ECFIN Economic Report: Hard work, and more - How to successfully conduct adjustment with official assistance

26 February 2014

What is needed for a country to adjust successfully after a crisis episode is a subject of much debate, including in the euro area where four out of 17 countries were in a full economic adjustment programme by end 2013.

The report identifies adjustment needs by a country's decision to approach the IMF for official assistance. It then investigate the factors conducive to successful exit from official assistance during more than 170 adjustment episodes by means of a panel regression framework. Success is defined as a resumption of growth and a significant debt reduction.

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. The report also finds 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.

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