Crossing the threshold: A positive analysis of IBRD graduation policy

According to World Bank policy, countries remain eligible to borrow from the IBRD until they are able to sustain long-term development without further recourse to Bank financing. Graduation from IBRD 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 takes a positive approach to IBRD graduation policy, investigating what income and non-income factors appear to have influenced graduation status in recent decades, based on panel data for 1982 through 2009. 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. We find that the observed correlates of Bank graduation status are generally consistent with the stated policy. Countries that are wealthier, more creditworthy, more institutionally developed, and are less vulnerable to trade, financial, and other shocks are more likely to be graduates. Predicted probabilities generated by the model conform closely to the actual graduation and de-graduation experiences of Trinidad and Tobago and Korea, among other countries, and suggest that Hungary and Latvia may have graduated prematurely—a prediction subsequently borne out by the large loans that they later received from the IBRD in the wake of the global financial crisis.