International Organization

Research Note

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

Axel Drehera1 and Martin Gassebnera2

a1 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

a2 ETH Zurich, KOF Swiss Economic Institute; and CESifo, Germany. E-mail: gassebner@kof.ethz.ch

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.

Axel Dreher is Professor and Chair of International and Development Politics at Heidelberg University, Alfred-Weber-Institute for Economics, Heidelberg, Germany. He is also affiliated with the University of Goettingen, CESifo, and IZA, Germany; and the KOF Swiss Economic Institute, Switzerland. E-mail: mail@axel-dreher.de

Martin Gassebner is Assistant Professor at the ETH Zurich, KOF Swiss Economic Institute. He is also affiliated with the CESifo, Germany. E-mail: gassebner@kof.ethz.ch

Footnotes

We thank Richard Jong-A-Pin for contributions to an earlier draft of this article as well as James Vreeland, seminar participants at Yale University, the University of Birmingham, the First Conference on the Political Economy of International Organizations (Monte Verità, 2008), the 2008 conference of the Research Committee Development Economics of the German Economic Association and the reviewers of this journal for helpful comments, and Stefanie Walter and Thomas Sattler for providing their data on fixed exchange rate collapses. We thank Scott Jobson for proofreading.

Supplemental material for this article can be found at www.journals.cambridge.org/ino2012007.