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Is two better than one? The effects of IMF and World Bank interaction on growth

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Abstract

We estimate the impact on economic growth of the joint participation in both IMF and World Bank programs. More specifically, using panel data for 128 developing countries over the period 1982–2005, and employing 2SLS to control for the possible endogeneity of participation in an IMF/World Bank program, we find that the interaction between these two organizations has a positive and significant impact on growth. The paper then opens up interesting new research questions related to investigate further on the effects of Bank–Fund simultaneous action and, to the extent to which their stronger impact on growth may depend on Bank–Fund interaction, also ways to optimize their joint effect through greater cooperation.

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Notes

  1. Another example of cooperation between the IMF and the WB was related to the need of the IMF to exploit the expertise of the WB in restructuring the financial sector after the East-Asian financial crisis.

  2. We thank Roland Vaubel for pointing this out.

  3. The term “lending projects” would be more appropriate in the case of the WB. For simplicity, the term “program” will be used throughout this paper to refer to any IMF or WB intervention.

  4. Typically, the Fund should rely on the Bank’s expertise in matters relating to development lending and focus its resources on its core responsibilities of macroeconomic and financial sector matters.

  5. Since January 2010, three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT) as part of a broader reform: the Extended Credit Facility (ECF), the Rapid Credit Facility (RCF) and the Standby Credit Facility (SCF). In particular, the ECF succeeds the PRGF as the Fund’s main tool for providing medium-term support.

  6. The significance of the political variables shows that the IMF is driven by its major stakeholdersʼ interests, first of all those of the United States, in identifying the recipient countries.

  7. Recidivism and prolonged use of IMF resources have also been investigated, among others, by Joyce (2005) and by Marchesi and Sabani (2007a, b).

  8. Such risk of duplication is also emphasized by Gould (2003).

  9. Bordo and James (2000) argue that even if joining Bank–Fund competencies and efforts could increase the overall effectiveness of their programs, “merging” these two institutions could be wiser, in order to avoid the risk of duplication and to reduce bureaucracy and operative costs.

  10. We observe that 1998 is the year in which the highest number of countries (57) was involved simultaneously with both the World Bank and the IMF.

  11. Among others, see Barro and Lee (2005), Dreher (2006a) and Rajan and Subramanian (2008).

  12. We also tried to include some measures for “education” and some of the ICRG indicators but missing data reduced the sample substantially, so we do not report the results below. We have also included the KOF Index of Globalization and its subcomponent on economic restrictions (Dreher 2006b) and our results are unchanged. Different specifications are available upon request.

  13. In particular, the IMF should take into account moral hazard issues related to its lender of last resort function, the need to be repaid and the importance of inducing some catalytic effect (e.g., Mody and Saravia 2006; Morris and Shin 2006; Marchesi 2003).

  14. Such preferential treatment may also be induced by the systemic importance of a single country (the so called “too big to fail” argument).

  15. The UNSC votes on UN military action against aggressors and investigates disputes. It holds 5 permanent members with veto power (China, France, Russia, the United Kingdom, and the United States) and 10 elected members (with 2 year term limits). As decisions require 9 votes temporary members can be pivotal in many decisions.

  16. Specifically, Dreher et al. (2009a, b) show that while UNSC membership significantly affects the probability to be under an IMF and a WB program, neither IMF nor WB loans are significantly affected by temporary UNSC membership.

  17. See Vaubel (1986).

  18. The extreme bounds analysis performed by Moser and Sturm (2011) also shows that participation in an IMF program is related to a country’s persistent involvement with the IMF.

  19. According to the descriptive evidence, presented in Section 4, Bank–Fund interaction has increased over time especially in the case of low-income countries.

  20. We have also included four-year period fixed effects but they were insignificant.

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Acknowledgements

We would like to thank: Emilio Colombo, Axel Dreher, Ugo Finzi, Rune Hagen, Joe Joyce, Chris Kilby, Katja Michaelowa, Tom Willet, Roland Vaubel, Jim Vreeland and participants to the “The Political Economy of International Financial Institutions,” Egon Sohmen Memorial Conference, Tübingen, 2010; 3rd Annual Conference on the Political Economy of International Organizations, Georgetown University, Washington, 2010.

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Authors and Affiliations

  1. Centro Studi Luca D’ Agliano, Universita di Milano Bicocca, Milano, Italy

    Silvia Marchesi

  2. Dipartimento di Economia Politica, Universita di Milano Bicocca, Piazza dell’Ateneo Nuovo 1, 20126, Milano, Italy

    Silvia Marchesi

  3. CSIL—Centre for Industrial Studies, Milano, Italy

    Emanuela Sirtori

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  1. Silvia Marchesi
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Correspondence to Silvia Marchesi.

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Marchesi, S., Sirtori, E. Is two better than one? The effects of IMF and World Bank interaction on growth. Rev Int Organ 6, 287–306 (2011). https://doi.org/10.1007/s11558-011-9107-8

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