Does IMF help or hurt developing economies?

Baur Zhan 2014 M01 21

Some argue that IMF's programs are not helpful for developing countries, while other think that IMF is the best solution. This work based on Indonesian case from 1997-2003

The International Monetary Fund (IMF) facilitates global growth and economic stability, provides resources to help its member states to cope with balance of payments difficulties. Indonesia was one of these countries which needed financial support for its economic and structural reform program. This blog focusses on situation before and after the IMF’s Stand-By Credit and Extended Fund Facility program (15 billion current US$) in Indonesia during 1997-2003, examine the economic variables, which induced Indonesia’s participation, and program’s economic effect in a period from 1988 to 2011 (IMF, 2000). Due to the previous Indonesia’s participation in 1987, the period from 1985 to 1987 will not covered by this blog.

According to IMF’s official Press release (1997, 2000) the aim of IMF program was to stabilize economy, restore growth, reduce the public debt and normalize relationship with private capital markets in Indonesia. To understand the determination of Indonesia’s participation in the IMF program following 3 economic variables examine below. Figure 1 shows that before Indonesia entered the IMF program there was moderate increase of Gross national income per capita (GNI) during 1991-1996. According to Vreeland (2007, p 69) countries with high GNI per capita are less likely to enter into IMF program and baseline probability of entering into IMF program is 0.15 (or 2.251US$). According to this calculation the probability of Indonesia’s participation is 0.14 (or 2.868 US$) in 1996. Also dynamics of GNI growth is positive; the probability of participation does not predict Indonesia’s participation due to the higher GNI per capita compared with observed by Vreeland countries. In this case, deviation can be explained by very small difference (0,01) between Vreeland’s general results.

Figure 2 illustrates the dynamics of Debt service on external debt, in % of exports of goods and services, and Total reserves in months of import. Although Debt service on external debt in 1990-1995 was lowering from 35% to 31%, in 1996 it reached the highest points of that decade. Vreeland (2007, p. 70) state that median value is 13,4%, while in Indonesia in 1996 this value was 37%. Therefore, this increase could be the reason to participate in IMF program – it has the same pattern as described by Vreeland (2007).

In 1996 Total reserves picked up since 1988 and reached 18% (see Figure 2). According to Vreeland (2007, p. 70) hitting the highest level in 1996 of Total reserves cannot predict the probability of entering by Indonesia into the IMF program because the median value for this indicator is 2,85%. According to Vreeland’s (2007, p. 70) results countries with higher percentage of Total reserves are less likely to inter into IMF program. As a result, 2 variables out of 3 shows opposite patterns and deviates from “average” country. In this case, it is important to mention that past participation could also increase the possibility to participate in the program (Vreeland, 2007, p. 71).

Turning into the IMF program has positive effect on all three variables after the participation in IMF program. GNI improved slightly and in 2005 it reaches highest level since 1988. This growth continued till 2011 (3,957$). Although the percentage of Total reserves dropped in 2005 and 2008 after the program, it was higher (sharp increase in 2007 and 2010) than years prior to the program and in 2011 this indicator also reached its highest point since 1988 (52%). Debt service on external debt decreased after the IMF program (despite small increase in 2006 and 2009, general pattern shows decline after the end of participation in the program).

One of the possible approach to measure effectiveness of IMF program, mentioned by Vreeland (2007, p. 76), the before-after approach, used to examine following variables: Foreign Direct Investment (FDI), Net official development assistance and official aid received, and Gross Domestic Product. The data presented in Figures 3 and 4 observes the possible economic effectiveness of IMF program in Indonesia. Foreign direct investment, net inflows climbed slightly from 1988 to 1994 and improved significantly in following two years (highest point in 1996 – 6.194 million US$). Although after the program this indicator was 3 times lower in 2004 (1.8 billion US$) than in 1996 (6.1 billion US$), following year FDI rose significantly and exceeded 8 billion US$, which was the highest value since 1988. Despite two small drops in 2006 and 2009, this indicator shows positive tendency by reaching almost 20 billion US$ in 2011. On this basis the IMF program could have catalytic effect on FDI. Also, it is important to notice that improvement of this indicator was one of IMF’s conditions. Moreover, Indonesian Government’s commitment to improve investment climate in Indonesia, strengthened implementation of legislation, strengthening the institutional and governance underpinnings for a durable recovery of investment and business activity, and better regulatory in the private sector investment after 2004, have had positive effect as well (IMF Press release, 2003, 2005).

Net official development assistance and official aid received has insignificant increase since 1988 and declined after 1992 (before participation). However, it dropped dramatically directly after the IMF program in 2004 and reached the lowest point since 1988 (only 131 870 000 current US$). Although the following year shows significant increase and reached maximal value (2 533 990 000 current US$), since 2006 this indicator decreased moderately and was lower than in previous decades. It was between 1000-1400 million US% in 2006-2010, and in 2011 this indicator was only 414 million US$. There is no positive effect on this indicator after participation. Sharp rise in 2005 of both these indicators can be explained by receiving investment and aid to restore Indonesia’s daily life after Tsunami in 2004 rather than IMF’s purchase effectiveness.

The possibility of promoting economic growth in Indonesia by the IMF program can be seen on Figure 4, which indicates changes in Gross domestic product (GDP) before and after the program. Before the program GDP improved significantly at the end of 1980s, and it leveled off at the beginning of the 1990s, then lowered insignificantly following years. After the participation in the program growth of GDP was stable and varied between 4.6-6.5%. Nevertheless, this growth was lower than in the 1990s, when this indicator varied between 7.2-9.1% in a period from 1990 to1996. The cause of the drop in 2009 is the Asian crisis. As it can be noticed, the IMF program in Indonesia has not promoted economic growth. Radelet (2000, p. 49) also blames the President Suharto’s unwillingness to enforce the policies and the IMF’s competence, and argues that without IMF’s purchases situation could be better than it was after entering into IMF program. Vreeland (2007, p. 89) also states that 8 out of 9 before-after studies do not have positive effect on economic growth. The findings of this paper also have negative effect, which has similar outcome.

The IMF program in Indonesia has the same and opposite patterns with Vreeland’s (2007) “average” countries. The deviation of Total reserves can be explained by its possible further development after participation and overwhelming by first two indicators, which have similar patterns with general results. Also deviation of Net official development assistance and official aid received can be explained by significant improvement of FDI. However, there are many other countless intervening factors because the program itself cannot be the only one decisive factor. In this case, it is very important to mention that after the IMF program in Indonesia there were some crucial changes, which should be taken into account, such as:

Parliamentary and the first Presidential elections, and new government in October 2004;

The lowering degree of corruption (IMF, 2005).

All mentioned changes have positive effect on the situation in Indonesia since 2004 (first year after the IMG program). Table 1 presents the general findings of this paper, where main indicators compared according to before-after approach with general results found by Vreeland (2007).

Table 1 – Findings of this work compared with Vreeland’s general results:

3 indicators out of 6 have opposite patterns.



Situation before participation


The effect of the IMF program


Vreeland’s general results


Similarity with/ deviation from the Vreeland’s general results


GNI per capita




Deviation – lower than baseline (do not predict participation)


Debt service on external debt, in % of export of goods and services




Similarity –higher that median value (predict participation)


Total reserves in month of imports




Deviation – does not predict participation


FDI, net inflows


Significant improvement from 2004 (despite some drops in 2006, 2009)


Similarity – the IMF program has had catalytic effect


Net official development assistance and official aid received


Mostly decrease (except increase in 2005 -Tsunami)


Deviation – has not had positive effect


GDP growth


Lower growth than in the 1990s


(negative effect)

Similarity – has not promoted economic growth


3 Similarities,  3 Deviations


In conclusion, the IMF program in Indonesia has both the same and different patterns as Vreeland (2007) describes. 1 indicator out of 3 has the same probability with participated countries, which predict entering into IMF program. 2 indicators out of 3 have the same result of effectiveness of IMF program. Deviation of GNI can be explained by very small difference between Vreeland’s results and findings of this work. However, the deviation of Indonesian indicators from the “average” country cannot be explained only by the IMF program, because there are countless intervening factors. It is important to bear in mind that changes in the governance of Indonesia in 2004 also have positive effect on its development. Therefore, it is not feasible to claim that only IMF program has positive effect on FNI. On the other hand, Asian crisis in 1997-1998 can be reason of extension of the IMG program in 2000 and this 7 year-long program could be an “airbag” for whole Indonesia’s economy after the program, which mitigates the negative consequences of crisis. This period was quite painless for Indonesia compared with other Asian countries. As a result, Indonesia has not entered into the IMF program after 2004 even during the financial crisis in 2007-2009.


Reference list:


Raderet S. (2000), Indonesia: Long Road to Recovery, in: Chow P.C.Y. and Gills B. ed. (2000), Weathering the Storm Taiwan, Its Neighbors and The Asian Financial Crisis, Virginia: R.R. Donnelley and Sons, P. 48-50.                                (online) [Accessed 20 September 2013]. Available at:


The International Monetary Fund (1997), IMF Approves Stand-By Credit for Indonesia (online) [Accessed 15 September 2013]. Available at:


The International Monetary Fund (2000), IMF Approves US$5 Billion Extended Arrangement for Indonesia (online) [Accessed 10 September 2013]. Available at:


The International Monetary Fund (2003), IMF Completes Eleventh and Final Review of Indonesia's EFF Program, Approves US$505 Million Disbursement (online) [Accessed 12 September 2013]. Available at:

The International Monetary Fund (2005), MF Executive Board Concludes 2005 Article IV Consultation and Third Post-Program Monitoring with Indonesia (online) [Accessed 12 September 2013]. Available at:


The World Bank (2013), World Data Bank: World Development Indicators (online) [Accessed 14 September 2013]. Available at:


Vreeland J.R. (2007), The International Monetary Fund: Politics of Conditional Lending, London and New-York: Routledge.


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