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

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  • Valentin Lang

    (University of Mannheim)

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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  • Valentin Lang, 2021. "The economics of the democratic deficit: The effect of IMF programs on inequality," The Review of International Organizations, Springer, vol. 16(3), pages 599-623, July.
    • Handle: RePEc:spr:revint:v:16:y:2021:i:3:d:10.1007_s11558-020-09405-x
    DOI: 10.1007/s11558-020-09405-x
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