The economics of the democratic deficit: The effect of IMF programs on inequality
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The economics of the democratic deficit: The effect of IMF programs on inequality Valentin Lang 1 Accepted: 29 October 2020/ # The Author(s) 2020
Abstract Does the International Monetary Fund (IMF) increase inequality? To answer this question, this article introduces a new empirical strategy for determining the effects of IMF programs that exploits the heterogeneous effect of IMF liquidity on loan allocation based on a difference-in-differences logic. The results show that IMF programs increase income inequality. An analysis of decile-specific income data shows that this effect is driven by absolute income losses for the poor and not by income gains for the rich. The effect persists for up to 5 years, and is stronger for IMF programs in democracies, and when policy conditions, particularly those that demand social-spending cuts and labor-market reforms, are more extensive. These results suggest that IMF programs can constrain government responsiveness to domestic distributional preferences. Keywords International Monetary Fund (IMF) . Inequality JEL codes F53 . O19
1 Introduction Over the course of the last decades, income inequality has been rising in many countries. While multiple factors have contributed to this development, there is now a broad consensus that changing national policies explain a substantial part of it (OECD 2011; World Bank 2016; World Inequality Lab 2017). Quite naturally, this prompts the question as to why so many countries changed their policies in a way that inequality increased. While the literature has often searched for answers by examining the pressures that economic globalization exerts on policies that ensure a more equal Supplementary Information The online version contains supplementary material available at https://doi.org/ 10.1007/s11558-020-09405-x.
* Valentin Lang lang@uni–mannheim.de
1
School of Social Sciences, University of Mannheim, A5, 6, 68159 Mannheim, Germany
Lang V.
income distribution, this article turns to the political dimension of globalization. Its focus is on the pressures that international organizations as institutions of global governance exert on national economic policies in the globalized world. More specifically, it examines whether the activities of “the most powerful international institution in history” (Stone 2002, p. 1) – the International Monetary Fund (IMF) – contribute to the explanation for why inequality has been rising in so many countries. The pressures that international organizations exert on national policies are rarely as strong as under the IMF’s loan programs. Since the IMF’s inception, its programs have been active in more than 130 countries. For many countries, some of the most fundamental economic reforms of their recent past were implemented under these programs (Reinsberg et al. 2019). This is largely due to the policy conditions that the IMF sets in exchange for its loans with a view to resolving balance-of-payment crises and correcting underlying macroeconomic and structural problems. Pursuing these objectives, however, can
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