# **Conclusion**

In this paper, we have presented what is to our knowledge the first attempt to model empirically the correlates of IBRD graduation. Under Bank policy, graduation from the IBRD is not an automatic consequence of reaching a particular income level, and the IBRD per-capita income threshold is used only as a trigger to initiate discussions about the country’s readiness. Graduation is instead supposed to be based on a determination of whether the country has reached a level of institutional development and capital-market access that enables it to sustain its own development process without recourse to Bank funding.

We assess how this policy is implemented in practice through a panel analysis of 55 countries, including 34 countries that were IBRD borrowers at some time since 1970. We find that the observed correlates of Bank graduation are generally consistent with the stated policy. Among the countries that have crossed the IBRD income threshold (currently $6725), those that are wealthier, more institutionally developed, and are less vulnerable to trade, financial, and other shocks are more likely to have graduated.

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 Trinidad and Tobago and Korea, and suggest that Hungary and Latvia graduated prematurely – a prediction subsequently borne out by their return to borrowing from the IBRD in the wake of the global financial crisis.

We supplement the graduation analysis with an analysis of the level of borrowing from the Bank, which is a continuous variable. Interestingly, the findings are largely consistent with the analysis of the (discrete) graduation variable: as countries become wealthier, develop higher-quality institutions, and become more creditworthy, they rely less on IBRD financing for their development needs. This finding is consistent with the expectation under the policy that as the country develops, it will have less need for IBRD assistance and thus will be ready for graduation.

A concern raised by these findings is about possible moral hazard effects of the IBRD graduation policy. In theory, because countries with stronger institutions and higher creditworthiness are more likely to have graduated and to receive less financing from the Bank, above-threshold countries could have an incentive not to improve their ratings on those scores. But in practice this is not likely to be a serious concern. Countries already theoretically face such a tradeoff when their per-capita incomes increase, but the benefits of increased income presumably so outweigh any costs in terms of reduced IBRD financing that the theoretical tradeoff is unlikely to enter into their calculations. Similarly, stronger institutions bring a host of benefits and higher creditworthiness increases access to private credit, so any perverse incentives will be outweighed by these benefits. As with social programs, one way to minimize any moral hazard is to withdraw a benefit gradually to ensure that there is no discrete cutoff at a given income level or institutional rating; our empirical results suggest that IBRD graduation follows this gradualist approach. Another approach is to provide assistance in ways designed to strengthen institutional capacity—for example, 20