IMF Programs: Who Is Chosen and What Are the Effects?

IMF loans react to economic conditions but are also sensitive to political-economy variables. Loans
tend to be larger and more frequent when a country has a bigger quota and more professional staff
at the IMF and when a country is more connected politically and economically to the United States
and other major shareholding countries of the IMF. These results are of considerable interest for
their own sake. More importantly for present purposes, the results provide instrumental variables
for estimating the effects of IMF loan programs on economic growth and other variables. This
instrumental estimation allows us to sort out the economic effects of the loan programs from the
responses of IMF lending to economic conditions. The estimates show that a higher IMF loanparticipation
rate reduces economic growth. IMF lending also lowers investment but raises
international openness. In addition, greater involvement in IMF programs tends to lower the rule of
law and democracy. We conclude that the typical country would be better off economically if it
committed itself not to be involved with IMF loan programs.