Crossing the threshold: An analysis of IBRD graduation policy

Abstract

According to World Bank policy, countries remain eligible to borrow from the International Bank for Reconstruction and Development until they are able to sustain long-term development without further recourse to Bank financing. Graduation from the Bank is not an automatic consequence of reaching a particular income level, but rather is supposed to be based on a determination of whether the country has reached a level of institutional development and capital-market access that enables it to sustain its own development process without recourse to Bank funding. This paper assesses how International Bank for Reconstruction and Development graduation policy operates in practice, investigating what income and non-income factors appear to have influenced graduation decisions in recent decades, based on panel data for 1982 through 2008. Explanatory variables include the per-capita income of the country, as well as measures of institutional development and market access that are cited as criteria by the graduation policy, and other plausible explanatory variables that capture the levels of economic development and vulnerability of the country. The authors find that the observed correlates of Bank graduation are generally consistent with the stated policy. Countries that are wealthier, more creditworthy, more institutionally developed, and less vulnerable to shocks are more likely to have graduated. Predicted probabilities generated by the model correspond closely to the actual graduation and de-graduation experiences of most countries (such as Korea and Trinidad and Tobago), and suggest that Hungary and Latvia may have graduated prematurely -- a prediction consistent with their subsequent return to borrowing from the Bank in the wake of the global financial crisis.

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