metadata: authors: 0: author: Corbo, Vittorio
1: author: Rojas, Patricio
docna: 0: docna: World Bank-supported adjustment programs :
            country performance and effectiveness
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,International Trade and Trade Rules,Economic Growth,Inflation,Macroeconomic Management,Inequality
teratopic: Poverty Reduction
abstracts: cdata!: Simple comparisons of growth rates in
            countries that have had at least two structural adjustment
            loans (SALs) or at least three adjustment loans show that
            their growth has improved more than that of other countries.
            But simple comparisons of the performance of groups of
            countries are poor estimators of the effectiveness of
            adjustment programs because the performance of an adjusting
            country is the result of: (a) the policies that would have
            been in place even without adjustment loans from the Bank;
            (b) world economic conditions; (c) the effects of the
            Bank-supported program; and (d) internal shocks to the
            economy. After explicitly controlling for external shocks
            and nonprogram determinants of performance, the authors find
            that adjustment lending programs have usually increased the
            growth rate of GDP and the ratio of exports to GDP, and have
            increased the saving-to-GDP ratio over early 1980s levels.
            But the average ratio of investment to GDP has fallen below
            1970s levels. For countries that have reduced most of their
            policy inefficiencies, achieving a sustainable growth rate
            in the 1990s will require higher investment rates than those
            achieved in the 1980s.
repnme: repnme: World Bank-supported adjustment programs :
            country performance and effectiveness
display_title: World Bank-supported adjustment
            programs : country performance and effectiveness
listing_relative_url: /research/1991/03/700032/world-bank-supported-adjustment-programs-country-performance-effectiveness
topicv3: Economic Growth m1326241 471,Current Account m1326278 1135,Poverty m1326687 695,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: Policy, Research & Ect Affairs
no_of_pages: 42
model_extractions: **Policy, Research, and External Affairs**

**S** * S S

**Macroeconomic Adjustment and Growth**

WPS 623 T'his paper - a product of'thle Macrocconiomic Adjustment and Growth Di\ision. Country F.cononltics Department - is part oi' a largcr cftort in PRE to asscss thc clfectivciless ol' ad(justimncit lending. 'oCpics areavailable free from thc World Bank, 181811 Street NW, Washingtonl, D)C2(433. Plca,c contact Aludia Oropesa, room N 1 1-035, cxteinsioni 39075 (37 pages).

Simple comparisons o' growtih rates in countries that have had at least two structural adjusiment loans (SALs) or at least threc adjustincit loans (tlhc first onc in 1985 or betore), show that lheir growth has improved more than that of other countries.

But simple comparisons of the p. ,ormancc of groups of countries aIrc poor cstimattors o' thIc effectiveness of'adjusimcnlt programs because the performance oi' an adjusting country is the result of:

* The policies thait would have been in **place** cven without adjustment loans f'rom thc Bank.

* World economic conditions.

* The effccts of the Bank-supported program.

*Intctnal shocks to the economy (sucil as drought, wars, and earthquakes).

After explicitly controlling for external shocks and nonprogram determinants of' performance, Corbo and Rojas find that adjustment lcnding programs have usually increased the growth rate of GDP and the ratio of'exports to GDP, and have increased the saving-to-GDP ratio over early 1980s levels. But the average ratio of' investimicilt to GD)P has ,'allcn below 1970s levels.

Thc drop in investmncilt's shalre- in GDP in thc initial years ol' adjustmcnt must be initcrprete(l carefully. **In** many countrics, cCoInIollic crisis was the result of unsustainable levels of public investment reachcd in tlhc 1970s: part of' the neede(i a(ijustiiieclt was rc(lucing hligih Icvels ol' inc'ficient public investimicnt. Also, the initial uncertainity that occurs wheln an adjustment program beginis will probably slow do\lon private investmeinlt.

Despite their (disappointing investment performance, these countries expericnccd morc ol' an increase in their rates of' GDP growth in 1985-88 than in 1970-80. This miust rielect mioic cfl'licient invcstment combined with increased capalcity utiliz.ation.

But for countries that havc rcduced miost of' ilicir policy inlef'ficieincies, achicving **an** acceptable, sustaina;lbie grovw1th rate in thec 1990s will require highier investnicnin rates than those achieved in the 190s. **I'lic** chalilcnge ol'lic 1990s is to creatle the coniditionis nec(ded to generate an incrcasc in investnlenl-to-3DlP ratios.

The PRE Working Paper Scries (disseminates **the** findings Of **orTk** un(ter **vsay** in the Bank's **PINhcs,** _Re;alc.li_ and F-iern;iI AffairsComplex. An objectiveof the scries ij lo get thcse findingsoit qutickl. eC cn if preTCentilon'.<sup>;;e 1.ss thln [eih1, miinf hieu.</sup> Thic findin,gs. in terprc tatiotin' **anid** concthi.iomn' **iii** 1dw % iper' do n(it **i** nefe **'** 1fi t r cii o f l zr 13 ink poh(\ IP'odk'''<' h'! thl I'RI: D1),%( ,1.,1nIwI .: (; II, I1.
# World Bank-Supported Adjustment Programs: Country Performance and Effectiveness

by Vittorio Corbo and Patricio Rojas

# Table of Contents

|1.|Introduction|1|
|---|---|---|
|2.|Initial Conditions, External Shocks, Policy<sup>Stance, and a First</sup><br>Look at Performance|3|
||Country Performance<br>Policy Stance|5<br>6|
|3.|Statistical Analysis of Country Performance|8|
||The B'fore-After Approach<br>Control-Group Approach<br>A Modified Control-Group Estimator|8<br>10<br>11|
|4.|Overview of the Data|16|
|5.|The Empirical Results|17|
|6.|Conclusions|21|
|Table|s|23|
|Appe|ndix A|33|
|Refe|rences|37|
# 1. Introduction

The purpose of a structural adjustment program is to restore sustainable economic growth an6 wake lasting progress in alleviating poverty. The process is lengthy, however, often with requirements to control inflation, achieve a sustainable external balance, change incentives, create or strengthen institutions, mobilize saving and increase investment. Control of inflation and reduction of the external deficit **are** usually attempted at the beginning of the program, to lay the foundation for credible macroeconomic and institutional reform. When enough progress has been achieved with the inflation and the current account, structural reform to improve resource allocation and lift other impediments to growth are initiated. Thus, an examination of performance indicators one or two years after the initiation of an adjustment effort reveals little about the effectiveness of an adjustment program. Rather, it will likely pick up the short-term adjustment costs instead of the medium- and long-term adjustment benefits. Case studies of countries where enough time has passed since the initiation of the adjustment effort may permit a more complete evaluation of adjustment programs. At the same time, even those studies need to look beyond the characteristics of the program to consider as well as initial conditions in the country (e.g., GDP growth and the ratios of investment, saving and exports to GDP in the period before the program), and internal (e.g., the policy envirornment) and external factors (e.g., the terms of trade, international real interest rates and access to external financing), and to take them into account in assessing effectiveness.

Evaluating performance in adjusting countries requires measuring the marginal contribution of adjustment programs while controlling for other factors that affect performance. Thus, the contribution of an adjustment lending program is calculated as the difference between actual performance and an estimated counterfactual scenario of what would have happened in the absence of the
2 program, given initial conditions in the country, the external environment facing it and policies in the pAriod before the program was initiated. We approach tte. construction oi a counterfactual scenario by using three alternative statistical approaches: the standard before-after comparison, the standard control group comparison and the modified control group comparison, in which we **_assess_ the** effects of adjustment lending using not only techniques to control for conditions that influence the effectiveness of adjustment measures but also for country characteristics that help determine the decision to participate in an adjustment program. In sum, the initiation of an adjustment program with World Bank support is seen as ea endogenous decision that is based on **the** benefits **the** country expects from the program.<sup>1</sup> We use these three approaches to assess if countries that undertake a program with the World Bank have performed better than they would have in the absence of the adjustment program. Performance and the effectiveness of adjustment lending are evaluated using four indicators: rate of growth of GDP, ratio of &aving to GDP, ratio of investment to GDP, and ratio of exports to GDP. We compare the value of the performance indicators in 1985-88--a period after adjustment was initiated--with performance in two base periods, 1970-80 and 198184, for three groups of countries: intensive adjustment lending (EIAL), countries that have received two or more structural adjustment loans (SALs) or three or more adjustments loans (SALs or sectoral adjustment loans, SECALs), starting in 1985 or before; other adjustment lending (OAL)--countries that started a program after 1985 or have received fewer than two SALs or fewer than three adjustment loans in 1985 or before; and no adjustment lending (NAL),<sup>2</sup> countries that have received no adjustment loans.

I Econometric or CGE-type models are usually used in individual country studies of program effectiveness. See, for example, Corbo and de Melo (1989), Condon, Corbo and de Melo (1990), and Bourguignon, Morrisson and Suwa (1990).

2 Table A.1 in the Appendix A lists the countries in each group.
**3**

# 2 **Initia-l Conditions. [sternal Shocks, Policy St-nce and** a **First**<sup>**tookA**St</sup>

Initial conditions and external shocks are important determinants performance as well **as** of the demand for adjustment lending. Sir-ilarly, the domestic policies before **and** during adjustm9nt are also important.<sup>In fact,</sup> countries receiving adjustment lending are supposed to follow<sup>policies aimed at</sup> reducing the current account deficit to a level compatible<sup>with normally</sup> available financing while minimizing losses in output and employment and creating the conditions for sustainable growth. Fiscal, monetary and exchange rate pclicies are the key macroeconomic oneo used for adjustment (most of the time as part of an IMF program), while the most common types of Bank-supported structural reforms involve institutional and incentive measures<sup>in the public</sup> sector, trade policy and the financial system.

When other factors **are** controlled for, the importance of initial conditions in the performance of a country when it undertakes a program is evident. A country with better initial conditions (e.g., higher saving, investment,<sup>and</sup> export to GDP ratios, a lower debt to GDP ratio, a lower fiscal deficit to GDP, less inflation, and so on) has a better chance of improving its performance under a given adjustment program than does a country with worse initial conditions.

Table 1 shows, in the 1970-80 period base the EIAL countries had relatively high saving and investment ratios. In contrast, they had the highest debt to GDP ratios and the highest rates of inflation. In the case of the ratios of debt to exports and exports to GDP, rate of growth of GDP and fiscal deficit<sup>to GDP,</sup> the EIAL countries fell between the OAL and NAL countries. The OAL countries had the highest debt to export ratios, and the lowest saving and export<sup>to GDP</sup> ratio qnd rate of growth of GDP. In contra6t, the NAL countries<sup>had the most</sup> favorable ranking for eight of the nine indicators. In the 1981-84 period,<sup>in</sup> general the indicators of initial conditions showed a similar<sup>ranking as before,</sup> except for rate of growth of GDP, which was lowest in the EIAL countries<sup>(see</sup> Tables 2 and 3). However, in absolute terms the indicators<sup>for debt, inflation</sup> and GDP growth were worse for the three groups, especially the EIAL<sup>countries.</sup> Thereafter, based on the review of initial conditions in each group of countries, it appears that on average the NAL countries did not need adjustment, while the
4 EIAL countries did quite wel'l in the 1970s except in the case of debt indicatols. However, in the 1931-84 period, the demand for adjustment lending by the EIAL countries seems to have been a mixture of debt problems and the worst indicators ir *erms of inf'ation and ;DP growth.

Even if initial conditions had been the same in the various country groups, the differences in the intensity with which they experienced the external shocks could have affected the economic performance of countries that were implementing adjustment programs. The developing countries in the 1980. faced an external environment that combined a world recession, the highest real interest rates since the Great Depression, declining and often volatile terms of trade fcr many countries, and, in the case of many middle-income countries, a sudden cut-off from international financial markets. Table 4 presents the effect of the terms of trade and interest rate shocks only. A comparison of 1981-84 with 1970-80 shows how large the external shocks in the early 1980s were: both EIAL and NAL countries suffered an average annual loss of close to 12% of 0.DP in 1980, the OAL countries about 5%. In contrast, when comparing the period 1985-88 with the period 1981-84, the EIAL countries were the only group that experienced a positive external shock. However, th<sup>1</sup> 's positive shock followed a much larger deterioration in the early 1980s.

External financing fromi non-official sources to the ELAL and OAL countries dropped substantially after the 1981-82 period, just when they were being hit by large terms of trade and interest rate shocks. If the negative external shocks of the early 1980s had been judged as taporary, the EIAL and OAL-principally middle-income countr.es--could have pursued the standard option of using foreign reserves and foreign borrowing to avoid adjustment. This response would have been proper. However, with the exception of IMF and World Bank borrowing--which was conditional on the adoption of an adjustment program-foreign borrowing was difficult to obtain after August 1982. Moreover, once it became clear the adverse external environment would continue for some time, countries had to adjust. For countries that were ready to initiate adjustment programs, the access to financing from international financial institutions allowed them to make progress toward achieving internal and external balance by
5 gradually implementing structural adjustment policies,<sup>assisted by foreign</sup> commercial borrowing.<sup>3</sup> Table 5 shows that EIAL countries suffered severe reductions in non-ofcicial flows of external financing<sup>after 1982, while the</sup><sup>**HAL**</sup> countries continued to receive an important amount<sup>in terms of GDP. That fact</sup> helps explain why the NAL countries ui-d not use adjustment lending **even** when the total external shock they faced in 1981-84 was also majo.

# Country Performance

To compare the performance of the EIAL, OAL and NAL<sup>countries, we</sup><sup>**analyze**</sup> four indicators of progress in macroeconomic adjustment--real<sup>GDP growth,</sup> domestic caving over GDP, investment over GDP, and<sup>exports over GDP--in three</sup> periods, 1970-80 (first), 1981-84 (second) and 1985-88<sup>(third). Although</sup> judgment of the effectiveness of an adjustment program cannot be<sup>**based**on a</sup> simple comparison of observed performance, nevertheless the before-after approach is useful in underlining what happened in the country groups.<sup>4</sup> Table 2 shows that for the EIAL countries the rate<sup>of GDP growth dropped</sup> substantially from 1970-80 to 1981-84 but then recovered in 1985-88.<sup>In the OAL</sup> and NAL countries, the rate of growth dropped on average<sup>between the first and</sup> secon,d periods and then stayed almost constant between the second<sup>and third.</sup> A drastic reduction in the rate of growth of GDP between<sup>the first and second</sup> periods was common to all the country groups but was greatest<sup>for the EIAL.5</sup> 3 The World Bank introduced adjustment lending in 1980 Lo<sup>facilitate this</sup> adjustment. The main rationaie was that a substantial<sup>adjustment could be made</sup> easier and its cost reduced, by spreading it over time In particular, to expand exports requires time to build export capacity and<sup>develop marketr. (See Corbo</sup> and Fischer 1990.) 4 As we explain in Section 3, the before-after comparison is a very poor measure of program effects. H,wever, it does provide<sup>measures of actual changes</sup> in given indicators.

5 Table A.2, which presants the performance of each EIAL<sup>country in the</sup> three periods, shows that only 13 of the 25 ELAL zountries<sup>hadahigher average</sup> growth rate in the third period than in the first period.<sup>This table also shows</sup> a wide variation in performance, indicating that a<sup>variety of factors seem to</sup> have been determining performance. Whl'e, a comparison of the rates of growth of GDP for the second and third periods tell us that 22 out<sup>of 25 EIAL countries</sup> improved performance. Often, the improvement in the external<sup>environment</sup> accounted for part of this improvement, but the effect of the programs could have been just as important.
6 The investment to CDP ratio in the EIAL and OAL countries decreased on average continuously from the first to **the** third **periods.** For **the** MAL **countries,** the ratio rose between tho first and second periods and fell **betvwon** the second and third periods.<sup>6</sup> Domestic **saving as a s:re** of GDP dropped by 3.9 percentage points **betvwen** the first and second periods **and** thea **recovered** 2.4 percentago points **betwoen** the second and third periods in the EIAL countries. In contrast, in the **NAL** countries, although the drop **betwoen** the first **and** second **periods vas** similar, the recovery was only 0.42 of GDP.<sup>7</sup> The export to GDP ratio of the EIAL countries improved continuously from the first to the third periods, increasing by almost 4 percentage points on average.<sup>8</sup> To **assess the** effect of extrome observations **we** also ueed indicators of rank (first quartile, median and third quartile). There **is** no evidence of extreme observations distorting the information provided by the central tendency measures, except in the case of the export to GDP ratio.

# Policy Stance

To sei how the policy stance changed in the EIAL countries, we examine four indicators--the real exchange rate, whe inflation **rate,** and the fiscal **and** resource balance deficits as shares of GDP (Table 3). Although a government cannot directly control the real effective exchange rate or inflation rate, fiscal, monetary and exchange rate policies affect their evolution. For countries that had to reduce their current account deficits, a substantial real devaluation was an important component of successful adjustment. For many 6 When comparing 1985-88 with 1970-80, the investment share in GDP decreased or stayed constant in every country but Korea, Costa Rica and Mauritius. Between 1981-84 and 1985-88, the ratio of investment to GDP increased in only 7 of the 25 EIAL countries.

7 As shown in Table A.2, between the first and third pe iods the saving retes in 10 out of 25 EIAL countries rose. When comparing periods two and three, the domestic saving rates increased in 16 of the 25 EIMA countries.

8 In 15 out of 25 EIAL countries, the export to GDP ratio improved between the first and third periods. Between 1985-88 and 1981-84, the export to GDP ratio increased in 17 of the 25 EIAL countries.
7 countries jfter 1982, it was available financing rather than poli.les that determined the evolution of their reeource balance. Therefore, the resource balance in the post 1982 period is more a constraint than a policy variable.

The comparison of 1981-82 with 1970-80 shows that the EIAL countries experienced an increase in the fiscal deficit as a share of GDP, appreciation of their currencies, an increase in their average inflation rates. and an increase in their average resource balance deficits. After 1981-82, in general the EIAL councries improved their fiscal situation and achieved a continuous real depreciation. Nevertheless, average inflation rose constantly, the result of the greater monetization of their (smaller) fiscal deficits. The middle-income EIAL countries with large external public debts adjusted their budgets in response to the sharp drop in their capacity to borrow abroad, but at the same time their interest payments on existing external debt were increasing, and government revenues were suffering from the worsened terms of trade. The resource balance deficit as a share of GDP fell in the EIAL countries by more than half on average between 1981-82 and 1983-84.

To deal with the fiscal crisis starting in 1981-82, the typical EIAL country cut its public expenditures (usually by drastically reducing investment), increased its revenue and relied more on domestic financing of the budget deficit (via domestic interest-bearing debt or credit from the central bank). Bailouts of firms hit hard by the large devaluations and the recession complicated the fiscal situation further. Fl.cal adjustment was usually a prerequisite for improving internal macroeconomic stability and was usually at the heart of the structural adjustment program. For the EIAL countries, the resource balance deficit as a share of GDP declined continuously after 1981-82.

The "AL countries also showed a mj'J deterioration in all four policy indicators between 1970-80 and 1981-82. Then, there was an increase in the rate of inflation between 1981-82 and 1983-84 without much change in the real exchange rate and the fiscal situation. They nevertheless made progress between 198384 and 1985-88 in achieving real devaluations, and in reducing their resource balance deficits as shares of GDP.
8 On the other hand, economic policy before 1980 was better in the NAL countries than in other countries. After 1981-82, however, their real exchange rates appreciated substantially and their policy indicators and real growth of GDP worsened (Table 2).

# 3. Statistical Analysis of Country Performance

# The Before-After Approach

This approach consists of comparing a given ind:cator of performance after a specific program was put in place with periormance prior to t program. The before-after estimator is simply the mean change in the target variable over some relevant per..od. With Ay the change in the target variable between the p-ogram period and the previous period, the simple before-after estimator (p) involves calculating the mean change acrobs the group of program countries for each of the macroeconomic outcome variables that we want to analyzes: where P denotes the set of program countries. Thus, any change in a target variable in a program country (or in a group of program countries) is attributed exclusively to the program. The significance of this estimator, /3, is usually tested through the standard t-test, and in some cases using non-parametric statistical tests.

Although the before-after approach has been the most popular in the literature on the effects of programs, the res.its are likely to be biased and inconsistent. The main problem with this approach is that it embodies the implicit assumption of "other things being equal," which is highly implausible. Specifically, it is difficult to determine whether observed changes in, say, the GDP growth rate can be ascribed to a Bank su-orted-program or to other nonprogram factors that have not been held fixed in the analysis. This point is crucial because in our period of analysis, these non-program determinants, especially terms of trade and international interest rates, have changed widely
9 from year to **year** and country to country. If we define the **effectiveness of a** program **cs** thes difference between the actual macroeconomic **performance observed** under a program and the performance that would have been expected in che **absence** of the program,<sup>9</sup> the before-after approach is **a** poor estimator of **this** counterfactual scenario, because the situation **prevailing** before **the program is** not likely to be **a** good predictor of what would have happened **in the absence** of a program, given that non-program determinants are changing frcm **year to year.** 9 Thi6 definition was used in Goldstein and Montiel (1986) and Khan (1988).
10

# Control-Group Approach

The control-group approach is designed to overcome, in part, the inability of the before-after approach to distinguish between program and non program (!eterminants of macroeconomic outcomes. This procedure basically _uses_ the behavior of a control group (a group of non-program countries) to estimate what would have happened in the program group in the absence of programs. It implicitly assumes that the only difference between the program and non-program groups is that countries in the former group of countries **aro** undertaking a program. The control-group approach still assumes, **however, that program** and non-program countries are subject to the same non-program determinants, i.e., they face the same external environment and the effect on performance of these other determinants is the same for both groups of countries. This approach also ignores the effecto of pre-program characteristics on performance.

The control-group estimator is calculated by running the following regression for the sample of program and non-program countries: where Q denotes the set of program and nonprogram countries and di is a dummy variable with a value of cne for program countries. The estimated value of PI is equa. to the difference in the mean changes in the target variables for program and non-program countries. Thus, a statistically significant value for 01 would thus indicate that the change in the target variable for the program country was different from the corresponding change in that variable for nonprogram countries (the control group).

This approach controls for the effect of changes in the global economic environment, but it assumes that such global factors affect program and nonprogram countries equally. This assumption introduces a bias, however, whenever program countries differ systematically from non-program countries. This point is important for performance evaluation.

If the determinants of program selection are positively correlated with the non-program determinants of change in the macroeconomic target variables that
21 would have occurred in the absence<sup>of a program, the control-group estimate of</sup> the program effects will overstate<sup>the actual program ones. In short, if the</sup> program countries are more likely<sup>to have experienced</sup> negative temporary shocks in the pre-program period, a<sup>comparison of the changes in mean macroeconomic</sup> outcomes between program and<sup>non-program countries will most likely overstate</sup> the true independent effect of the<sup>program. A negative shock in the pre-program</sup> period simultaneously increases the probability of participation in the program and the probability of<sup>a</sup> positive<sup>change in the target variable, Yi, in the</sup> program period. Thus, attributing<sup>all the improvement in Yi toaprogram</sup> overstates its real effect. This<sup>kind of bias, known in the literature as</sup> sample-selectivity bias, will be zero if the determinants<sup>of program selection</sup> are uncorrelated with the determinants of macroeconomic performance or when the program group has been randomly<sup>selected. Only in these case will the control-</sup> group approach estimator be an unbiased<sup>indicator of the program effect.</sup>

# A Modified Control-Group Estimator

TIare are several estimators that<sup>resolve the sample-selectivity</sup> bias. One of them is obtained from the<sup>modified control-group</sup> approach.<sup>10</sup> The basic idea is to accept the non-random<sup>selection of program countries, to identify the</sup> differences between program and non-program<sup>countries in the pre-program period</sup> and then to contriA for these differences<sup>in the comparison with subsequent</sup> economic performance. Furthermore,<sup>the modified control group approach also</sup> control for world economic conditions<sup>and the stance of country policies without</sup> program.

The modified control-group approach starts from the basic equation<sup>for the</sup> macroeconomic target variable in country i in level<sup>form (equation [31) instead</sup> of using the first difference form<sup>that applied in the before-after</sup> and controlgroup approaches. Thus, in period<sup>3 we have the following equation:</sup> 10 Goldstein and Montiel (1986)<sup>outline a procedure for removin the</sup> sample-selectivity bias from control-group estimates<sup>of</sup><sup>**the effects of the**</sup> program when the selection of program<sup>countries is non-random.</sup>
12 where xi is a R-element vector of macroeconomic<sup>policy instruments that would</sup> have been observed in the absence of a program in country<sup>i; Wi is an M-element</sup> random vector of world non-program variables relevant<sup>to country i; and di is</sup> a dxmry variable that takes the value of unity if<sup>a country hasaprogram and</sup> the value of zero otherwise.11 Equation (3) says that the level<sup>of the targeted</sup> results will be a function of four factors: (i)<sup>the value of soelected policy</sup> instruments that would have occurred in the absence<sup>ofeprogram, x; (ii) the</sup> change in selected world economic conditions, W;<sup>(iii) the total effects ofa</sup> Bank-supported program if the country has a program<sup>in place, d; and (iv)a</sup> range of unobservable shocks that are specific<sup>to country i, ei.</sup> The complete policy vector x can be generated<sup>by estimating equation 4,</sup> the policy reaction function:<sup>1 2</sup> where yid is the desired value of the vector yi and ui<sup>is the unobservable error</sup> term. This equation says that policymakers display<sup>a systematic policy reaction</sup> to perceived disequilibria in their macroeconomic<sup>target variables.</sup> More specifically, it says that the change in country i's macroeconomic<sup>policy</sup> instruments between the current and previous period will be<sup>a function of the</sup> difference between the desired value of the macroeconomic<sup>target variables in</sup> this period and their actual value in the preceding<sup>period. y is the vector of</sup> the coefficients that indicates the responsiveness<sup>of the policy instruments to</sup> such target disequilibria.

11 To avoid a potential specification error we also<sup>included in our</sup> estimation a predetermined durmmy that takes a value<sup>of one for countries with</sup> an IMP program in 1985 or before. Of our sample of _25_ intensive adjustment countries, 23 undertook a program with the IMF before<sup>that they undertooka</sup> program with the World Bank. Of other two, only one, Nigerio, undertook a program with the IMP after 1985--during 1987--while<sup>Colombia has not undertaken</sup> a program with the IMP in 1985 or since.

12 As x represents the counterfactual scenario--the<sup>policies that would</sup> have been undertaken in the absence of the program--it<sup>is directly</sup><sup>**observable**</sup> only for non-program countries and must be estimated<sup>for program countries.</sup>
13 In practice, as Goldstein and Montiel (1986) mention, an important limitation of the modified control-group estimator is that such a reaction function nay be highly unstable both across countries and in a given country over time so that, in the extreme case of instability, the problem of estimating the counterfactual scenario becomes insoluble.

The model is completed with equations (5) to (7): where zi is a random variable that serves as the index of country-specific characteristics that determines the proba',ility of country i having a program during a given period; z* is the threshold value of the z that divides progr&m from non-program countries and wi is an unobservable error term.

The first step in estimating xi for the program countries is to fit the reaction function to observable data for the non-program countries. The only unobserved variable in equation (4) is the country-specific vector of desired macroeconomic outcomes, yd . As Goldstein and Montiel (1986) maintain, if this variable can be assumed to be constant over time, it can be captured by a set of country-specific constants (yoi) so that equation (4) is now If both the setting of the policy instruments in equation (8) and the acceptance by a country of a program as specified in equation (5) reflect policy decisions of the government, any unobservable factors, Wi that make a given country more likely to resort to official assistance, such as a specific program, may also lead it to adopt a different policy package in the absence of the program, in contrast to another country facing similar observable circumstances.
14 Thus, if the model presents a correlation between **the** error **terms** i in equation (5) and ui in equation (4), the behavior of the non-program countries would not be a good guide to the counterfactual scenario in the program countries. If such a correlation is present,13 then equation (8) will provide a biased estimate of axi for the program countries, unless we assume something with respect to **the** errors w, and ui. The method of estimation that we **use** in **this paper** does not require any extra assumption with respect to the relationship **between** the error terms of equations (4) and (5) (more on this point below).1<sup>4</sup> By subtracting (yi)_1 from both sides of equation (3) **and** substituting xi by equation (8), our model for estimating the effects of a specific program is:15 13 In their estimations of the model, Goldstein and Montiel (1986), assume that both error terms are uncorrelated.

14 See Heckman (1979).

15 Equation (9) is the reduced form used by Goldstein and Montiel (1986) to estimate the effects of the IMF program.
15 However, the dummy variable included on the right side of the equation that measures the effect of the program in country i is endogenous. The choice cf countries to undertake a specific program principally depends on their expectation of better performance with respect to the target macroeconomic variables, Yi. Thus, we would expect that the coefficient of the effect of the program should be biased and inconsistent in the model used by Goldstein and Montiel (1986). This kind of bias can also be called self-selectivity, because the data are generated by the self-selection of the countries.

> To resolve this selectivity bias, Barnow, Cain and Goldberger (1981) discuss several consistent estimators for in this situation. The method used here essentially treats di as an endogenous variable and uses instrumental variables to correct for the bias.16 The first stage consists of estimating a status equation that determines whether or not the country should undertake a program. We estimate the following equation using the probit ML method

where 0( I denotes the standard normal cumulative distribution, W is an M- element random vector of world non-program variables and R is an N-element vector of individual country characteristics, such as if the country is low-income, has a recurrent program with the IMF, has had an important internal shock, and so on. In the second stage we use the value of the probability of that the country will undertake a program with the World Bank, calculated with equation (10), as an instrument for di in the estimation of equation (9). The probability of the country undertaking a specific program, calculated by the probit model, is di - aocVn17 16 See also Heckman (1978).
16 Thus, using an instrumental variables<sup>technique in the estimation of equation</sup> (9), with a, as an instrument of di,17 allows<sup>us to obtain a consistent estimate</sup> of 34, the coefficient of the<sup>effectiveness of the program.18</sup>

# 4. Overview of the Data

All the data used in our analysis<sup>are taken from the World Bank's ANDREX</sup> data b'Ase except the real exchange<sup>rate, which comes from IMF calculations. We</sup> consider a sample that contains<sup>observations from 77 developing countries during</sup> the 1970-88 sample period. They<sup>are ones for which data are available for all</sup> relevant macroeconomic variables<sup>for the period 1970-88. We work with the data</sup> in current and constant prices.<sup>Because most EIAL countries carried out a real</sup> depreciation in 1985-88, the<sup>relative price of investmen! goods and exports rose</sup> relative to the early 1980s.<sup>Therefore, to measure the contribution of growth</sup> in the supply response of exports,<sup>it is better to work with the investment to</sup> GDP and export to GDP ratios<sup>in constant prices. For completeness and to satisfy</sup> the adding up condition we also<sup>work with saving ratios at constant prices. For</sup> purposes of this analysis, the<sup>countries were grouped into two categories:</sup> EIALs, the program countries<sup>and a "control" group--the non-program countries-</sup> -consisting of OALs and NALs.<sup>The OAL's are considered non-program countries</sup> because they have received too<sup>few adjustment loans during the period analysed.</sup> The sample period was, as noted,<sup>divided into three periods: 1970-80</sup> (first), 1981-84 (second) and 1985-88<sup>(third), with the latter corresponding to</sup> the adjustment period. We compare performance in this<sup>third period in the</sup> program countries with respect<sup>some counterfactual scenario of what would have</sup> 17 This solution to the sclectivity-bias<sup>problem of an instrumental</sup> variable method means that we<sup>do not have toassume</sup> that the error terms of equations (4) and (5) are uncorrelated.

18 The instrumental variable<sup>method used here is more efficient than the</sup> two-stage least squares method suggested<sup>by Barnow, Cain and Goldberger (1981),</sup> principally because the robustness<sup>of the two-stage method depends on the well</sup> specification of the status equation<sup>and on the distribution assumption madein</sup> the estimation of equation (10) more<sup>than the instrumental variable procedure</sup> does. In addition, with the instrumental<sup>variable estimation,</sup><sup>**we**do not need</sup> to correct the standard errors obtained<sup>from equation (9), while the standard</sup> errors o'4tained from a two-stage least<sup>squares estimation must be corrected.</sup> Because di has been estimated, the<sup>standard errors underestimate the true</sup> standard errors.
17 happened in the absence of an adjustment program. We use four indicators: rate of GDP growth ind the ratios of gross domestic saving, gross investment and total exports to GDP. For each of these indicators we calculate **simple averagea** in each period. Thus, for each country J, we have observations for variable i in periods one, two and three. (A complete list of the variables used in the analysis is presented in Appendix A.)

# 5. The EmRirical Results

In both the control-group and modified control-group approaches we compare the performance of our four indicators in 1985-88 with performance in 1970-80 and 1981-84 for the program and non-program groups of countries.<sup>19</sup> Table 5.1A and 5.1B report the results of the control-group estimates. Under this criterion for program evaluation and working in current prices, we find that the coefficients of the program effects are statistically significant for the rate of GDP growth and exports to GDP ratio: they show an improvement in the program period (1985-88) in relation to the periods (one and two). In contrast, the other two indicators do not show significant improvement with respect to any of the previous periods (Table 5.1A). When working at constant prices, only the change in the average rate of growth is positive and statistically significant. The investment to GDP ratio shows a substantial decrease with respect to the period 1970-80. In contrast, the changes in the saving to GDP and export to GDP ratios are not significant. Thus, if we were to use only the results from the control-group approach to evaluate the adjustment lending program, we would conclude that it led to improvements in the rate of GDP growth and the current price ratio of exports to GDP. In the case of the constant price ratios, the investment ratio decreased with respect to the period 1970-80, while the change in the other ratios was not statistically significant. As we mentioned in Section 3, the control-group estimates are an inconsistent estimator of the program's effects unless the determinants of

> 19 The relevant period of comparison would be the period before the program was put in place, but as some programs were initiated in the early 1980s, the 1970-80 is a better base period. In any case, we report results for both base periods.
18 program selection are uncorrelated with the determinants of macroeconomic performance or the program group is selected randomly. There are good a priori reasons for believing that the assignment of countries to the program and nonprogram groups is not random.

The inconsisteotcy of the control-group estimates **is ovet-o. e** here by using the modified control-group estimates presented in Section **3.** Table **5.2** presants the maximu-m likelihood probit estimates of the coefficients of the participation status function, equation (10). If a country decided to participate in an adjustment program in the period 1981-84, then we **assume** that **the** only important variables in that decision were the value of the external shock during the period 1981-84 (period two) with respect to 1970-80 (period one), SHOCK1; the change in the ratio of the current account surplus to GDP between periods one and two, CACC6; the change in non-official external financing over GDP between periods one and two, NETF6; the change in the ratio of total debt to GDP between periods one and two, DEBT6; the level of investment in period 2, INV2; the level of the real exchange rate in period 2, RER2; and a group of **dummy** variables--if the country had a program with the IMF, Dl, if it is an African country, D2, if it is a Latin American country, D3, if it is a middle-income country, D6, and if it has a rate of inflation of over 60% per year in period 2, DINFLAC.<sup>20</sup> All the coefficients of the participation equation (10) have the expected signs except the coefficient of change in the ratio of non-official external financing to GDP between periods one and two, NETF6. We expected that a positive change in this variable decreases the probability that a country would undertake an adjustment program with the World Bank. However, the coefficient is not significant. The rest of the coefficients are significant except for dummy variables D2 and D6. Table 5.2 also presents the pseudo-R<sup>2</sup> , defined by McFadden (1974) as a measure of the goodness of fit of the ML probit estimation.

20 The dummy variable DINFLAC is defined with a value of one if a countr has a rate of inflation of over 60Z per year in period two. Countries with high levels of inflation are expected to be less likely to undertake a program, because before receiving a loan from the World Bank, they need to make enough progress in reducing their internal disequilibrium.
19 Consistent estimates of the coefficients<sup>of the target equation (9)</sup><sup>**are**</sup> obtained using instrumental variables,<sup>with da as an instrument for di</sup> Since we are working with grouped data,<sup>we calculate the robust White standard errors</sup> that are consistent under the<sup>possibility of heterokedasticity. The results are</sup> presented in Tables 5.3A and 5.3B.<sup>21</sup> After explicitly controlling<sup>for the size of</sup><sup>**the externalshock, the**</sup> initial conditions and the policies<sup>followed in the pre-program period</sup><sup>**by**each</sup> country, we find that the adjustment<sup>programs have had a</sup><sup>**positive and**significant</sup> effect on the rate of growth of<sup>GDP.2 2</sup> This finding **is** verified when<sup>comparing</sup> performance in 1985-88 with<sup>1970-80 and 1981-84.</sup> The change in the annual average rate of GDP growth in<sup>the EIAL countries was 1.6</sup><sup>**percenatage**</sup> **points higher** than that the in all the other<sup>countries when measuring changes with respect to</sup> 1970-80. When measuring differences<sup>with respect to 1981-84, the adjustment</sup> programs are estimated to<sup>have boosted the rate of GDP growth by about 2</sup> percentage points. In other words, adjustment does<sup>seem to have caused an</sup> increase in GDP growth relative<sup>to the early 19809.</sup> Note, however, that this average<sup>result for the EIAL countries involves</sup> an aggregation of successful<sup>and unsuccessful adjustment programs. Typically,</sup> the successful adjustment programs<sup>improved the rate of growth as a result of</sup> higher export growth, which<sup>more than offset the effects of the contractionary</sup> policies. In other zuntries, resources<sup>did not snift rapidly enough from non-</sup> tradable to tradable activities<sup>to increase growth, probably because of market</sup> distortions and institutional<sup>weaknesses.23</sup> The estimations of equation (9)<sup>for the ratio of domestic saving to GDP</sup> find a positive and significant<sup>coefficient of program effects when comparing</sup> 21 For the modified control-group<sup>approach we report the results for the</sup> ratios in constant prices only.

22 In the results (showr in Tables<sup>5.3A and 5.3B) we are only interested</sup> in identifying the effect of Bank<sup>programs. Some of the coefficients for the</sup> other variables on the right-hand<sup>side are most of the time not statistically</sup> significant, in part because<sup>of high collinearity.</sup> 23 Because in many of the countries<sup>in our sample IMF programs were also</sup> in place, we used a dummy for the<sup>presence of the IMP program. However, the</sup> dummy was never significant,<sup>and the results for the effectiveness of Bank-</sup> supported programs were practically<sup>identical to the ones without the dummy.</sup>
20 with the period 1981-84 but an insignificant effect when contrary with the **period** 1970-80. When comparing 1985-88 with 1981-84, **the increase was 3.7 percentage** points of GDP more for the EIAL than for the other countries.

In the case of the investment to 5DP ratio, the adjustment programs appear to have led to a statistically significant drop of 3.5 percentage points of **GDP** between 1970-80 ind 1985-88, whereas the effect betveen 1981-84 **and** 1985-88 was small and not significant. The impact of the programs on investment should, however, be interpreted carefully. Since adjustment **is** not **estilatd** to **have** reduced growth, it must have increased the average efficiency of investment **and** utilization of capital. For countries where an integral component of **their** adjustment programs was to curtail low-efficiency public **(and private) investment** programs, a decrease in the investment rate was part of adjustment. The result is nonetheless worrisome, since in most countries the achievement of sustainable higher growth paths is likely to require an increase in physical capital (and human capital) investment above the average levels of the eighties.

Finally, when controlling fot other factors, the coefficients of the program effects indicate that the programs also had a positive and significant effect on the export to GDP ratio, equal to about 6.5 percentage points of GDP between 1970-80 and 1985-88 and 2.5 percentage points of GDP between 1981-84 and 1985-88.
21 From this analysis we conclude that the ad4ustment lending programs in the EIAL countries have contributed to higher CDP growth and<sup>higher export to GDP</sup> ratios, and the saving to GDP ratio has improved with respect to the<sup>values</sup> reached in the early 1980s. However, the investment to GDP<sup>ratio has decreased</sup> on average for program countries over the level reached in the seventies.<sup>2 4</sup>

# 6. Conclusions

Simple comparisons of the growth rates in the countries that have<sup>had at</sup> least two SAL8 or at least three adjustment loans, with the<sup>first one in 1985</sup> or before, show that their growth has improved relative to that<sup>of the other</sup> countries. However, simple comparisons of the performance of groups of countries are poor estimators of the effectiveness of adjustment programs. The reason is that the performance of an adjusting country results from (i)<sup>the policies that</sup> would have been in place in the absence of adjustment lending<sup>from the Bank,</sup> (ii) world economic conditions, (iii) the effects of the Bank-supported program and (iv) shocks to the economy (such as droughts and earthquakes).<sup>To isolate</sup> the net contribution of Bank-supported programs. it is necessary to "control" for non-program determinants of performance.

When the external shocks and conditions that determine the demand<sup>for</sup> adjustment programs are explicitly controlled for, the evidence<sup>shows that</sup> adjustment lending programs have usually increased the rate of growth<sup>of GDP and</sup> exports to GDP ratio and increased the saving to GDP ratio with<sup>respect to the</sup> level reached in the early 1980s, and have decreased the<sup>average ratio of</sup> investment to GDP over the level reached in the reventies.<sup>2 5</sup> The drop in the share of investment in GDP in the initial years<sup>of</sup> adjustment has to be interpreted carefully. In many countries<sup>their economic</sup> 24 When working with ratios at current prices, the changes in GDP growth, saving/GDP and export/GDP are statistically significant with respect<sup>to both</sup> periods. In contrast, the change in investment/GDP was<sup>negative but not</sup> statistically significant with respect to both base periods. 25 Conway (1990), using another statistical approach for a sample<sup>of 76</sup> developing countries, also concludes that there is a significant association between participation in a World Bank adjustment lending program on the one hand and more rapid real economic growth, improved current account as a<sup>percentage</sup> of GNP and lower ratio of domestic investment to GNP on the other.
22 crisis resulted from a level of public investment reached in the 1970s that was unsustainable. Part of the needed adjustment was a reduction in the high levels of inefficient public investment. For private Investment, the initial uncertainty that occurs when an adjustment program is started most like.'y will result in a slowdown of investment. Despite their disappointing investment performance, the EIAL countries experienced an increase in their rates of CDP growth in 1985-88 relative to 1981-84 and 1970-80. This result must reflect an increase in the efficiency of investment combined with an incrsca! in capacity utilization. However, for countries that have reduced most of their policy inefficiencies, achieving a sustainable and acceptable rate of growth in the 1990s will require investment rates higher than those achieved in the early eighties. The challenge in the 1990s is to create the conditions needed to generate an increasa in the investment to GDP ratios. 2 6 26 The role of policies in generating a rise in investment is discussed in Serven and Solimano (1990).
TABLE 1

|||||(p|INITIAL<br>eriod<br>avera|CONDITIO<br>ge.<br>197|NS<br>0-80)|||
|---|---|---|---|---|---|---|---|---|---|
||1<br>DEBT ASI<br>OrCOPp&/|2<br>DEBTAS X OF<br>c,port98/b/|3<br>REAL<br>EFFECTIV<br>EXCH. RAIE|4<br>FISCAL<br>E DEFICIT A)<br> _%_OF CDP'/|S<br>ANNUALAVG.<br>RATE OF<br>INFLATION|8<br> <br>RATE<br>OF<br>CROWTH|7<br>DOI.ESIIC<br>SAYINGAS<br>d/ X OF CDPdI|8<br>INVESTMEW<br>AS1<br> <br>OF coPd/|9<br>T EXPORTS<br>AS 1<br>OFCDpd/|
|rA[average<br>|41.5 (3)|204.7 (2)|98.3 (3)|-8.4(2)|23.2 (3)|4.8(2)|18.7 (1)|24.3 (3)|24.7 (2)|
|61edan<br>|48.6<br>|199.8|9e.8|-8.9|13.6|6.8|19.2|23 8|22.3|
|1t quartile<br>|24.2<br>|118.3|94.4|-9.2|9.8|2.6|14.6|19.8|16.6|
|3,d quartilo|**49.3**|**_277.0_**|101.7|**-3.6**|19.8|**8.3**|**22.1**|28.2|29 4|
|04t**average**<br>|**39.8**(2)<br>|**208.2**(3)<br>|97.9 (2)<br>|-7.0<br>(3)|21.3 (2)|**3.9**(3)|13.9 (3)|23.6<br>(2)|24.7 (31|
|Wie:ian<br>|34.9<br>|160.1|99.1|-6.2|11.8|3.8|14.3|21.8|20.4|
|1'quartile<br>|22.3|11.0|96.1|-7.1|8.9|2.7|2.9|_15.7_|_12.0_|
|3<sup>rd quartlto</sup>|46.8|320.8|101.2|-2.1|16.9|4.9|24.0|30.8|34.4|
|NA!**_average_**<br>|29.7<br>(1)|144.8(1)|97.8<br>(1)|-4.4<br>(1)<br>|12.2<br>(1)|6.6(1)|14.8(2)|22.8(1)|29.9<br>(1)|
|Mledidan<br>|28.1|112.8|_97.8_|-3.6|11.4|4.8|16.4|21.8|29.1|
|**1 **<sup>**5t**quartil</sup><br>|**18.9**<br>|**78.6**<br>|94.2<br>|**-7.7**|**9.1**|**3.8**|10.0|**18.8**|**18.3**|
|3 <sup>d quarti</sup><sup>**l**</sup>|37.0|128.8|**100.6**|-1.4|**13.3**|**7.0**|**19.8**|26.8|30e|

'ourco World Eanl dota.

- a. **The** ratios **are** computed using data in current US dollars; the period covered is 1976-80. The data includtotal disbursed guaranteed an-' non-guaranteed debt. f.Iorts of goods and non-factor sorvices **aro** obtained from balance of payments stotistics in **the** World Bank **date file.** 7 1 - column corsiders only the average for the period 1978-80 and is based on IIMF date; **Algeris,** Bolivia, Indonesia **and Jsmsics have** date ave **lab:e** only **.'-.e** 1979, Guinee-Bis..u and Morocco since 1978. and Brazil. B.,rkina Foso China, Congo, Greece, Niger and Portugal since 1917.

- d/ The ratios **are** calculated with data in constant local currency. **Note: The numbers** in **parentheses are the** rankings of **the** country groups for that indicator **(1beat' is one).**

f,l710 tSPiFQ 90 F s
# TABLE 2

# COUNTRY PERFORMANCE

||Ret.<br>1970-80|of Growth<br>1981-84|<br>1985-88|Ra<br>DItow,.s<br><sup>1970-80 1</sup>|tio of<br>tic<br>Ss ing<br><sup>981-84</sup>|to GDP<br><sup>1985-88</sup>|<br>Inve<br>1970-80|Ratio of<br>stment to<br>1981-84|CDP<br>1985-88|Ratio of<br>1970-80 1|Exports<br>961-84|toCDP<br>1985-88|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|F<br>.<br>.....|A<br>Z'|II 1()|4 2(I)|16 7(I)|(4 6t (I)|I? 2(1)|24<br>1(3)<br>|19 9 (I)<br>|10 6 (I)<br>|24<br>7 (2)<br>|25I<br>_1f 2)_<br>_'_|20 I (1)<br>|
|||'1**6**|3 7|1127|147y|IS|2(a|19 0|I6|3|_2,)1_|34 6|
||.~~ o..~~%.'*<br>_2_**S**|I|2I|0<br>14'|09|I|96<br>|I',<br>|Lb<br>|'5<br>|12<br>||
|14o.,.,6,I.|<br>_6_|2 7|6 0|L2<br>1|10|19 I|62|2|21)|29**4**|30 I|3|
||I<br>11)|II2)<br>|I0(2)|(3 9 (3)|(2) 2|13 3 (3)|23 6(2)<br>|<br>72 0(2)<br>|2'lI (1)<br>|24 7(1)<br>|24 4 (3)<br>|<br>23 6**(1)**<br>|
|*<br>do...<br>.|**4 9**|~~~3<br>**9**<br>|3 9<br>|24 0|211|16 6|30a|2b 11|21_2_|34 4|25, 3|2|
|**44**|**S**())<br>|1~~~~<br>(I<br>|~I(<br>2 7 13)|1 46<br>(2)<br>|44<br>0(3)<br>|144(2<br>|2 6 (1)<br>|24**I,**(3)<br>|20 0 (2)<br>|29 9**(I)**<br>29 1|716**1)**(1<br>253|?-4<br>(2)<br>7/0|
||**46**|<br>**/6 **|<br>22|**1**<br>**4**|**44**<br>|**(1**<br>|**2?6**|_77?_|**_21_**<br>a<br>|<br>|<br>||
||**.1**<br>*.*.~~~~<br>**6**|.<br>.<br>**I**<br>I_2_|0 7|100|79~~~~~|~~<br>**96**<br>|a<br>|**I?**I<br>|ii 0<br>|1 6 3<br>|**II9**<br>**32? I**|**1**<br>**4**|
|**1**<br>**..**<br>.|||_3_9|**I**96|20 0|19_2_|_25_a|_2?3 _|23 2|36 6|||

Sou,ce: World Ban), data.

h. at,, **_are_** _calculated_ with date in constant<sup>local currency.</sup> Note: Th. f,qu,oa in parentheses<sup>indicate th. ranking. of th. country groups for</sup><sup>**that**</sup> indicator **('best a** on.).

(T22P.WP)FQ (PATOX90.WKI() X i-i-g0
# TABLE 3

# SELECTED INDICATORS OF POLICY STANCE

||221jIf2ijj|_EJ(_<br>|h-mat-<br>|_i-_<br>|FIL<br>of<br><br>|Ftp 5 1 .Qijjo.<br>|jb!~n.<br> <br>|||.'.<br>4..<br>|o<br>f<br>|p<br>~ ~<br>|<br>95~P,<br>|9<br>j<br> <br>|<br> <br>|*<br>|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
||19708<br>0|1901-82|1983-84<br>|1985.08|1970so|1982 82|1903 84<br>|lo9s0788|2970 80|2902-82|1983-84|2985as|1970 80|1901 82<br>|193<br>O.<br>|1982.so|
|A<br>-.|903(3)|210 7(3)|<br>103 8 (2)|79 .2 (1)|-I<br>4 (2)|-7<br>6(3)|<br>-6 2 (2)|-46 (3)|23 2 (3)|27 5 (3)|59 8 (3)|150**4**(3)|5I(I)|7 I<br>(II|3 2 (1)|2**4**(1(|
|14.4 ..,|96 8|2057|90 2|78 9|-6 9|-7 8|86 1|-3 8|135|14 3|179|134|5 0|6 I|I9|0 7|
|2.6, q.-..6.|94 4|97_6,_|se<br>8|_89 7_|.9 2|-20 5|-7 1|-5 9|9 8|II 5|8 5|4 S|21|3 9|0 2<br>|2 8<br>|
|3,dq.-t,?|to017|1123|107 9|88 3|-3 5|-4 3|-3 3|-22|198a|3122|3122|26 5|0 4|10 2|6|43|
|A..,.~.|_1.1_9 (2)|1042 ()|<br>103 4 (I)<br>|<br>81<br>2 (2)<br>|-?<br>0 (3<br>|)<br>-7 3 (2<br>|)<br>**-76**<br>(3)<br>|<br>-8 4 (3)<br>|21 3 (2)<br>|<br>22 3 (2)<br>|44**6**(2)<br> <br>|37 6 (1)<br>|7 3(3)<br>|10 9(2)<br>|7?7(2)<br>|6 8<br>|
|14.4.-|99<br>1|1040|94 9|80 S|-5<br>2|-5 8|.5I7<br>|-5 7<br>|IIa8<br>|14 3<br>|II<br>I<br>|10 I<br>|5 5<br>|91<br>|5 0<br>|2 I<br>|
|2.6<br>qo.r6l..|95<br>I|96 3|89 3|**64**8|-7<br>I|-8 0|-9 6|22 0|a9|9a<br>|7a<br>|3 7<br>|2 1<br>|I 3<br>|-0I<br>|0-<br>|
|3,4|1..~'<br>01 2|12225|2048a|97 2|-2<br>1|-3 6|-3 3|-3 1|16 9|25. 2|3968|33 9|9 4|13 9|12 8|12 2|
|A.-.97|8(2)|106 7 (2|)<br>118 7 (3|)<br>115 0 (3)|-4 4(1<br>|)<br>-6 7 (<br>|2)<br>-,70<br>(2)<br>|<br>-6 4 (2)<br>|12 2 (1)<br> <br>|<br>13 5 (I)<br>|15 2 (2)<br>|135 7 (2)|6 7(2)<br>|12 6 ()<br>|I7<br>(2)<br>|5 6<br>27)|
|_14.4..._<br> <br>|97 6<br>|107 4<br>|123 0<br> <br>|101 1<br>|-3&<br>|-6 2<br> <br>|-7I2<br>|6 4<br>|II<br>**4**<br>|104<br>|92<br>|9 0<br>|35<br>|7 5<br>|61 I-<br>||
|2.6<br>g...6.I.<br>Srd<br>W-W6..|98 2<br>100 5|0102I<br>Its7|9<br>0<br>12046|87 4<br>12'2|-7_7_<br>-1 4|-20<br>4<br>-24|9a6<br>-37|-20 3<br>-3 0|91<br>133|_7_6<br>13|6 0<br>25is9|4 4<br>202|2 0<br>8 4|3 0<br>172|I 9<br>104|0 5<br>89D|

o.,.W-rld 8..-I 4.6.

I/ Th. ,..I *ff.vt.... I.* . _t.ha._ 5... fr-e **t.** IW d.t. I... 75. I,.t. _-ob-_ to.4r.ol **U. *..... .** of **U..** 1978 80 **_rod -._** JA 4.,.. **.** 4.(19800.00). *.4-c...: a .. 4.p'.c,.5,o' I, .. O.rto r coaSst.4 .. :,.o _4.6_ t. Carr.t lo-a cur--c Alg.,.., 11ol-g,. laot _._ ta _J.-.cm_ **h....** 4.5.0 J-1.110.h o,,I, tn,.t 2979 ...a-8.. ts .4 Pero h-.. **4.1.** a.-,.bi. o,,ly -c. 1976 Ir.s.lBrl,. F.-.. Cha..t, Con q. N..r , go a Fr.ga ... 4 *...lI.bl 047 ,a 1977 Th. 2976 ...4 1988 4.6. f.r C-r..c r a Th I. r.t,o.ar ctlva .4 t.U 4.t. a. -ta.5, loalcrec Hat. Th. f'gr... .. p-reaU...... *4-.c. t. h .n . of **Lb.** -outry q-op. fo.t5.6. .. 4-L.o (%b..%6 **a-n** (T23P WP)F0 _(X[- 1-90)FO_
# TABLE 4A

# EXTERNAL SHOCKS

||1981-84 Rela|tive to|1970-30|1986-88**Re**|**lative**to|1970-80|.'I9-88 R|elative t|o 1981-84|
|---|---|---|---|---|---|---|---|---|---|
||Terus|Roal|Total|**Terws**|Reel|Total|**Terus**|Real|Total|
||of<br>Trade|Int.<br>Rate|Shock|of<br>**Trade**|Int.<br>Rate|Shock|of<br>**Trade**|**Int.**<br>**Rate**|Shock|
|EIAL|-10.6|-1.9|-12.4|-o.0|-3.2|-9.2|1.1|-0.2|0.9|
|CAL|-2.9|-2.0|-4.9|-3.4|-3.6|-7.0|-0.4|-0.6|-1.0|
|hAL|-10.4|-1.2|-11.6|-13.9|-2.0|-16.9|-3.3|-0.3|-3.8|

## Source: World Bank data.

Note: The total effect of **the** external shocks<sup>as</sup><sup>**a %**of CDP is computed</sup><sup>**as**the sum of</sup><sup>**the**real</sup> interest rate offect and **the** terms of trade<sup>offect. The interest rate effect is calculatedas-(r-</sup> rbas*):(debt/GDP)be, **where** r is the real interest<sup>rate computedas(i-dp/p)/(1+dp/p); rb,s is the</sup> averag resl intereit rate of the base period<sup>(1976-80) or (1981-84); i is the rat;o of intorest</sup> payments to total debt; interest payments<sup>are calculatedby adding public interest payments to</sup> private interest payments; private irterest payments<sup>**are**proxied by multiplying private debt by L</sup> (L equals the thr-4-month annualized LIBOR plus<sup>1%); private debt is estimatedbysubtracting public</sup> and publicly guaranteed debt from total debt;<sup>dp/p is 'world' inflation (proxied by the percentage</sup> change of the CNP deflator in the US, and (debt/gdp) is the ratio of debt to GOP in the year preceding the beg nning of the end reriod. The debt<sup>**dat9**correspond to total disbursed guaranteed</sup> and non-guaranteed debt. The debt and interest rate<sup>information is available startingii</sup> 1976 only. Therefore, the average for the par;cd 1970-1980 is estimated<sup>using information for the period 1975-</sup> 80.

Th- effect of the terms of trsde is computed **as**<sup>((PX/PXbas,)-13J(X/CDP)</sup> -((PM/PUbase)1)S(U/CDP)beg, where PX and PM are the average<sup>export and import price indices</sup><sup>**deflated**by the US</sup> GNP deflator, respectively; PX Jaso and PWbase<sup>**are**the average price indices of the base period; X</sup> and **U are** exports and imports o'? goods and non-factoral services;<sup>and (X/CoP)b,g</sup><sup>**and**(U/CDP)be*</sup><sup>**are**</sup> the ratios of X and W to CDP respectively in<sup>the yeor preceding the beginning of the end peFiod.</sup> All the variables **are** denom nated in current US<sup>dollars.</sup> (ARATEI.WKJ)FQ (ASNOCKT1.WK1)FQ (T23S,WP)FQ X-30-90
# TABLE 4B

# TOTAL EXTERNAL SHOCKS

||1981-84<br>Relative<br>to 1970-80|1985-88 Relative<br>to 1970-80|1985-88<br>Relative<br>to 1981-84|
|---|---|---|---|
|EIAL<br>average|-12.4|-9.2<br>|0.9<br>|
|Median|-13.6|-10.1<br>|0.7<br>|
|,St<br>quartile|-17.1|-13.3|-2.3<br>|
|3 <sup>rd quartile</sup>|-8.9|-3.3|3.4|
|CAL<br>average|-4.9|-7.0|-1.0<br>|
|Median|-6.3|-6.9<br>|-1.5<br>|
|]st<br>quartile|-16.8|-13.1<br>|-5.2<br>|
|3 <sup>rd quartile</sup>|-1.9|0.5|2.1|
|NAIL average|-11.6|-15.9|-3.6<br>|
|Median|-10.8|-11.2|-1.6|
|rSd quartile|-20.6|-25.0|-7.1<br>|
|3<sup>r</sup><br>quartile|-2.1|-5.2|0.0|

Source: *orld Bank **data,**

**Note:** _The_ total **effoct** of the **external** shocks **as a** X of CDP **is** computed **as** tho **sum** of **the real** interest **rate s^a** te-.s of trade *ffects. **The** ;nterest rate effect **is** calculated **ae** -(r-rb,Se)*(debt/COP)b* 9<sup>, whern</sup> r **iS** the **reoal** --. eest **rate** computed **as** (i-dp/p)/(l-dp/p); rrbs **is the averago** real intorest **rete** in **base** poriod (1975-80); (198 -84. is **the** ratio of interest **peyments** to tote1 **debt;** interest payments **are** calculated by adding public and privste -te-est payments; **privste** interest **payments are** proxied by multiplying private debt by L (L oquolo three-month annualized .:39R plIQ 1%); private debt **is estimated** by subtracting public and publicly guaranteed debt from totol debt; _dp,p_ S 'world' inflation (proxied by **the percentage** change in the CNP deflator of **the** US, end (debt/gdp)bl 9 ie **the** aSt o _6f_ debt to GOP in the **year** preceding **the** beginning of tho and period. **The** debt **data** correspond to total d sb..sed guaranteed and non-guerenteed debt. Oebt and **interest** rate informaeion **is avsi lable** starting in 1975 only. Yhsefo e **the** average for the period 1970-80 is ***etimated** using information for **the** period 1976-80. **Tie** effect of the **terms** of **trade is** computed **as** ((PX/PXbaa )- **)C(X/GOP)b4** -((PM/pMb **se)-)*(W/CDP)beg,** wh **vs** Px I'd P4 **are** the **everage** export **and** import **price** indices **deflate** by the US **CNI9** deflator, respectively; PXb4se sd oase **a-a** the **evorage** price indices of **the** base period, X **and** M **are** exports **and** imports of GNFS; **and** (X/COP)b.n **and** (Wi/ZP p a,o **the ratios** of X **and** W to COP respectively **at the** year preceding the 6.ginning of the **end** period. A I th **oa** . *s9 **a-e** denominsted in current US **dollars.**

. **5,** _,005_ **3*** }.i
TABLE 5 NON-OFFICIAL EXTERNAL FINANCING BEFORE AND DURING ADJUSTMENT NET FLOW AS % OF GDP

||1975-80|1981-82|1983-84|1985-88|
|---|---|---|---|---|
|EIA|1.8|3.3|0.4|0.0|
|OAL|3.0|1.1|0.6|0.5|
|NAL|1.1|3.1|2.2|-0.2|

Source: World Bank data.

1 ot The .t cup **ta #..** o,^ **Ce'O"^^** d to tr **net** 19*d long **4'0t.ta-** C t. **#o. obtan;.** **_fro_** t. balance of **Dey.*nt.. *-.. nat** **_4_** O.* **_t4_ iiriaff.'t.** ^ c_.^*^tS dol **_a._** * **Psaia 5_ iq1** tat en.' nt e'0".a 44 **Qe** by tn. **_Oe_ data** . to (b b .o- **Ct.i** tc **dtlot** ed **... t. o'*** **_ataril)_** t?it tre **_c'ad-to,a_** no., *A All **ce.tii** .'eSbla sb *1 **5'** **_ieS_** _Eanea.at. *^_

**( to** "; do. **_(C_** 453.D C ( 1,3;)Cj
4

-

-

**TABLE** 5.1 **A**

**CONTROL-GROUP ESTIMATES OF THE PROGRAM EFFECTSV/ (ratios at** current prices)

|Perlcds<br>CrDmpared|Change in<br>GDP Growth|Change ir.<br>Investment/CDP|Change in<br>Saving/GDP|Change in<br>Exports/GDP|
|---|---|---|---|---|
|1985-88<br>with<br>1970-80|0.017<br>(2.402)|-0.015<br>(-1.108)|0.014<br>(0.839)|0.042<br>(2.023)|
|i985-88<br>with<br>1981-84|0.028<br>(3.141)|0.017<br>(1.498)|0.021<br>(1.438)|0.042<br>(3.070)|

a/ As measured by the coefficient of the program dummy, 0,, of equation (2). The t-values are in parentheses.

**TABLE 5.1 B CONTROL-GROUP ESTIMATES OF THE PROGRAM EFFECTS/ (ratios at constant prices)**

|Periods<br>Compared|Change in<br>**GDP**Growth|Change in<br>Investment/GDP|Change in<br>**Saving/GDP**|Change in<br>**Exports/GDP**|
|---|---|---|---|---|
|1985-88<br>with<br>1970-80|0.017<br>(2.402)|-0.031<br>(-1.786)|-0.013<br>(-0.620)|0.038<br>(1.603)|
|1935-88<br>with<br>1981-84|0.028<br>(3.141)|0.017<br>(1.322)|0.025<br>(1.516)|0.018<br>(1.466)|

a/ As measured by the coefficient of the program dummy, 6,, of equation (2). The t-values are in parentheses.
TABLE 5.2 MAXIMUM LIKELIHOOD PROBIT ESTHIATES OF **THE** STATUS PARTICIPATION EQUATION

|VariabIe|Coefficient|Std. Error|t-Stat.|2-Tail Sig.|
|---|---|---|---|---|
|CONSTANT|-3.338|1.881|-1.775|0.081|
|CACC6|-15.269|6.685|-2.284|0.026|
|NETF6|7.731|5.183|1.491|0.141|
|RER2|0.020|0.012|1.667|0.101|
|SHOCKI|-3.156|1.583|-1.994|0.051|
|DEBT6|2.652|1.525|1.<br>-8|<br>0.087|
|INV2|-8.692|4.574|-1.4v.|0.062|
|D.'|2.045|0.715|2.858|0.006|
|D2|0.266|0.672|0.396|0.693|
|D3|-2.469|1.033|-2.389|0.020|
|D6|0.725|0.637|1.138|0.259|
|D7|3.540|1.008|3.511|0.001|
|DINFLAC|-1.465|0.658|-2.223|0.030|

Ncte: Log likelihood a -24.99; pseudo R<sup>2</sup> = 0.50. Number of observations: 77. The pseudo **R**<sup>**2**</sup> measure is equal to [1-(log L,)/(iog **L]. where L,** denotes the maximum of the likelihood function when maximized with respect to all ..e parameters, and L. is the maximum when maximized with respect to the constant term oniv.
# TABLE 5.3 A

_MODIFIED CONTROL-GROUP ESTIMATES OF THE PROGRAM EFFECTS!' (constant prices) (1985-88 relative to 1970-80)_

||_C_|_GDPI_|_INVI_|_SAVDOM1_|_EXPI_|_RER1_|_FISCi_|_SHOCK2_|_d_|
|---|---|---|---|---|---|---|---|---|---|
|_Change in_<br>_GDP growth_|_0.004_<br>_(0.133)_|_-0.613_<br>_(-5.164)_|_0.032_<br>_(0.693,_|_-0.014_<br>_(-0.425)_|_-0.034_<br>_(-1.198)_|_-0.000_<br>_(-0.003)_|_-0.052_<br>_(-0.742)_|_-0.026_<br>_(-1.358)_|_0.016_<br> <br>_(1.988)-_|
|_Change In_<br>_investmentlGDP_|_0.009_<br> <br>_(0.128)_|_0.854_<br>_(3.339)_|_-0.561_<br>_(-5.509)_|_-0.014_<br> <br>_(-0.173)_|_0.021_<br> <br>_(0.427)_|_0.000_<br>_(0.609)_|_-0.086_<br>_(-0.764)_|_0.037_<br> <br>_(0.724)_|_-0.035_<br>_(-1.725).-_|
|_Change in_<br>_savinglGDP_|_-0.094_<br>_(-0.972)_|_1.336_<br>_(3.975)_|_-0.011_<br>_(-0.084)_|_-0.345_<br> <br>_(-3.281)_|_0.004_<br> <br>_(0.065)_|_0.000_<br>_(0.707)_|_0.079_<br>_(0.513)_|_-0.010_<br>_(-0.187)_|_0.014_<br> <br>_(0.542)_|
|_Change in_<br>_exportsfGDP_|_-0.092_<br>_(-0.700)_|_-0.412_<br>_(-0.753)_|_0.634_<br>_(3.746)_|_-0.295_<br>_(-1.816)_|_-0.179_<br>_(-2.005)_|_0.001_<br> <br>_(0.487)_|_0.621_<br>_(2.852)_|_-0.074_<br>_(-0.833)_|_0.065_<br> <br>_(2.023)_|

_No:e: The t-values are in parentheses._ _* Statistically significant at the 2.5% level. ** Statistically significant at the 52 level._ _*** Statistically significant at the 7.5Z level. Statistically significant at the 10% level. al Estciation of equation (9), using d as the instrument of d._
# **TABLE** 5.3 _B_

_MODIFIED CONTROL-GROUP ESTIMATES_<sup>_OF PROGRAM EFFECTS!'_</sup> _(constant prices) (1985-88 relative to 1981-84)_

||_C_|_GDP2_|_INV2_|_SAVDOM2_|_EXP2_|_RER2_|_FISC2_|_SHOCK3_|_d_|
|---|---|---|---|---|---|---|---|---|---|
|_Change in_|_0.009_|_-0.750_|_0.057_<br>|_-0.030_<br>|_-0.015_<br>|_0.000_<br>|_0.028_<br>|_0.026_<br>|_0.020_<br>|
|<br>_CDP Growth_|_(0.625)_|_(-11.480)_|_(1.521)_|_(-0.989)_|_(-0.708)_|<sup>_(0.643)_</sup>|<sup>_(0.883)_</sup>|_(0.459)_|_(2.561)_|
|_Change In_|_0.027_|_0.006_|-0.343|_0.092_<br>|_-0.022_<br>|_0.000_<br> <br>|_-0.052_<br>|_0.081_<br>|_0.001_<br>|
|<br>_Investment/GDP_|_(0.908)_|_(0.063)_|_(-4.986)_|_(1.635)_|_(-0.662)_|<br>_(0.360)_|_(-0.860)_|_(0.806)_|_(0.039)_|
|_Change_<br>_in_|_-0.026_|_0.116_|_0.095_|_-0.238_|_0.069_<br>|_0.000_<br>|_-0.029_<br>|_0.128_<br>|_0.037_<br>|
|<br>_Saving/GDP_|_(-0.702)_|_(0.860)_|_(0.795)_|_(-2.714)_|_(1.249)_|_(0.306)_|_(-0.312)_|_(1.199)_|_(2.186)_|
|_Change in_|_-0.006_|_0.086_|_0.035_|_0.027_|_0.069_<br>|_-0.000_<br>|_0.000_<br>|_0.063_<br>|_0.025_<br>|
|<br>_ExportslCDP_|_(-0.219)_|_(0.817)_|_(0.494)_|_(0.508)_|_(1.522)_|_(-0.849)_|_(0.006)_|_(0.688)_|_(1.640)_|

_Note: The t-values are in parentheses._ _* Statistically significant_<sup>_at the 2.5 1 level._</sup> _** Statistically significant_<sup>_at the 5 t level._</sup> _*** Statistically significant_<sup>_at the 7.5 t level._</sup> _**** Statistically significant_<sup>_at the 10 t level._</sup> _al Estimation_ of _equation (9), using d_<sup>_as instrument of d._</sup>