Last October, Congress allocated $18 billion to the International Monetary Fund (IMF) following an intense debate on the effectiveness of the IMF, as well as its capacity for reform to improve its performance. To measure the IMF's effectiveness objectively, Heritage Foundation analysts looked at the IMF's economic forecasts from 1971 to 1998 for various industrial countries and developing regions published biannually in the IMF's World Economic Outlook (WEO).

The researchers found that the IMF made unbiased and efficient forecasts for developed countries in terms of real Gross Domestic Product (GDP) growth, inflation and balance of payments on the current account.

However, they found serious errors in IMF forecasts for developing regions that suggest a systemic bias in IMF reports. For example:

• The IMF overestimated real GDP growth for Africa by an average of 1.05 percentage points each year and underestimated inflation by 67 percentage points each year in the Western Hemisphere.

• For every additional billion in Special Drawing Rights (SDR) the IMF gave to the Western Hemisphere, the forecast error increased by 0.17 percentage points; a similar correlation occurred for inflation in the pooled regions and for the balance of payments in Africa and Asia.

• For Africa, assuming real GDP growth and consumer price inflation were the same as the preceding year predicted outcomes more accurately than did the WEO forecasting model.

Because the IMF provides funding and makes policy recommendations to countries, its WEO forecasts are likely to support its policies. Thus IMF forecasts for developing regions were overly optimistic -- and their optimism, and degree of error, increased the more funding countries in a region received -- which indicates those countries were following IMF advice.

Source: William W. Beach, Aaron B. Schavey, and Isabel M. Isidro, "How Reliable are IMF Economic Forecasts?" CD Report No. 99-05, August 26, 1999, Heritage Center for Data Analysis, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.