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Is Fiscal Adjustment More Durable When The IMF is Involved?

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Abstract

This paper investigates fiscal developments in 112 countries during the 1990s. It finds that while the overall fiscal balance improved in most of them, the composition of this improvement differed. In countries without IMF-supported programmes, revenues increased modestly and expenditure declined sharply, while in programme countries both post-programme revenue and expenditure declined. However, in countries with programmes that included fiscal structural conditions, the adjustment was effected primarily through sharp expenditure compression. No evidence of a statistically significant impact of IMF conditionality was found. Moreover, fiscal developments were influenced by cyclical factors and by the general stance of macroeconomic policies.

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Notes

  1. IMF-supported programmes typically do not stipulate quantitative fiscal conditions in terms of, say, the primary fiscal balance or domestic fiscal revenue.

  2. Throughout the paper, we used a sample of 112 countries, of which 48 countries did not have a programme during the sample period, and 31 and 33 countries had programmes without and with structural conditions, respectively. See the fourth section for the list of countries.

  3. For example, we classified the ‘introduction of ad valorem excise duties’ as a revenue-increasing condition; a ‘reduction in civil service positions’ as an expenditure-lowering condition; and the ‘adoption of accounting system of the Treasury’ as a neutral condition.

  4. 1993 and 1999 are the median dates in the sample of programme countries.

  5. We are aware of measurement problems. First, owing to data limitations, all fiscal balances are actual, cyclically nonadjusted observations as opposed to structural fiscal balances. Second, in recognition of the reporting weaknesses, IMF-supported programmes often broaden the definition of the fiscal balance, such as to include extrabudgetary expenditures or contingent liabilities, invariably implying a worsening of the headline fiscal balance. Unfortunately, historic series are not always fully adjusted.

  6. More conditions required for programme continuation increase the risk of missing some of them, however, missing one of them does not stop a programme. Providing the macroeconomic programme remained on track, the missed condition would likely be waived, the likelihood of waivers being positively related to the political clout of individual countries (Bird, 2002).

  7. The estimates of φ could suffer from simultaneous equation bias: participation in IMF-supported programmes depended on past policies (Conway, 1994, 2000; Przeworski and Vreeland, 2000; Barro and Lee, 2002) and an OLS regression of (1) would underestimate the true effect of Fund programmes.

  8. There are a few well-known exceptions, though. For example, Bulgaria in 1997 insisted on a detailed specification of structural conditionality in order to avoid domestic political confrontation about the design of reforms (International Monetary Fund, 2001).

  9. The alternative is to estimate the policy reaction function for programme countries before IMF arrangements. This approach has two disadvantages. First, countries pursue ‘bad’ policies in the run-up to the IMF-supported programme. Second, for some of the repeated users of Fund resources, it is difficult to find long enough periods of pre-programme policies.

  10. More complex alternatives could, for example, derive the targeted fiscal balance from a sustainable debt trajectory (Bohn, 1998) or medium-term fiscal rules (Scott, 1996).

  11. Although we tested more than 10 political economy variables, all but one were eliminated using the general-to-specific approach used to arrive at a parsimonious version of the policy reaction function. In some sense, this result was to be expected – in a forward-looking policy reaction function, the authorities would not base their policies on noneconomic forces outside of their control.

  12. The following 31 countries’ IMF-supported programme did not contain any structural conditions: Azerbaijan, Belarus, Congo, Republic of, Costa Rica, Croatia, Czech Republic, Dominican Republic, Egypt, El Salvador, Estonia, Georgia, Haiti, Hungary, Jordan, Kazakhstan, Latvia, Lesotho, Macedonia, FYR, Mexico, Moldova, Nicaragua, Panama, Peru, Philippines, Poland, Romania, Sierra Leone, Slovak Republic, Turkey, Uganda, and Uzbekistan. The following 33 countries’ programmes contained structural conditions (with the number of fiscal conditions in parentheses): Albania (10), Algeria (3), Benin (8), Bolivia (8), Bulgaria (0), Burkina Faso (14), Cambodia (16), Cameroon (5), Central African Republic (7), Chad (10), Côte d’Ivoire (8), Ecuador (1), Equatorial Guinea (4), Gabon (1), Ghana (8), Guinea-Bissau (11), Guyana (3), Kenya (4), Kyrgyz Republic (9), Lao People's Democratic Republic (10), Lithuania (0), Malawi (8), Mauritania (13), Mongolia (3), Niger (1), Pakistan (4), Papua New Guinea (5), Russian Federation (2), Senegal (8), Togo (6), Ukraine (1), Vietnam (3), and Zambia (4).

  13. We did not include political economy variables in the GEE regression because of potential simultaneity bias: domestic politics is likely to have an impact on domestic GDP growth or aid receipts, but these variables were already included in our regressions.

  14. Gupta et al. (2002) reported that the probability of a reversal in fiscal adjustment was as high as 70 percent at the end of the second post-programme year for low-income countries. Three possible explanations are available for this finding. First, poor fiscal discipline or a lack of programme ownership may have caused the reversal. Second, the initial fiscal tightening could have been excessively tight, necessitating a subsequent fiscal stimulus. Finally, the initial adjustment may have been a mirage: the fiscal authority ran arrears vis-à-vis its suppliers, improving its reported cash balance and worsening its (unreported) accrual balance.

  15. We present both full-blown and parsimonious estimates with statistically significant variables only. See Bulíř and Moon (2003) for detailed regression results.

  16. The improvement in the overall balance was partly tautological, because total revenues included grants, a part of foreign aid.

  17. Some authors argued that foreign aid causes longer-term fall in revenue by breeding corruption and creating a perverse motivation for the authorities not to collect taxes (Ziegler, 1996). Similarly, political economy models were mostly skeptical about the revenue increasing role of aid (Bulow and Klemperer (1999) or Tornell and Lane (1999).

  18. We did not find, however, any evidence of the so-called Wagner's law – a positive relationship between expenditures and the level of development – in our data.

  19. The sample sizes for 1-, 2-, and 3-year-after-the-programme regressions were 64, 61, and 49 observations, respectively. The full set of results is available from the authors.

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Authors and Affiliations

  1. International Monetary Fund,

    Aleš Bulíř

  2. Department of Economics, University of California, Los Angeles, CA, USA

    Soojin Moon

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  1. Aleš Bulíř
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The authors are indebted to Tim Lane and Alex Mourmouras for extensive discussions. We are also grateful for helpful comments from George Anayiotos, Martin Čihák, Christina Daseking, Kamil Dybczak, Gervan Fearon, Rex Ghosh, Sanjeev Gupta, Javier Hamann, Eduardo Ley, Paolo Mauro, Alex Segura Ubiergo, Kateřina Šmídková, Alun Thomas, Jaroslaw Wieczorek and two anonymous referees as well as participants at the 2002 Atlantic Economic Society conference, 2002 Czech Economic Society conference, 2003 International Institute of Public Finance conference, and seminar participants at the International Monetary Fund. Anna Ivanova kindly shared some data with us.

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Bulíř, A., Moon, S. Is Fiscal Adjustment More Durable When The IMF is Involved?. Comp Econ Stud 46, 373–399 (2004). https://doi.org/10.1057/palgrave.ces.8100051

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