Do IMF and World Bank Programs Improve Governance?
Do International Monetary Fund and World Bank programs improve governance in the recipient countries? Sometimes they do, but they can also have a negative effect, according to the findings of a working paper by the IMF’s Jiri Honda.
The paper does not represent the IMF’s official view, but provides an interesting analysis of the “the effects of IMF financial assistance on economic governance in developing countries.”
The paper finds statistically robust results that IMF concessional programs through the Poverty Reduction and Growth Facility tend to enhance the rule of law and strengthen control of corruption. Through this exercise, however, no statistically significant effect is observed for assistances under the General Resource Account.
The study begins by placing itself in a historical context: “After a decade of experience in dealing with this issue, and with recent progress in collecting data on governance, it is now time to take stock of what the assistance has accomplished.”
The study’s findings:
There is a positive correlation between receiving IMF assistance under the PRGF on the rule of law and control of corruption: “Though the IMF would not directly deal with the judicial systems of its member countries, apparently the programs have an indirect positive effect.”
“One possible explanation is that, with successful completion of program reviews, the credibility of the government’s commitment to policies is appraised, raising confidence in the rules of society, ” Honda writes. “Another possibility is that the PRGF coefficients include the effects of aid from donors that condition their aid on completion of IMF program reviews. That aid may go to areas associated with rule of law and control of corruption.”
GRA programs, however, are associated with a reduction in effective governance: “On the contrary, there are negative signs for government effectiveness, control of corruption, and regulatory quality (for which the coefficient is significantly negative). ”
“One potential reason for this is that most GRA assistance is provided through Stand-By Arrangements (SBA), which are designed to help countries address short-term balance of payments problems rather than structural issues,” according to Honda.
No significantly positive effect is found for International Development Association and International Bank for Reconstruction and Development assistance. However, Honda notes that these results may be associated with failure to correctly capture the World Bank’s efforts on economic governance. “Given the variety of World Bank projects at any point, merely using overall financial assistance as a variable may cover up the effects of specific efforts on economic governance.”
In concluding the author notes that “The empirical analyses find a significant role for political stability in determining some elements of economic governance (voice and accountability; government effectiveness; rule of law; control of corruption).”
“Given the recent erosion of the political stability indicator in low-income countries, the decline in economic governance indicators in those countries can probably be explained by political factors,” Honda asserts.
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