Chapter

CHAPTER 1 Program Objectives and Program Success

Author(s):
Alessandro Rebucci, and Ashoka Mody
Published Date:
April 2006
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Author(s)
Atish Ghosh, Timothy Lane, Alun Thomas and Juan Zalduendo1 

This paper examines how IMF-supported programs have evolved over the past decade, and to what extent national authorities have been successful in achieving their program goals.2

Introduction

Are IMF-supported programs a success or a failure? This is a key question in evaluating the role of the IMF, and a large body of literature has set about an swering it.3 Yet defining success, let alone measuring it, is far from straightforward. In part, this is because the circumstances facing member countries have evolved over time, as has the nature of problems that national authorities expect to address with IMF support. These changing circumstances have been accompanied by a broad range of facilities for IMF financing, which are often associated with different objectives: in addition to the Stand-By Arrangement, introduced in 1952 to address short-term balance of payments needs, financing is provided through the Extended Fund Facility (EFF), established in 1974 to address longer-term payments imbalances rooted in structural problems, and the Poverty Reduction and Growth Facility (PRGF), introduced in 1999, with its explicit eponymous goals.4

The paper is structured as follows. The second section presents the classic type of IMF-supported program and discusses how IMF-supported programs have evolved from that classic type. The third section examines experience under IMF-supported programs, including external adjustment and macroeconomic performance. The fourth section studies performance, while the fifth section draws some conclusions.

Types of IMF-Supported Programs

A useful starting point in discussing program design is the classic type of IMF-supported program. In this type of program, a country turns to the IMF for financing because it faces a loss of international reserves stemming from an external current account imbalance, often in the context of poor macroeconomic performance—such as high inflation or low growth. In this setting, the primary objective is to correct the current account imbalance and restore reserves to a safe level. The IMF provides temporary financing while this process is taking place, both to ease the adjustment burden and minimize the output loss, even though some temporary contraction in economic activity is unavoidable.5 Indeed, growth typically dips during the program period owing to restrictive monetary and fiscal policies intended to bring aggregate demand into alignment with national income and the drying up of external financing that leads to lower investment. As confidence is restored, capital flows resume and economic activity picks up, enabling the country to finance its now sustainable deficits.

Although this classic adjustment paradigm remains surprisingly relevant, the past decade has also seen an important evolution in the kinds of circumstances in which the IMF has been providing financing. These newer programs can be classified into two broad categories. The first are the so-called capital account crisis programs, where the salient initial condition is a sudden loss of private external financing, which is in the nature of a stock adjustment—in fact, there need not be a sizable initial current account imbalance when these crises emerge—with pervasive consequences for economic performance.6 Typically, this loss of financing puts the exchange rate under pressure, leading to the abandonment of the initial exchange rate peg regime (which characterizes these countries) and to a large currency depreciation. In the presence of currency mismatches in domestic public and private sector balance sheets, the depreciation leads to a sharp contraction in economic activity, which brings about a large current account adjustment despite the fact that the initial current imbalances were small. In fact, the policy package in these programs is not intended to bring about current account adjustment, as this is already being forced by the markets. Instead, the proximate objective is to restore confidence with a view to attenuating the loss of financing.

The second group can broadly be characterized as reform programs, in which the country’s main priority is to undertake a set of structural reforms designed to contribute to economic growth and stability over the longer term. Again, there need not be an external imbalance in the first place, but maintaining a sustainable external position is a constraint on policy choice.

Within the broad category of reform programs, one can identify some important and diverse groupings. Many transition economies fit the description (whether or not they have access to private financial markets): beyond their initial stabilization phase, their main priorities are undertaking structural reforms aimed at transition to the market economy, maintaining macroeconomic stability, and keeping a viable external position while they are doing so.

IMF-supported programs in low-income countries also have the broad features of reform programs and, though they differ from transition economies in many respects, share a common logic of program design: while the need to maintain external viability is generally an important constraint, the primary objective is not short-run adjustment of the current account but rather structural transformation of the economy to create a sound basis for growth. Low-income countries also have some important distinctive characteristics—in particular, the very long-term nature of the reform agenda and the prospect that they will be supported by concessional lending and grant aid over the foreseeable future.

A final type of program that fits the reform profile deals with non-crisis emerging market countries. These countries do not face acute balance of payments pressure, in part because they continue to enjoy access to private financial markets, but they seek support from the IMF to help maintain stability while they are undertaking other policy initiatives designed for longer-term growth and stability—which may include disinflation and various aspects of structural reform.

In sum, these programs are designed primarily to support sound policies and enhance the credibility of the authorities’ policy programs, rather than to close an immediate balance of payments gap. In several emerging market countries, the purpose of such programs is to elicit lower inflationary expectations and interest rates to put domestic debt dynamics on a more sustainable footing, while maintaining access to external markets.

While the differing nature of these programs imply different objectives, all IMF-supported programs share the goal of achieving (or maintaining) external viability for at least two reasons. First, a loss of external viability would eventually force an abrupt adjustment, in turn jeopardizing any other program goals. Second, both economic logic and the IMF’s Article of Agreements dictate that IMF resources be used to meet a country’s balance of payments needs. Since the use of IMF resources adds to the country’s external obligations, which will subsequently need to be repaid, IMF support essentially involves shifting the time profile of the country’s ex ternal adjustment to minimize the associated economic and social disruption, including by allowing time for the adjustment to come through a supply response rather than demand management alone.

As IMF-supported programs have been designed to respond to different initial conditions than originally envisaged, with a different set of objectives in mind, the analytical framework used to design them has also evolved. In the past, the connections between policies and objectives were often analyzed on the basis of projections using the financial programming framework based on the monetary approach to the balance of payments—a special case of the Mundell-Fleming model.7 In recent years, this framework has given way to a more eclectic approach, in which a variety of analytical tools are used to analyze and predict developments in particular sectors while the financial programming framework is used to ensure that projections for different sectors are consistent with key balance-sheet identities.

This eclectic approach has been viable in most cases, given that projections are often revised after a quarter or two and over that period are typically reasonably accurate (Table 1, Figure 1, and Figure 2). The IMF’s analytical approach has been less successful in capital account crises—since neither IMF staff nor anyone else have been able to construct an accurate short-run model of the rapid and often massive stock adjustments that take place in a crisis setting. The balance-sheet approach has been developed to analyze these adjustments and to in form a sharper assessment of crisis vulnerability; this approach needs to be developed further to provide a clearer basis for the policy response in a crisis. A second area in which more work is clearly needed is the analysis of long-term growth and debt dynamics: while the IMF’s debt-sustainability template provides a basis for prudent assessments of the debt dynamics, it has to contend with a continuing tendency toward over-optimism in medium-term growth projections. Deriving realistic growth projections poses a significant challenge, especially given that growth remains far from well understood by the economics profession at large.8 These analytical issues should be borne in mind in considering the experience with IMF-supported programs in the remainder of the paper.9

Table 1Statistical Characteristics of Program Projection Errors1
Period tPeriod t+1Average Period

t+1: t+3
Number of

Observations
Mean

error
RMSEMean

error
RMSEMean

error
RMSE
Real GDP Growth
PRGF-supported programs56-0.42.2-1.2***3.1-1.3***2.8
GRA-supported programs
Transition countries2270.13.7-0.74.4-0.52.9
Non-transition countries235-0.32.7-0.74.4-2.4***4.3
CACs39-9.3***10.7-0.95.0-0.42.3
Current Account Balance
PRGF-supported programs48-1.5**4.9-1.9***4.8-2.2***4.1
GRA-supported programs
Transition countries2240.42.5-0.42.3-0.82.6
Non-transition countries2282.4***4.62.7***5.21.6***3.2
CACs385.6**7.26.5**8.7
Sources: IMF, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.Notes: *** significant at 1 percent level; ** significant at 5 percent level; and * significant at 10 percent level. PRGF denotes the Poverty Re duction and Growth Facility. RMSE denotes root-mean-squared error. GRA denotes the IMF’s General Resources Account.

Data have been transformed so that they map into the interval (−100, 100). Errors are defined as actual minus projections. Table was con structed using a dataset of countries with available information for years t, t + 1, t + 2, and t + 3.

Excludes capital account crises.

CAC stands for capital account crisis.

Sources: IMF, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.Notes: *** significant at 1 percent level; ** significant at 5 percent level; and * significant at 10 percent level. PRGF denotes the Poverty Re duction and Growth Facility. RMSE denotes root-mean-squared error. GRA denotes the IMF’s General Resources Account.

Data have been transformed so that they map into the interval (−100, 100). Errors are defined as actual minus projections. Table was con structed using a dataset of countries with available information for years t, t + 1, t + 2, and t + 3.

Excludes capital account crises.

CAC stands for capital account crisis.

Figure 1Growth and Current Account Balances: Projections and Actuals

(x-axis projections; y-axis actuals; GRA programs only)

Sources: IMF, World Economic Outlook (WEO) and Monitoring of Fund Arrangements (MONA) databases; and IMF staff estimates.

Notes: Data were mapped into the interval (−100, 100). GRA denotes the IMF’s General Resources Account. Capital account crisis countries are depicted by triangles.

Figure 2Growth and Current Account Balances: Projections and Actuals

(x-axis projections; y-axis actuals; PRGF programs only)

Sources: IMF, World Economic Outlook (WEO) and Monitoring of Fund Arrangements (MONA) databases; and IMF staff estimates.

Notes: Data were mapped into the interval (−100, 100). PRGF denotes the Poverty Reduction and Growth Facility.

What Happens in IMF-Supported Programs?

With these basic types in mind, we may now consider the macroeconomic outcomes of IMF-supported programs in the 1990s. Here we are simply trying to characterize what happened during the course of the programs and thereafter—rather than trying to establish what would have happened in the IMF’s absence.10

We may first examine the experience of Stand-By Arrangements. Programs supported by these arrangements look, on average, surprisingly close to the classic type (Figure 3). At the outset of a typical program, the country faces substantial external imbalances, and these imbalances are reduced during the course of the program. Monetary and fiscal policies are tightened to help promote the external adjustment. Economic activity dips below trend during the program and subsequently recovers.

Figure 3Macroeconomic Performance Under GRA-Supported Programs, 1995–2003

(Excluding transition economies)

Sources: IMF, World Economic Outlook (WEO) database; and IMF staff estimates.

Notes: GRA denotes the IMF’s General Resources Account. Standard error bands for real GDP growth, inflation, and government balances are shown by the dotted lines.

Programs adopted in the context of capital account crises display similar but more extreme patterns (Figure 4). In these cases, large current account adjustment takes place in the face of capital outflows. This adjustment is associated with a major slump in economic activity, followed by a sharp recovery. The major difference between capital account crisis programs and the classic adjustment paradigm lies in the orientation of policies: in capital account crises, fiscal policy is loosened to support economic activity (except, of course, in those crises that are driven by public sector imbalances), since the external adjustment is being forced on the country through capital outflows anyway. Monetary policy is tightened, although this is done mainly to attract capital rather than to foster adjustment through demand restraint.

Figure 4Macroeconomic Performance Under Capital Account Crisis Countries, 1995–20031

(Excluding transition economies)

Sources: IMF, World Economic Outlook (WEO) database; and IMF staff estimates.

1 Standard error bands for real GDP growth, inflation, and government balances are shown by the dotted lines.

Macroeconomic developments in low-income country programs supported by IMF concessional facilities display quite a different pattern (Figure 5). In those cases, while external deficits were quite large, little current account adjustment took place. How ever, in this set of programs, growth increased during the course of the program. On the negative side, these countries tended to experience an increase in external debt, corresponding to the continuing exacerbation of low-income countries’ debt problems during this period.

Figure 5Macroeconomic Performance Under Enhanced Structural Adjustment and Poverty Reduction and Growth Facility Programs, 1995–20031

Sources: IMF, World Economic Outlook (WEO) database; and IMF staff estimates.

1 Standard error bands for real GDP growth, inflation, and government balances are shown by the dotted lines.

Performance

External Adjustment

How well did programs succeed? Since IMF financial support is intended to bring about orderly external adjustment, and a failure to maintain external viability is likely to jeopardize any other program goals, a good starting point is the record on external adjustment. But even here, establishing what should constitute a “successful” program is not straightforward, since it is not only the overall amount but also the means and the time path of external adjustment that are important.

The importance of the time path of adjustment can be illustrated with reference to two extreme cases: Argentina (1995) and the Republic of Korea (1997). In the aftermath of the “tequila” crisis, in 1995 Argentina faced large bank deposit withdrawals, putting severe pressure on the balance of payments and calling into question the viability of the currency board arrangement. In the event, the authorities were able to stabilize capital outflows, a devaluation was avoided, and the government was even tapping the capital markets by year’s end. The program was thus very successful in dealing with the immediate balance of payments problem. Yet, in retrospect, it is also clear that the failure to tackle the underlying weaknesses of the public finances resulted in a mounting public and external debt problem, culminating in the 2002 crisis.11 In contrast, Korea’s 1997 program met with very little initial success in stemming capital outflows or preventing a collapse of the exchange rate and of economic activity. Over the longer term, however, by enhancing the credibility of policies and instituting structural reforms, the IMF-supported program succeeded in restoring confidence and bringing about a return of private capital together with a replenishment of foreign exchange reserves. Neither extreme is optimal: Korea achieved a sharp reduction in its external debt, but at a cost of a wrenching external adjustment and contraction of output. In Argentina, the impact of adjustment was avoided in the short run—but at the cost of a highly disruptive crisis in the longer-run.

This suggests that any measure of successful external adjustment must weigh the benefits of attenuating adjustment in the short run against the longer-run considerations of maintaining external viability. Medium-term debt sustainability provides one such measure. The basic principle is that if a country is solvent, it should be able to obtain financing rather than having to adjust its current account in response to a temporary shock. Therefore, unless the country is constrained in the financing it is able to obtain, the current account balance should adjust by as much as is required to maintain solvency—except inasmuch as it has a high level of external debt or low level of reserves, in which case a larger surplus (or smaller deficit) would be appropriate to reduce vulnerability to future balance of payments problems.

Programmed and actual current account balances (relative to the debt-stabilizing balance) for middle-income countries (those supported by Stand-By and Extended Arrangements) are plotted against the initial external debt ratio in Figure 6. Three points are apparent. First, consistent with reducing vulnerability, there is indeed a positive relationship between the initial level of external debt and the targeted improvement in the current account balance (relative to the debt-stabilizing balance). Second, actual adjustment was generally greater than the programmed adjustment—on average by about 1 percent of GDP. Third, in a large number of cases, adjustment was greater than would be required to stabilize the debt ratio. While it is difficult to establish exact thresholds at which debt should be considered high, most studies suggest a range of about 40–60 percent of GDP for developing and emerging market countries (Figure 6). Segmenting the figure according to whether the country undertook more adjustment than necessary to stabilize the debt ratio and whether the initial debt ratio exceeded 40–60 percent of GDP shows that in about one-quarter of the cases, the current account balance was higher than necessary to stabilize the debt ratio even though debt was below 40 percent of GDP (in the second section in Figure 6). In a further 21 percent of cases—including some notable capital account crises such as Korea (1997) and Mexico (1995)—current account balances exceeded the debt-stabilizing balance although the initial debt ratio was within the 40–60 percent of GDP range (in the second section in Figure 6). Finally, in about 30 percent of cases, current account balances exceeded the debt-stabilizing balance—but the country was starting from a high initial level of indebtedness.

Figure 6Projected, Actual, and Debt-Stabilizing Current Account Balances in GRA-Supported Programs

(In percent of GDP)

Sources: International Monetary Fund, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.

Notes: Country abbreviations are based on three-letter country codes used in IMF automated database systems. GRA denotes the IMF’s General Resources Account. Capital account crisis countries are depicted by triangles.

To some extent, countries may have run larger current account balances than necessary to stabilize the debt ratio in order to build up reserves to reduce vulnerability to future crises. While this is part of the explanation, it does not account for it fully, since the excess current account balance (for countries in the first section) was, on average, almost 3 percent of GDP—against a programmed increase in reserves of 1½ percent of GDP. For countries in the second section, the difference is even more dramatic—8.7 percent of GDP against a programmed increase in reserves of 1½ percent of GDP, although a number of these countries are oil exporters that enjoyed a positive terms of trade boost from higher oil prices. As such, capital outflows are likely to have forced some of these countries to adjust their current account balances by more than would be indicated by considerations of debt sustainability.

IMF-supported programs in low-income countries present a sharply contrasting picture of external adjustment. First, the positive relationship between programmed current account adjustment and the country’s initial external debt characteristic of the middle-income countries is not evident for the low-income countries—indeed, the relationship is slightly negative (Figure 7). Second, actual current account adjustment typically fell short of even this planned adjustment—often because of delays in disbursements of external grants. Facing such a delay, however, not only did these countries not adjust their current account deficits but, on average, they borrowed more than the corresponding shortfall. While these results may be consistent with the primary purposes of these programs to promote growth and reduce poverty, they also imply a growing debt burden in the absence of debt relief—corresponding to the persistent debt problems of low-income countries.

Figure 7Projected, Actual, and Debt-Stabilizing Current Account Balances in Poverty Reduction and Growth Facility (PRGF)-Supported Programs

Sources: IMF, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.

Notes: Country abbreviations are based on three-letter country codes used in IMF automated database systems. Non-HIPCs (highly indebted poor countries) are depicted by triangles.

Macroeconomic Performance

Beyond external adjustment, national authorities often have a number of other objectives in their economic programs for which they are seeking IMF support. These typically include lowering inflation and achieving macroeconomic stability, raising growth, and promoting poverty reduction. Without attributing outcomes to the IMF’s support, Table 2 reports macroeconomic performance under countries’ programs. Among the middle-income countries, during the 1990s, annual inflation fell from an average of 80 percent to less than 30 percent for the three years following the program. This contrasts with the experience of the 1980s, when inflation actually rose during the program period—and remained higher in the years following the program than it had been previously. Consistent with the classic adjustment paradigm, growth recovers to its pre-program rates, but there is not a marked improvement in the growth performance of the country.

Table 2Macroeconomic Performance of Countries with IMF-Supported Programs1
Number of ObservationsThree Years Before ProgramProgram Period2Three Years After Program
PRGF-Eligible Countries3
Inflation3
1980–91169682673
1992–2002622816**8*
Real GDP growth3
1980–911692.12.62.4
1992–2002622.44.1*3.4**
Standard deviation of growth
1980–911693.93.43.2
1992–2002623.03.02.4
Non-PRGF-Eligible Countries3
Inflation3
1980–91104427255
1992–200251803927**
Real GDP growth3
1980–911042.72.03.1
1992–2002513.62.73.4
Standard deviation of growth
1980–911043.7n.a.3.5
1992–2002513.0n.a.3.0
Sources: IMF, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.

Average annual growth rates over 3-year periods unless otherwise specified.

PRGF-eligible countries: program period is three years and includes the year in which the program begins. Non-PRGF-eligible countries: program period is one year—the year the program begins.

Statistical significance of the average rate relative to the pre-program average rate; * at 1 percent; ** at 10 percent; n.a. stands for “not applicable.” PRGF denotes Poverty Reduction and Growth Facility.

Sources: IMF, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.

Average annual growth rates over 3-year periods unless otherwise specified.

PRGF-eligible countries: program period is three years and includes the year in which the program begins. Non-PRGF-eligible countries: program period is one year—the year the program begins.

Statistical significance of the average rate relative to the pre-program average rate; * at 1 percent; ** at 10 percent; n.a. stands for “not applicable.” PRGF denotes Poverty Reduction and Growth Facility.

Among low-income countries, in contrast, not only did inflation come down significantly, growth improved as well. Indeed, during the program period, annual growth was about 1½ percentage points higher, and in the three years following the program, about 1 percentage point per year higher, than the pre-program rate. Applying standard cross-country growth regressions suggests that the coincidence of better inflation performance and higher growth is not coincidental—improved growth in low-income countries can be explained by better macroeconomic policies (as captured by inflation and smaller fiscal deficits) as well as a more benign external and domestic environment (Table 3). At the same time, inasmuch as external resource flows have helped these countries contain their deficits (after grants) and foreign borrowing has limited their recourse to inflationary finance, it remains an open question whether this improved performance can be maintained without an unsustainable buildup of debt or greater grant financing.

Table 3Explaining Growth in PRGF Countries(1992–2002, average annual growth rates)
Coefficient EstimatesThree Years Preceding ProgramThree-Year ProgramThree Years Following Program
Real GDP per capita growth
Change in per capita growth1.90-0.66
Contributing factors
G-7 real GDP growth0.6828***0.500.10
Initial conditions
Of which
Initial income level-0.0595***-0.27-0.37
Fertility rates-0.00900.250.24
Macro policies
Of which
Inflation-0.0376***0.020.22
Fiscal balance0.1360***0.29-0.01
Structural reforms0.0285**0.080.01
Shocks (internal and external)
Of which
Domestic shocks-0.0409***0.50-0.06
Terms of trade0.02470.08-0.02
Constant0.0052*0.520.52
Unexplained-0.08-1.29
Number of observations1624646
Number of countries463131
R-squared adj.0.23
F-statistic26.21***
Standard error of regression0.039
Sources: IMF, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.Notes: Asterisks indicate statistically significant coefficient estimates; *** at 1 percent, ** at 5 percent, and* at 10 percent. PRGF denotes Poverty Reduction and Growth Facility. G7 denotes the Group of Seven.
Sources: IMF, Monitoring of Fund Arrangements (MONA) and World Economic Outlook (WEO) databases; and IMF staff estimates.Notes: Asterisks indicate statistically significant coefficient estimates; *** at 1 percent, ** at 5 percent, and* at 10 percent. PRGF denotes Poverty Reduction and Growth Facility. G7 denotes the Group of Seven.

Conclusions

This paper contrasts the classic framework of program design and the growing diversity of country circumstances and program objectives for which IMF-supported programs are now being designed. In view of this diversity, the concept of a financial program has changed. In the classic type of program, IMF financing enables a country to undertake needed external adjustment in a more gradual and orderly manner than would be possible in the absence of such support. The program achieves the country’s objectives and safeguards IMF resources by ensuring that the financial flows implied by the policies envisaged will enable the country to repay the IMF on the arranged schedule.

Although this classic adjustment paradigm remains—perhaps surprisingly—relevant, the past couple of decades have also seen the emergence of programs with different characteristics. Foremost among these are capital account crises, where capital outflows force external adjustment on the country, and IMF-supported programs in low-income countries, where promoting growth and reducing poverty are the key objectives.

These differing objectives and characteristics of IMF-supported programs are reflected in outcomes. Defining program success requires a metric for judging the appropriate degree of adjustment; medium-term debt sustainability may provide such a metric. Among middle-income countries, especially but not exclusively in capital account crises, capital out flows (or, more generally, a lack of sufficient external financing) sometimes forced larger external adjustments than should be required for debt sustainability considerations. This experience raises important questions of whether larger official financing packages or action to “bail in” private creditors, or both, could result in better outcomes.

In low-income countries, the experience was quite different: adjustment typically fell short both of the programmed current account adjustment and the adjustment required to stabilize external debt ratios. In large part, this reflects the goals of these programs—promoting growth and reducing poverty. However, to the extent that the growth came at the price of mounting debt, it nevertheless raises questions about the longer-term viability of this approach. This experience argues for an increase in the grant element of external financing for low-income countries.

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1

This paper draws on analytical work undertaken as part of the 2004 Program Design project, which served as background material for the review of the 2002 IMF Conditionality Guidelines.

2

The IMF-supported programs examined cover the period 1995–2000. Although this period includes only the early years of the PRGF, during the latter years of ESAF arrangements, these had already been redirected toward growth and poverty-reduction objectives.

3

This literature has been reviewed by Haque and Khan (1998); some recent contributions include Barro and Lee (2002); Dicks-Mireaux, Mecagni, and Schadler (2000); and Przeworski and Vreeland (2000).

4

The PRGF replaced the Enhanced Structural Adjustment Facility (ESAF) and the Structural Adjustment Facility (SAF), which were designed to support structural reforms in low-income countries.

5

The IMF also requires that the resources it provides be used in a manner consistent with IMF purposes, which precludes the imposition of trade and payments restrictions for balance of payments purposes during the program period.

7

Specifically, the financial programming model assumes that real economic activity is determined on the supply side and where money demand and capital flows are interest inelastic. These assumptions are not unrealistic for many countries with limited capital mobility, repressed financial mobility, and constrained supply sides—which characterized many countries with IMF-supported programs in the past—but have become less relevant, particularly for emerging market countries. See IMF, Research Department (1987) on theoretical aspects of program design and Polak (1991).

8

See, for instance, Easterly (2001).

9

A fuller discussion of the analytical frameworks for program design is presented in the set of papers on “The Design of IMF-Supported Programs,” which is available on the IMF website (http://www.imf.org/external/np/pdr/2004/eng/design.htm).

10

In contrast, the existing literature on the macroeconomic outcomes of IMF-supported programs typically seeks to distinguish the role of the IMF from some counterfactual—but, on the other hand, does not focus on the fact that different types of programs may have different objectives.

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