A new study by Vice Provost Geoffrey Garrett demonstrates that the policy conditions the International Monetary Fund attaches to its loans increases the prices investors are willing to pay for state-owned assets privatized sold off by governments in developing countries.
Well over a trillion dollars worth of state-owned firms have been privatized by governments all around the world since 1980. Economists argue that privatization increases efficiency by placing decisions in the hands of markets rather than public officials. The IMF is sufficiently enamored of privatization that it has included for more than a decade stipulations about the sale of state-owned assets as condition for the receipt of its loans.
The evidence that privatization directly increases efficiency, however, is not nearly so clear as most economists would have us believe. Moreover, the IMF has been roundly criticized for imposing unrealistic and unhelpful policy straitjackets on developing countries in economic – and often political – distress.
In this new study, Garrett and his collaborators, Nancy Brune from Yale University and INSEAD’s Bruce Kogut, delineate an important indirect economic benefit of IMF conditionality. Private investors are willing to pay more for privatized assets in countries that owe the IMF money (and hence that are subject to the policy constraints attached to these loans). The reason for this is that investors view IMF conditionality as a de facto good housekeeping seal of approval. Countries that owe the IMF money are more likely to pursue market-friendly policies into the future – with respect not only to privatization, but also to taxes, deregulation, balanced budgets and the like. The magnitude of this effect is striking. For every dollar a developing country owed the IMF in the early 1980s, it subsequently privatized state-owned assets worth roughly 50c.
Garrett and his colleagues argue that this “credibility bonus” of IMF lending does not necessarily justify the types of policy conditions typically imposed by the IMF on developing countries that receive its financial support. However, the additional capital drawn into developing countries as a result of the IMF-privatization nexus is no doubt helpful to these economies.
The paper is forthcoming in the journal IMF Staff Papers.
Click link below to view and download a full version of the research paper.
Published: Thursday, November 13, 2003
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