ECONOMIC ANALYSIS

Paper Review
IMF Program: Who are Chosen and What are the Effects
Robert J Barro and Jong-Wha in the paper IMF Program: Who are Chosen and What are the
Effects investigate the political-economy determinants of the loans made by IMF. They go
further to explain the unprecedented results of IMF loans on the countries taking them. It has
been observed that in recent years the trend towards taking IMF loans has increased and at least
one all the developing nations have taken load from IMF. It is pivotal to find out what are the
consequences of taking these loans.
Premise of this research is based on the fact assumption of IMF as a purely bureaucratic
organization. Hence, the approval for granting loans is dictated through the agreement of the
most influential of the member countries. So the research shows that the countries with either a
greater number of staff working or larger size of quota fare of better in the size of the loans
granted along with the greater probability of that loan being granted. This paper also tries to
determine the direction a causal relationship whether the poor economic conditions stimulate the
loan being grated or do the loans granted result in reduction in the economic growth of a country.
To build upon their claim of IMF being an autocratic organization an overview of the
organizations setup was presented. The authors write that the quota of each country is
determined by the amount that the country submits as a form of credit-union (Robert J. Barroa,
2005). The decision making is through the board of directors of which eight out of the 24 are
from the major shareholders i.e. The United States of America and the major European countries.
So they automatically hold a veto power. This is the very fact that spawns the idea that closer the
economic and bilateral relationships with these blocks the greater the chance of the loan being
granted. Great changes have occurred from the original purpose of IMF. The economic and
global monetary changes have led it to become a crisis manager (Robert J. Barroa, 2005).
From the initial short term assistance in balance-of-payments problems IMF had expanded into
longer term loans like the ESAF.
The developing the research model, the authors have taken into account variables which they
have hypothesised as the determinants of the political-economy perspective in loans decision
making. First the quota size is taken as institutional variable. The second variable under study to
expand upon the previous researches is the strength of the countries national staff in the
organization. Here the hypothesis is that the larger the number of the national the greater is the
probability of the loan being granted. The third variable is the ``economic proximity`` of a
country to the USA. In order to measure this UN voting is used as an analogy that how many
countries vote with USA. In determining the variables short term loans were considered and the
participation in IMF was measured within five years in which loans were granted and finally
analysed with a variable accounting for the size of the loan.
The results for determining the IMF loan programs were elaborated using Tobit equations.
Reviewing those results, the findings were that decline in the GDP per capita by 1 % point
increased the ratio of lending by the IMF by 0.06%; decrease in reserves by 1 month of imports
raises the lending by 0.13%. This relation shows that IMF is reluctant to lend to those countries
who have very low per capita GDP for credit-worthiness purposes and also that above a certain
level of per capita GDP ( $6745) the countries do not demand the loan. The political-economic
variables inclusive of the bilateral trade relationships with the US are significant ranging from
0.008 to 0.015 p-values; and that a rise in voting and bilateral relations and intensity of trade
increases the expected lending. Next, increase IMF quota share raises the IMF loan size by 1.2%
of GDP, an increase IMF staff share raises IMF lending by 0.21% of GDP.

Considering the economic impact of the lending the results show that between the IMF lending
and the impact of the GDP, the increases in lending lowers the GDP. However, the authors argue
that the strong negative relation is probably due to the innate endogenity of lending to resolve
this the endogenity of the factor was controlled and as a result the coefficient became
significantly small and thus it was concluded that the les the GDP more likely will be the fact of
the IMF loan being sought. Further increased participation of a country in the IMF loans also
considerably lowers the economic growth, after controlling the said endogenity of these factors
this result became more pronounced. Additionally it was observed that the larger the size of the
loan the lower will the GDP be. The gist of these conclusions was that the most significant
relation which surfaced was, that participation in the loan program decreases the economic
growth while the loan to GDP ratio became insignificant after the instruments so it is basically an
impact of the fact of lending not the amount.

The research was taken a step further. The researchers believed that the drop in the GDP as a
result of the IMF loans could be due to indirect impact of variables affecting GDP themselves
being affected by the loans. These variables were investment ratio, inflation rate, government
consumption ratio, international openness, and rule of law. Of all these indirect variables only
rule of law was found to be significantly and indirectly related to the IMF loans. In turn in also
effected the GDP growth. Conclusively it was said by the authors, as supported by the previous
researches, that the indirect variables do reinforce the effect but only to a minimal extent.

At the end of the results it can be concluded that the close economic proximity, participation of
the country in IMF loans, national working at IMF and the quota of a company influence the
probability and size of the loan being approved. Further the lending and the size of the lending
influence the economic growth of the country. The loan to GDP relationship was not as
significant as the negative relationship of participation in the IMF loan to the GDP decreasing.

At the end of the paper the authors pose a dilemma that if the participating in the IMF loans
results in lowering of the GDP why countries do so? Looking at it from our perspective in
Pakistan we present an exemplification of the findings. We have taken a host of eleven loans
ranging from the SAP, PRGF and the Extended SAP from IMF including the $7.6 Billion in
2008. The rule of law in our homeland has seen progressive deterioration. Further we fall true to
the dogma hinted at the conclusion of the article that the IMF loans being sought, seemingly an
undesirable act for the economy, are still being vied for. The reason the authors give is for the
bureaucrats themselves. We have had an exceptionally infamous set of political leadership and
bureaucracy in terms of corruption. The IMF loans come in and get lost in the food chain of the
Haves. Further we are in a vicious cycle of borrowing to repay loans to borrow some more! It is
time that our economic think tank took a stand with statistically sound data and researches to
influence the decisions made by the few for the masses.