...criticisms to the intermediate targets set in IMF-supported programs in the areas of monetary and fiscal policy, as well as to the macroeconomic outcomes--such as inflation, employment, and growth. Are both groups right? Is there any validity to these criticisms? Or, are the benchmarks by which IMF programs are judged simply misplaced?

Defenders of IMF-supported programs would argue that the programmed objectives and targets should not be viewed as forecasts. The objectives are set high so that countries can aspire to achieve them. Similarly, targets are set tight to ensure that policy slippages are kept to minimum. If targets are missed either because of negative exogenous shocks or because the programs were set too tight, mechanisms in IMF policies and procedures exist to provide waivers for missing these targets. As a matter of fact, ample evidence exists on the waivers given in IMF-supported programs to ensure that IMF loan disbursements are not interrupted as a result of factors outside of the authorities' control. This raises the question of whether tight policy targets and ambitious objectives are deliberate. And, if they are deliberate, do they help countries achieve better outcomes than they could otherwise?

Most of the literature on IMF-supported programs focuses on the effects of these programs on macroeconomic outcomes. However, because the decision to enter into an IMF program is not random but driven by country-specific characteristics that can be difficult to identify, this literature has faced serious methodological difficulties. Results that do exist have inherent problems in evaluating outcomes against counterfactuals, or they depend on instruments that are not entirely convincing. (1)

In this paper, we evaluate the outcomes in a IMF-supported program on the basis of the benchmarks that are set in the program itself. By taking this approach, we hope to shed light on how program design can be improved. Moreover, this approach explicitly avoids the issue of nonrandom selection and the counterfactual. For example, instead of focusing on what economic growth might have been without an IMF-supported adjustment program, we compare growth with the outcome envisaged in the adjustment program itself. In addition, we ask whether under- or overperformance in the intermediate policy targets mattered for achieving the goals of the program. The latter has particular significance because it can be expected to shed light on whether IMF programs target the right policies and at the appropriate levels for the objectives they are intended to achieve. Note that in answering these questions, the political economy questions of whether some countries got more or less loans for political reasons are unimportant--this is because IMF programs, when they are designed (or modified in light of new information), should take these constraints into account in setting policies and objectives. These policies and objectives should, in turn, be mutually consistent.

In an earlier paper based on a much smaller sample size (Baqir, Ramcharan, and Sahay, 2005), we found that programmed objectives on inflation and growth in IMF-supported programs were often not fully achieved. Given the small sample of 29 countries in that paper, however, we were unable to report conclusive results and, in particular, to explore the link between objectives and policy targets.

In this paper, we expand the data set to 94 countries and confirm our previous preliminary findings on the optimism on growth projections in IMF-supported programs. We then compare the programmed and actual values of other program objectives (inflation and current account balance) and uncover systematic patterns. We conduct a similar exercise for intermediate policy targets, namely fiscal and monetary targets. We then explore the relationship between the growth objective and intermediate policy targets. Our focus on the growth objective is motivated by previous findings in reviews of IMF-supported programs: the relatively poor performance on meeting the growth objective.

Our main results are as follows. First, IMF-supported programs achieve the objectives set for external current account balance more frequently than those set for inflation and growth. All three objectives are met simultaneously in only about 10 percent of the programs. Likewise, the programmed values on intermediate policy targets on the fiscal and monetary variables were generally more ambitious than those actually achieved in the programs. Second, better fiscal performance is associated with the achievement of higher growth. Finally, systematic biases in inflation and growth projections exist even after controlling for shocks and policy implementation.

I. Framework for Program Objectives and Targets

To assess how IMF-supported programs perform relative to their internally set benchmarks we first need to describe how IMF staff set these benchmarks. Analytical frameworks used to set quantitative objectives and intermediate policy targets vary depending on the country and the nature of the economic problems to be addressed. The basic framework in IMF-supported programs is the financial programming framework, which is supplemented to varying degrees by the balance sheet approach, debt sustainability analysis, and vulnerability assessments. As such, there is no one framework to be tested in the data. (2) Nevertheless, a comparison of what programs endeavored to achieve with the realized outcomes sheds useful light on program-design issues.

In comparing actual outcomes with the corresponding programmed values, we explore several questions. If there is a systematic difference between outcomes and programmed values, it would suggest that the average program is biased in a particular direction. Furthermore, if this difference persists even after controlling for the extent of policy implementation, it would indicate that systematic shortfalls in achieving objectives are not simply due to policy slippages. Instead, it would show that even when countries implemented fiscal and monetary polices as envisioned under the IMF-supported program, they would not, on average, have achieved the objectives envisioned in the programs. That is, the intermediate policies were not consistent with the objectives. (3)

The financial programming framework is based on the monetary approach to the balance of payments and uses a series of macroeconomic accounting identities to link economic growth, inflation, the money supply, the external current account, the budget deficit, and other macroeconomic variables (Mussa and Savastano, 1999). (4)

The intermediate policy targets derived within the financial programming framework, such as domestic credit and the fiscal balance, are designed to be consistent with the set of macroeconomic objectives--such as growth, current account adjustment, and inflation--and are chosen to help resolve the country's economic difficulties. (5) In other words, countries that meet the intermediate policy targets should conditionally expect to achieve the macroeconomic outcomes that underlie these targets.

A typical financial programming exercise starts by setting targets for inflation and growth. An estimate is made for money demand, often using an assumption for income velocity of money, which then implies a ceiling on money creation consistent with the program objectives. Money creation in excess of this amount would be inflationary. In practice, velocity is often chosen either by examining its historical pattern and making some assumption about how it is likely to be affected by particular factors in the near future and by the credibility of having a IMF-supported program itself, or more formally by estimating money-demand functions.

With money supply programmed, and given an external target on the net foreign assets of the country, the banking system's balance sheet yields the maximum tolerable level of net domestic assets consistent with program objectives. By definition, government (public sector) deficits financed from the banking system and private sector credit are the components of the banking system's domestic assets. A higher government deficit financed by the banking system would crowd out credit to the private sector. And to the extent that private sector credit facilitates investment, such crowding out would affect real output. (6) In light of these considerations, a ceiling is set on government deficit. We use these relationships to examine, in the empirical section that follows, how assumptions on income velocity of money and programmed fiscal adjustments affect growth outcomes.

II. Data

The data for this paper have been assembled from an internal IMF database on IMF-supported programs. In the sampling methodology, a unit of observation is defined as a program country-year: a calendar year in which disbursements were made to a particular country. Before disbursements are made, a document known as a staff report is issued and discussed at a meeting of the Executive Board, the body that decides IMF policy and approves IMF-supported programs. As their name suggests, staff reports contain the IMF staff's assessment of a country's economic situation and policies. They include the program's intermediate policy targets and their macroeconomic counterparts that are meant to correct the particular problem(s) that prompted the country to seek IMF assistance. After each such Executive Board meeting, the data in the staff report on the key macroeconomic indicators are recorded in the database.

Typically, there are several Board meetings on a country's program in a given year. The staff report issued for each successive meeting contains an updated set of historical and programmed/projected data on key macroeconomic indicators. As such, there are several vintages of the programmed values for any variable of interest. We make use of the information in the evolving forecasts/programs by recording the programmed values for a variable [x.sub.t] in years t, t - 1, t - 2, and t - 3 from the most recent staff report in that particular year.

Data on outcomes are generally not released until after the end of the year. We therefore define the within-year horizon as the forecast made for [x.sub.t] in year t. Similarly, a...

NOTE: All illustrations and photos have been removed from this article.



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