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

Published online by Cambridge University Press:  05 April 2012

Axel Dreher  and
Martin Gassebner
Axel Dreher
Affiliation:
Heidelberg University, Alfred-Weber-Institute for Economics, Heidelberg, Germany; the University of Goettingen, CESifo, and IZA, Germany; and the KOF Swiss Economic Institute, Switzerland. E-mail: mail@axel-dreher.de
Martin Gassebner
Affiliation:
ETH Zurich, KOF Swiss Economic Institute; and CESifo, Germany. E-mail: gassebner@kof.ethz.ch
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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.

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Type
Research Note
Information
International Organization , Volume 66 , Issue 2 , April 2012 , pp. 329 - 358
Copyright
Copyright © The IO Foundation 2012

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