The International Monetary Fund (IMF) gives loans to countries in economic trouble. In exchange, countries must implement a programme of painful policy reforms. Countries rarely complete these programmes. Some scholars have blamed the failure rate on a lack of motivation by borrowing governments. Facing pressures from special interest groups, such as labour unions and business groups, governments often backpedal from previous commitments. Our research also investigated financial market responses to programme interruptions. Using annual data for all developing countries, we found that investors rate a country lower when it had a permanent interruption of an IMF programme. Monthly data from 30 emerging market economies showed that a permanent interruption increased the cost of borrowing by governments by about 3%.Borrowing countries that failed to implement IMF programmes therefore faced the risk of more volatile capital flows and higher refinancing costs. Ultimately, higher financing costs made them even more dependent on the Fund, entrapping them in a cycle of dependency.
SOURCE: THE CONVERSATION
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