IMF Staff Papers, Vol. 51, No. 2

Well over a trillion dollars worth of state-owned firms have been privatized since 1980. The traditional argument is that governments choose to privatize in response to fiscal pressures. In this study, the authors examine the impact of IFI conditionality on privatization and find that IMF conditionality, in particular, has an important indirect economic benefit. Investors are willing to pay more for privatized assets in countries that owe the IMF money (and hence that are subject to the policy constraints attached to the loans). The reason for this is that investors view IMF conditionality as a signal of credible policy reform. The magnitude of this effect is striking. For every dollar a developing country owed the IMF in the early 1980s, it subsequently privatized state-owned assets worth roughly 50c. Admittedly, this “credibility bonus” of IMF lending may not justify the policy conditions typically imposed by the IMF. However, the additional capital drawn into developing countries as a result of the IMF-privatization nexus is no doubt helpful to these economies. [JEL L3, F33, F34]