the model, we were to rely solely on the IBRD income threshold in predicting whether or not an observation in Sample 2 was a graduate, our prediction would be correct 65% of the time—because in 65% of observations, countries over the threshold had in fact graduated. [The share rises to 83% if we include all high-income countries as well, in Sample 1.] But once we incorporate the institutional variables, the specific income level, and other factors included in the model, we correctly predict 87.2% of the observations (or 93.7% when high-income countries are included).

Korea and Trinidad and Tobago (see Figure 1) illustrate the predictive power of the model. Korea’s predicted probability of graduating rose rapidly from 1989-1996, peaking in 1996 just before its actual graduation in 1997. It took out no new IBRD loans in either 1996 or 1997. With the onset of the crisis in 1997, its predicted probability of being a graduate fell rapidly, and it in fact “degraduated” and borrowed heavily in 1998 and 1999. Korea has not borrowed since 1999, and in the last several years, its predicted probability of graduation has risen to near 90%. In 2010 it is officially joining the OECD-DAC group of aid donors.

Trinidad and Tobago graduated in 1984, when its predicted probability of graduating was well over .5 but declining. Crude oil prices were already well below their 1981 peak, and plummeted below $10 per barrel in mid-1986. Per-capita income fell each year from 1982 through 1989, as oil prices fell and remained low until 1990. Largely due to declining incomes, Trinidad and Tobago’s predicted probability of being an IBRD graduate fell to .10 by 1987. Beginning in 1988 (and continuing through 2000), the country’s per-capita income had fallen below the IBRD threshold, so its predicted probability in our framework had effectively fallen to 0. Consistent with the model’s prediction, Trinidad and Tobago began borrowing again from the IBRD in 1990, after taking out no new loans in the entire decade of the 1980s.

Even some of the (relatively few) incorrectly predicted observations are quite instructive. Hungary and Latvia graduated in 2007, at a time when their predicted probabilities of graduation were both below 50 percent: 45 percent for Hungary and only 22 percent for Latvia. Yet both countries had to return to the IBRD for financing after the (admittedly major) financial crisis hit in 2008, raising the possibility that they indeed graduated too early. By contrast, when Slovenia graduated in 2004 and the Czech Republic the next year, their predicted probabilities were both above 50 percent, at 82 percent and 59 percent respectively. Neither of those countries was driven to take Bank loans in the wake of the crisis.<sup>14</sup>

> 14 The probit estimates of graduation underlying this figure implicitly assume that graduation and degraduation transitions are symmetrical—that is, that the same statistical relationship holds on the way up as on the way down.  One commenter noted that these two transitions are fundamentally different:  graduation tends to be a gradual process, while degraduation is typically a sudden result of an economic shock.  But the cases of Korea and Trinidad and Tobago in

Figure 1 show that the predicted probability of graduation can also suffers a sudden large drop at the time of degraduation. This correlation suggests that an assumption of symmetry is plausible.

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