Biased decision-making in international financial institutions -- mechanical rules overridden to assign a different official rating

Room for discretion? Biased decision-making in international financial institutions. Valentin Lang & Andrea Presbitero. Journal of Development Economics, Volume 130, January 2018, Pages 1-16. https://doi.org/10.1016/j.jdeveco.2017.09.001

Abstract: We exploit the degree of discretion embedded in the World Bank-IMF Debt Sustainability Framework (DSF) to understand the decision-making process of international financial institutions. The unique, internal dataset we use covers the universe of debt sustainability analyses conducted between December 2006 and January 2015 for low-income countries. These data allow us to identify cases where the risk rating implied by the application of the DSF's mechanical rules was overridden to assign a different official rating. Our results show that both political interests and bureaucratic incentives influence the decision to intervene in the mechanical decision-making process. Countries that are politically aligned with the institutions' major shareholders are more likely to receive an improved rating; especially in election years and when the mechanical assessment is not clear-cut. These results suggest that the room for discretion international financial institutions have can be a channel for informal governance and a source of biased decision-making.

Keywords: International organizations; Political economy; IMF; World Bank; Debt sustainability