to the 1984 clarification, GNI (GNP) per capita is to be used as an indicator that a country has reached a level of development where it can sustain its development process without Bank lending. However, the 1984 Board statement also clarifies that a country’s attainment of the prescribed GNI benchmark does not automatically imply that it must graduate. Rather, it is merely a milestone for Bank management to begin reviewing the country’s development, its overall economic situation, and capacity to sustain a long-term development program. Graduation is to take place only when the country has met the conditions and substantive factors listed above (Shihata 2000).

This paper takes a positive approach to understanding graduation from IBRD—“positive” in the sense of describing actual behavior, as opposed to a normative approach that specifies how the graduation policy _should_ operate. Our approach is analogous to the positive analyses of government, which does not assume that government acts as a welfare-maximizing social planner, but instead analyzes how governments actually perform and what appears to motivate their behavior. In this case, the object is not to assess the merits of the official graduation policy of the Bank, but to analyze how it has been applied in practice.

The current policy on graduation is highly flexible, in part because it is widely recognized that the income threshold is an imperfect proxy for the two criteria of access to capital markets and adequate institutions. A flexible policy does not necessarily imply an inconsistent or nontransparent policy, however. It should be possible to identify a limited set of indicators of institutional development that—together with per-capita income—can explain past decisions on graduation and on pre-graduation IBRD borrowing. The goal is to make observable these unobservable institutional factors that influence decisions on the continued need for engagement as IBRD borrowers.

An alternative would be to survey Bank governors, senior Bank management, and senior government officials about the criteria that went into their decision-making about the timing of graduation. For example, they could be asked whether they regarded the Atlas-based IBRD income threshold as an adequate measure of a country’s development progress, whether they took into account some other income measure (such as PPP-based measures), and how non-income factors entered into the graduation decision. That approach has merit too, but our approach here has three advantages over it. First, the decision-makers’ stated criteria may not match up directly with the criteria actually used. Given that there is no explicit formula, the process of graduation may have been approached more as an art than as a science, once a country has already met the objective criterion of the per-capita income threshold, and that process may be hard to describe precisely. Second, this empirical methodology allows us to cover nearly three decades of graduation decisions, whereas an interview approach might not allow the same coverage. Third, different actors in the graduation decision-making presumably had different criteria, or at least applied them differently, and it would be hard to know how to aggregate the interview responses. By identifying the factors correlated with actual graduation, we are in effect using a revealed-preference approach to graduation that shows in practice how the preferences and views of the various actors—most notably, the Bank and the officials of the graduating country—were aggregated.

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