Whenever countries face financial crises, they often turn to the International Monetary Fund (IMF) for a bailout. Many IMF bailouts come with programs for economic reforms. These programs are meant to tackle the causes of financial crises such as weak governance, transparency, and regulatory environments. The IMF argues that these programs help stabilize markets, reduce capital outflows, and restore economic growth. Nevertheless, critics of IMF bailouts argue that these policies are actually enabling political and business interests to circumvent less expensive market solutions. They also lead to moral hazard among international banks who may be willing to lend money to ailing governments and companies.
In return for financial assistance, bailed-out countries agree to implement the strategies outlined in their IMF-supported programs. These strategies include, but are not limited to, monetary and fiscal policy tightening, lowering debt and foreign borrowing, privatization, and devaluation of currencies. These programs are referred to as structural adjustment policies or programs (SAPs).
The effectiveness of SAPs is controversial. Some studies, such as Stone (2004) and Kilby (2009), found that the IMF does not seriously punish its political allies who fail to cooperate with its structural adjustment program conditions. Others, such as Presbitero and Zazzaro (2012) and Dreher, Jan-Egbert, and Vreel (2007), reported that the IMF’s loan allocations and conditionality are biased by political connections with major donor countries.
However, the literature is still inconclusive on the issue. The fragmented nature of previous studies and the use of different events, variables, and periods, make it difficult to draw a definitive conclusion.
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