NCPA - National Center for Policy Analysis


December 14, 2005

The International Monetary Fund (IMF) and the World Bank's involvement in reforms of developing countries may do more harm than good, according to two Wharton School of Business studies led by Witold Henisz.

Indeed, IMF and World Bank programs can produce a backlash when they are implemented in countries where domestic support for free-market reforms is lacking. In some cases, the result is a "mob on the street" scenario where angry crowds protest and political unrest prevails.

Henisz and his colleagues examined 71 countries between 1977 and 1999 and found:

  • IMF or World Bank involvement (multilateral borrowing) increases the likelihood of a developing country privatizing its markets and separating the regulatory regime from the executive branch.
  • However, such involvement does not reduce politicization of the regulatory regime, nor does it improve market liberalization (access of firms to enter the market).
  • Moreover, investors who send money to countries facing stronger-than-average pressure to enact IMF or World Bank reforms are 63 percent more likely to face some type of government intervention.

In other words, countries that are not faced with the internal demand for free-market reforms are likely to fail when coerced into them by international organizations.

Promoting market reforms requires winning over a country's populace through unusual steps, such as "playing politics," doing community work, and talking to citizens on their terms, say the researchers.

Sources: "Are Failed Infrastructure Projects Linked to the Presence of the IMF or World Bank?" Public Policy and Management, Wharton School of Business, September 7, 2005; Witold J. Henisz et al., "The Worldwide Diffusion of Market-Oriented Infrastructure Reform, 1977-1999," December 12, 2005; and "Deinstitutionalization and Institutional Replacement: State-Centered, Neoliberal and Hybrid Models in the Global Electricity Supply Industry," Wharton School of Business, May 26, 2005.

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