# **Introduction**

This paper investigates how income and non-income factors affect graduation from the IBRD (International Bank for Reconstruction and Development). While the Bank does have an income threshold for IBRD borrowing, there is no automatic graduation rule linked to per-capita income of the borrowing country. According to World Bank policy, countries remain eligible to borrow from the IBRD until they are able to sustain long-term development without further recourse to Bank financing and until they have reached a sufficiently advanced level of development. The income threshold (currently $6725) is simply a trigger for the beginning of discussions on graduation, which then look beyond the income proxy to assess whether the country meets the criteria for graduation. In contrast, eligibility for the World Bank’s concessional lending through IDA (International Development Association) is more tightly linked to per capita income, and with a few exceptions ends when a country exceeds a certain threshold (currently $1165).

This paper assesses how IBRD graduation policy has operated in practice, by investigating what income and non-income factors appear to have influenced graduation decisions over the past three decades. It does so through panel estimation for 1982 through 2008 on the graduation status of countries that were above the IBRD income threshold in those years.<sup>1</sup> Explanatory variables include the per-capita income of the country, as well as measures of institutional development and market access that are cited as criteria by the graduation policy, and other plausible explanatory variables that capture the levels of economic development and vulnerability of the country. We also supplement the graduation analysis with an analysis of the correlates of levels of IBRD borrowing of the non-graduates.

We find that, as expected, per-capita income is an important predictor of graduation: each standard-deviation increase in log income increases the likelihood of graduating by about 4 percentage points. Thus even though all the countries in the sample are above the IBRD threshold, the greater the amount by which a country’s income exceeds the threshold, the greater the probability of graduation. But in addition, after controlling for income, advances in the institutional development cited in the graduation policy are significant predictors of graduation. Institutional development (as measured by indicators from the International Country Risk Guide and Freedom House) increases the probability of graduation. A standard-deviation increase in either index increases the likelihood of graduating by about 2 percentage points. Beyond these explicit criteria, we find other significant explanatory variables for graduation that are likely picking up other aspects of institutional development and ability to sustain development, including measures of the economy’s vulnerability. These results are broadly consistent with the stated policy.

With a relatively few variables, our graduation model is able to predict correctly the IBRD graduation status of a country in a high percentage of cases. Predicted probabilities generated by the model conform closely to the actual graduation and de-graduation experiences of Korea and Trinidad and Tobago, among others, and suggest that Hungary and Latvia may have graduated

> 1 No country below the threshold has graduated from IBRD borrower status, which is why we restricted the estimation to that sample.

2