The economics of the democratic deficit: The effect of IMF programs on inequality

By Valentin Lang. Revista Internacional de Organizaciones, 2016

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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.

Subfields: Development, Political Science and International Relations, Safety Research

View Paper: https://www.semanticscholar.org/paper/de2e7b8a1934845c9cfbaace13b0f544b4571d85