policy emphasizes the latter criterion, but the Bank’s Articles of Agreement require lending decisions to take into account a country’s ability to repay the loan.

Finally, we consider the role of vulnerability to shocks that may reduce per-capita incomes. For a given level of measured income and institutional quality, countries that are more exposed to shocks seem less likely to meet the criteria for graduation. If they were to graduate, they might be more likely to return to the Bank for assistance because of a realized shock, and so they may be less willing to graduate in the first place. We include two measures of vulnerability to shocks in our analysis. One is the degree of export concentration: countries with exports concentrated in fewer products are likely to face greater volatility and to be more vulnerable to idiosyncratic exogenous shocks. Concentration is measured using a Herfindahl index of export lines.

A second measure of vulnerability is country size. The Bank’s IDA classifies countries with under 1.5 million people as small states subject to higher vulnerability to natural disasters and macroeconomic shocks. The same rationale may apply even to middle- or high-income small states.<sup>6</sup> We therefore include an indicator variable for these small countries, with population data taken from the WB-WDI.

In addition, we include one measure of actual shocks: a dummy variable representing whether the country has suffered a systemic banking crisis within the previous 5 years. Data for that variable are drawn from Laeven and Valencia (2008).<sup>7</sup> All regressions control for a linear time trend. This time trend could reflect the net effect of various factors, such as any tendency to interpret the graduation policy more or less stringently over time. For example, if the IBRD was more capital-constrained in the 1980s than in the 2000s, it may have rationed lending and graduated the wealthier above-threshold countries sooner in that early period than in the later decade. This change would show up in our regressions as a negative time trend.

A final variable in the base specification of the graduation regression measures the IBRD income threshold as a share of world average income. The threshold is adjusted to account for inflation (i.e., reduction in the purchasing power of the US dollar), and so it increases over time. It is not adjusted, however, for changes in real income. Most countries have experienced growth in real incomes, not merely in nominal incomes, over the 1982-2008 period. As a share of mean income worldwide, therefore, the IBRD threshold has fallen in most years, and over the period as a whole.<sup>8</sup> Whether this relative threshold value matters for graduation or not will depend on whether decision makers take into account a country’s relative income level, rather than just its absolute (real) income level. If they do, then an above-threshold country may be less likely to graduate in years when the threshold that it has exceeded is low relative to world average income.

> 6 The minutes of the January 26, 1982, discussion of the graduation policy by the Bank’s Executive Directors reflect agreement that particular country circumstances, such as “the problems of small countries with narrowly-based economies,” should influence how soon a country graduates once it surpasses the income threshold (Shihata 2000).

> 7 The same source provides similar data on debt crises and currency crises, but those turned out to be unrelated to graduation. For simplicity, we report only the results for banking crises.

> 8 It is correlated with the linear time trend at -.78.

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