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The 'Despotic Leviathan' and Its Financial Architecture: How IMF Conditionalities Deepen Inequality

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  • Mehrotra, Santosh

    (University of Bath)

  • Hassan, Shady

Abstract

This paper examines how IMF policies contribute to the inequality in MENA, and to a Middle-Income Trap (MIT). Developing a theory expanding Acemoglu and Robinson’s “Narrow Corridor” framework, it shows how IMF conditions align domestic elite incentives with creditor interests through a principal-agent lens. Using 2020-2025 data, its analysis reveals IMF monetary policies create rent-seeking structures that institutionalize inequality and suppress growth. The paper identifies an “engineered r>g dynamic” as a quantifiable signature of this extraction, empirically verified in Egypt. It establishes a causal link between financial/monetary policy (interest rates, debt compounding) and the “Despotic Leviathan” state formation.

Suggested Citation

  • Mehrotra, Santosh & Hassan, Shady, 2025. "The 'Despotic Leviathan' and Its Financial Architecture: How IMF Conditionalities Deepen Inequality," IZA Discussion Papers 18350, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp18350
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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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