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Hard work, and More: How to successfully conduct adjustment with official assistance

Martin Larch, Kristin Magnusson Bernard and Balint Tatar

Hard work, and More: How to successfully conduct adjustment with official assistancepdf(724 kB) Choose translations of the previous link 

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What is needed for a country to successfully adjust after a crisis episode is a subject of much debate including in the euro area where four out of seventeen countries were in a full economic adjustment programme by end 2013. We identify adjustment needs by a country's decision to approach the IMF for official assistance. We then investigate the factors conducive to successful exit from official assistance during more than 170 adjustment episodes by means of a panel regression framework. We define success as a resumption of growth and a significant debt reduction. Our econometric results suggest hard work, i.e. policy action such as fiscal adjustment and decisive financial sector repair, play an important role for the probability of a successful exit. We also find that more stringent conditionality, especially in the structural area, increases the chances of success. Supportive external conditions further enhance the prospects for a durable and successful exit. These results also hold up when success is instead defined as the ability of the country to finance itself on capital markets.

(European Economy. Economic Papers. 514. February 2014. Brussels. PDF. 76pp. Tab. Graph. Ann. Bibliogr. Free.)

KC-AI-14-514-EN-N (online)
ISBN 978-92-79-35163-1 (online)
doi:10.2765/72106 (online)

JEL classification: E61, F33, G01,H81

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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