Transcript Slide 1

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
Outline
2
„What did structural adjustment adjust? The association of policies and
growth with repeated IMF and World Bank adjustment loans“ – William
Easterly (2005)
---------------------------------------------------------------------------------I.
II.
III.
IV.
V.
VI.
VII.
VIII.
Historical review & Purpose of SAL
Research question
Approach
Methodology
Results and Criticism
Alternative Approaches
Conclusions
Discussion
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
I. Historical review & Purpose of SAL
SAL: Good Idea, but Bad Guys – or the Other Way Round?
3

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…
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
I. Conditionality of SALs
4
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

"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
I. Evolvment of World Bank Adjustment
Loans
5
Source: World Bank (2001)
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
II. Research Question
6

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
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
III. Approach
7

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
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
1. Claim of SALs: Promote ec. growth & good macroec. policies
8
Informative Statistics
1.Result: disappointing results
But: not yet evidence that SALs were ineffective
How would the outcomes look like without treatment?
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
Perverse incentives through prospect of debt relief ?
9

Heavily Indebted Poor Countries (HIPEC) Initiative
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
2. claim of SALs: Lead to favorable policy reforms
10

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 (crosssection & longtitutional annual data from 1980-99)
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
How to measure macroeconomic distortions ?
11

Dummy DISTORTION =1 if:
 1)
inflation > 40 %
 2) Black Market Premium > 40 %
 3) Real Market Premium > 40 %
 4) Real Interest Rate < -5%
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
Contradiction ?
12
• Fraction of countries with
macroec. distortions declines over
time
• On average proportion of adjustment lending
countries around 50%, independent of the
cumulative # of SALs
• Macroec. distortions persist despite a high # of
SALs
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
Probit regression of DISTORTION on cum. adjustment loans
13


Account for an exogenous time trend
Alternative dummy: composed by the former 4
criteria
+ budget balance/GDP (incl. grants) < -5%
+ current account balance < - 5%

Effect of explanatory variables on the response
probabilty:
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
Has conditionality failed ?
14
• 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
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
Testing for reverse causality
15
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

"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Methodology
Why Testing for reverse causality?
16


Simple example
Y= β1 + β2X + ε
 Simultaneous
causality bias (endogenous explanatory
variables; X causes Y , Y causes Y)
 An instrumental variable, is uncorrelated with the
disturbance ε but is correlated with X
 TRICK: Isolate movements of X which are not correlated
with ε (via X^)  2SLS
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
IV. Instruments
17

„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 UN
Colony dummies
14


U.S. Military assistance over 1980–99 as an indicator
of strategic importance to the U.S.
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
V. Results & Criticism
18



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 ?
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
V. Results & Criticism cont‘d
19

Measure of adjustment lending: # of loans & time spent under
IMF/WB program
But what about the amount that was lend?

One measure for all ?
 IMF’s focus: ‘lender of last resort’, macroeconomic and related
structural areas
 World Bank’s focus: social, structural, and sectoral issues
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
V. Results & Criticism cont‘d
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
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 ?

Country‘s ec. performance depends on program implementation
Dreher (2005/2006)
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
VI. Alternative Approaches
Account for compliance - Dreher (2005)
21

How can the IMF influence economic outcomes?
$$$


Conditions that
come with $ $ $
Policy advice
So let‘s 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‘
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
VI. Alternative Approaches
Account for compliance - Dreher (2005)
22


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

"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
VI. Alternative Approaches
Methodological Issues - Dicks-Mireaux et al. (2000)
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
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
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
VI. Alternative Approaches
Removing binding constraints by trial and error - Abbott & Trap
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(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 ?
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
VII. Conclusions and Discussion
25



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“)
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
VIII. Discussion
26
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 IMF‘s/WB‘s
approach?
4) Own oppinion: feel free to give your own statement 
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015
References
27

Abbott, P. & Tarp, F. (2008), „IMF and Economic
Reform in Developing Countries“.
"Repeated Structural Adjustment Loans" - Presentation by E.Ules and
E.Niendorf
21.07.2015