Studies; Other Relevant Works
- Killick, T., 1984, The Quest for Economic Stabilization: The IMF and the Third World, (New York, NY: St. Martin’s).
- Killick, T., M. Malik, and M. Manuel, 1992, ―What Can We Know About the Effects of IMF Programmes?‖ World Economy, Vol. 15, pp. 575-97.
- Loxley, J., 1984, The IMF and the Poorest Countries, Ottawa, Canada: North-South Institute.
- Marchesi, S., 2003, ―Adoption of an IMF Programme and Debt Rescheduling: An Empirical Analysis,‖ Journal of Development Economics, Vol. 70, pp. 403-23.
- Mody, A. and D. Saravia, 2003. Catalyzing Capital Flows: Do IMF-Supported Programs Work as Commitment Devices? IMF Working Papers 03/100 (Washington: International Monetary Fund).
- Pastor, M., 1987, ―The Effects of IMF Programs in the Third World: Debate and Evidence from Latin America,‖ World Development, Vol. 15 (2), 249-262.
- Vreeland, J., 2003, The IMF and Economic Development (New York: Cambridge University Press).
- Zulu, J., and S. Nsouli, 1985, Adjustment Programs in Africa: the Recent Experience, IMF Occasional Paper 34 (Washington: International Monetary Fund).
- Gylfason, T., 1987, Credit Policy and Economic Activity in Developing Countries with IMF Stabilization Programs, Princeton Study in International Finance 60.
- Schadler, S., F. Rozwadowski, S. Tiwari, and D. Robinson, 1993, Economic Adjustment in Low-Income Countries—Experience under the Enhanced Structural Adjustment Facility, IMF Occasional Paper No. 106 (Washington: International Monetary Fund).
- Khan, M., 1990, ―The Macroeconomic Effects of Fund-Supported Adjustment Programs,‖ IMF Staff Papers, Vol. 37 (2), pp. 195-231.
- Khan, M., and M. Knight, 1985, Fund-Supported Programs and Economic Growth, IMF Occasional Paper No. 41 (Washington: International Monetary Fund).
- Khan, M., and S. Sharma, 1993, ―IMF Conditionality and Country Ownership of Adjustment Programs,‖ The World Bank Research Observer, Vol. 18 (2), pp. 227-48.
- Espinoza, R., H. Leon, and A. Prasad (forthcoming), ―When Should We Worry about Inflation?‖ World Bank Economic Review (Washington: The World Bank).
- Evrensel and Kim, 2006, ―Macroeconomic Policies and Participation in IMF Programs,‖ Economic Systems, Vol. 30 (3), pp. 264-281.
- Mody, A. and D. Saravia, 2003. Catalyzing Capital Flows: Do IMF-Supported Programs Work as Commitment Devices? IMF Working Papers 03/100 (Washington: International Monetary Fund).
- Conners, T., 1979, The Apparent Effects of Recent IMF Stabilization Programs, International Finance Discussion Paper No. 135 (Washington: Board of Governors of the Federal Reserve System), http://www.federalreserve.gov/pubs/ifdp/1979/135/ifdp135.pdf.

*Source: _061812c - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_061812c.pdf_