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02.12.2020 Open Access

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

Zeitschrift:
The Review of International Organizations
Autor:
Valentin Lang
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The online version contains supplementary material available at https://​doi.​org/​10.​1007/​s11558-020-09405-x.

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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.
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