• Global institutions

Global institutions

This paper examines whether and under which circumstances IMF and World Bank projects induce major government crises in borrowing countries. In addition to testing whether the International Financial Institutions’ (IFIs) involvement per se affects the probability of crises, the paper also investigates how the effect of the IFIs depends on the current economic situation in the borrowing country.

The authors argue that the economic situation at the time the project is concluded affects crisis probability. They also find that crises are on an average more likely as a consequence of the Bank and the IMF involvement. The argument is based on the analysis of a sample of more than 90 developing countries over the period 1970-2002. Other findings include:

• structural adjustment arrangements significantly increase the probability of major government crises
• governments face an increasing risk to enter a crisis when they remain under IFI programs when the economy performs better
• The economic conditions present when a new IFI program is initiated, however, do not play a major role for the probability of entering a crisis
• only programs concluded by the current government affect crises, while those inherited by preceding governments do not

The paper also says that, while countries do on average increase the risk of entering a crisis after turning to the IMF and the World Bank, the extent of the crisis depends on how the economy evolves over the period of the IFIs’ involvement. This insight might help governments choosing the right time to exit their programs.

The authors conclude that on average, governments can blame the Bank for unpopular policies when the economy is in rough times. However, once recovery is on its way, governments might consider terminating existing arrangements in order to avoid major government crises.

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