Do IMF and World Bank Programs Induce Government Crises? An Empirical Analysis

TLDR

IFI program completion may signal government incompetence, and inherited programs may reduce implementation of prior conditions. The study investigates how World Bank and IMF programs influence the likelihood of major government crises. World Bank programs raise crisis likelihood, and staying under IMF or World Bank arrangements after economic improvement increases risk; the IFI scapegoat role weakens when support is less urgent, while inherited programs do not affect crisis probability.

Abstract

Abstract We examine whether and under what circumstances World Bank and International Monetary Fund (IMF) programs affect the likelihood of major government crises. We find that crises are, on average, more likely as a consequence of World Bank programs. We also find that governments face an increasing risk of entering a crisis when they remain under an IMF or World Bank arrangement once the economy's performance improves. The international financial institution's (IFI) scapegoat function thus seems to lose its value when the need for financial support is less urgent. While the probability of a crisis increases when a government turns to the IFIs, programs inherited by preceding governments do not affect the probability of a crisis. This is in line with two interpretations. First, the conclusion of IFI programs can signal the government's incompetence, and second, governments that inherit programs might be less likely to implement program conditions agreed to by their predecessors.