IDEAS home Printed from https://ideas.repec.org/a/spr/revint/v14y2019i1d10.1007_s11558-017-9295-y.html
   My bibliography  Save this article

International demands for austerity: Examining the impact of the IMF on the public sector

Author

Listed:
  • Stephanie J. Rickard

    (London School of Economics)

  • Teri L. Caraway

    (University of Minnesota)

Abstract

What effects do International Monetary Fund (IMF) loans have on borrowing countries? Even after decades of research, no consensus exists. We offer a straightforward explanation for the seemingly mixed effects of IMF loans. We argue that different loans have different effects because of the varied conditions attached to IMF financing. To demonstrate this point, we investigate IMF loans with and without conditions that require public sector reforms in exchange for financing. We find that the addition of a public sector reform condition to a country’s IMF program significantly reduces government spending on the public sector wage bill. This evidence suggest that conditions are a key mechanism linking IMF lending to policy outcomes. Although IMF loans with public sector conditions prompt cuts to the wage bill in the short-term, these cuts do not persist in the longer-term. Borrowers backslide on internationally mandated spending cuts in response to domestic political pressures.

Suggested Citation

  • Stephanie J. Rickard & Teri L. Caraway, 2019. "International demands for austerity: Examining the impact of the IMF on the public sector," The Review of International Organizations, Springer, vol. 14(1), pages 35-57, March.
  • Handle: RePEc:spr:revint:v:14:y:2019:i:1:d:10.1007_s11558-017-9295-y
    DOI: 10.1007/s11558-017-9295-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11558-017-9295-y
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s11558-017-9295-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Axel Dreher, 2009. "IMF conditionality: theory and evidence," Public Choice, Springer, vol. 141(1), pages 233-267, October.
    2. Vreeland,James Raymond, 2003. "The IMF and Economic Development," Cambridge Books, Cambridge University Press, number 9780521016957, September.
    3. Raymond Vreeland, James, 2002. "The Effect of IMF Programs on Labor," World Development, Elsevier, vol. 30(1), pages 121-139, January.
    4. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2005. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 151-184, February.
    5. Bewley, R. A., 1979. "The direct estimation of the equilibrium response in a linear dynamic model," Economics Letters, Elsevier, vol. 3(4), pages 357-361.
    6. International Monetary Fund, 2010. "Evaluating Government Employment and Compensation," IMF Technical Notes and Manuals 2010/015, International Monetary Fund.
    7. Zlata Hajro & Joseph Joyce, 2009. "A true test: do IMF programs hurt the poor?," Applied Economics, Taylor & Francis Journals, vol. 41(3), pages 295-306.
    8. Dreher, Axel & Gassebner, Martin, 2012. "Do IMF and World Bank Programs Induce Government Crises? An Empirical Analysis," International Organization, Cambridge University Press, vol. 66(2), pages 329-358, April.
    9. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2015. "Politics and IMF Conditionality," Journal of Conflict Resolution, Peace Science Society (International), vol. 59(1), pages 120-148, February.
    10. Rama, Martin, 1999. "Public Sector Downsizing: An Introduction," The World Bank Economic Review, World Bank, vol. 13(1), pages 1-22, January.
    11. Schiavo-Campo, Salvatore & de Tommaso, Giulio & Mukh, 1997. "An international statistical survey of government employment and wages," Policy Research Working Paper Series 1806, The World Bank.
    12. Lee, Chang Kil & Strang, David, 2006. "The International Diffusion of Public-Sector Downsizing: Network Emulation and Theory-Driven Learning," International Organization, Cambridge University Press, vol. 60(4), pages 883-909, October.
    13. Dreher, Axel, 2006. "IMF and economic growth: The effects of programs, loans, and compliance with conditionality," World Development, Elsevier, vol. 34(5), pages 769-788, May.
    14. Christopher H. Achen, 2005. "Let's Put Garbage-Can Regressions and Garbage-Can Probits Where They Belong," Conflict Management and Peace Science, Peace Science Society (International), vol. 22(4), pages 327-339, September.
    15. James A. Robinson & Thierry Verdier, 2013. "The Political Economy of Clientelism," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(2), pages 260-291, April.
    16. Stone, Randall W., 2008. "The Scope of IMF Conditionality," International Organization, Cambridge University Press, vol. 62(4), pages 589-620, October.
    17. repec:hal:pseose:halshs-00846558 is not listed on IDEAS
    18. Nelson, Stephen C., 2014. "Playing Favorites: How Shared Beliefs Shape the IMF's Lending Decisions," International Organization, Cambridge University Press, vol. 68(2), pages 297-328, April.
    19. Bienen, Henry S. & Gersovitz, Mark, 1985. "Economic stabilization, conditionality, and political stability," International Organization, Cambridge University Press, vol. 39(4), pages 729-754, October.
    20. Mahdavi, Saeid, 2004. "Shifts in the Composition of Government Spending in Response to External Debt Burden," World Development, Elsevier, vol. 32(7), pages 1139-1157, July.
    21. Lorenzo Forni & Natalija Novta, 2014. "Public Employment and Compensation Reform During Times of Fiscal Consolidation," IMF Working Papers 2014/192, International Monetary Fund.
    22. Aleš Bulíř & Soojin Moon, 2004. "Is Fiscal Adjustment More Durable When The IMF is Involved?1," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 46(3), pages 373-399, September.
    23. Oberdabernig, Doris A., 2013. "Revisiting the Effects of IMF Programs on Poverty and Inequality," World Development, Elsevier, vol. 46(C), pages 113-142.
    24. Axel Dreher, 2003. "The influence of elections on IMF programme interruptions," Journal of Development Studies, Taylor & Francis Journals, vol. 39(6), pages 101-120.
    25. Garrett, Geoffrey & Lange, Peter, 1991. "Political responses to interdependence: what's “left” for the left?," International Organization, Cambridge University Press, vol. 45(4), pages 539-564, October.
    26. Dreher, Axel & Jensen, Nathan M, 2007. "Independent Actor or Agent? An Empirical Analysis of the Impact of U.S. Interests on International Monetary Fund Conditions," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 105-124, February.
    27. Karen L. Remmer, 2004. "Does Foreign Aid Promote the Expansion of Government?," American Journal of Political Science, John Wiley & Sons, vol. 48(1), pages 77-92, January.
    28. Benedict Clements & Sanjeev Gupta & Masahiro Nozaki, 2013. "What happens to social spending in IMF-supported programmes?," Applied Economics, Taylor & Francis Journals, vol. 45(28), pages 4022-4033, October.
    29. James Vreeland, 2006. "IMF program compliance: Aggregate index versus policy specific research strategies," The Review of International Organizations, Springer, vol. 1(4), pages 359-378, December.
    30. Bird, Graham, 1996. "Borrowing from the IMF: The policy implications of recent empirical research," World Development, Elsevier, vol. 24(11), pages 1753-1760, November.
    31. Alexander E. Kentikelenis & Thomas H. Stubbs & Lawrence P. King, 2016. "IMF conditionality and development policy space, 1985–2014," Review of International Political Economy, Taylor & Francis Journals, vol. 23(4), pages 543-582, July.
    32. Muhammet Bas & Randall Stone, 2014. "Adverse selection and growth under IMF programs," The Review of International Organizations, Springer, vol. 9(1), pages 1-28, March.
    33. Bown, Chad P. & Tovar, Patricia, 2011. "Trade liberalization, antidumping, and safeguards: Evidence from India's tariff reform," Journal of Development Economics, Elsevier, vol. 96(1), pages 115-125, September.
    34. repec:bla:rdevec:v:4:y:2000:i:3:p:229-43 is not listed on IDEAS
    35. Martin Steinwand & Randall Stone, 2008. "The International Monetary Fund: A review of the recent evidence," The Review of International Organizations, Springer, vol. 3(2), pages 123-149, June.
    36. Gelb, A & Knight, John B & Sabot, R H, 1991. "Public Sector Employment, Rent Seeking and Economic Growth," Economic Journal, Royal Economic Society, vol. 101(408), pages 1186-1199, September.
    37. Valerie Mercer-Blackman & Anna Unigovskaya, 2004. "Compliance with IMF Program Indicators and Growth in Transition Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 40(3), pages 55-83, May.
    38. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    39. Suzanna De Boef & Luke Keele, 2008. "Taking Time Seriously," American Journal of Political Science, John Wiley & Sons, vol. 52(1), pages 184-200, January.
    40. Baumol, William J, 1993. "Health Care, Education and the Cost Disease: A Looming Crisis for Public Choice," Public Choice, Springer, vol. 77(1), pages 17-28, September.
    41. Garuda, Gopal, 2000. "The Distributional Effects of IMF Programs: A Cross-Country Analysis," World Development, Elsevier, vol. 28(6), pages 1031-1051, June.
    42. Gandhi,Jennifer, 2010. "Political Institutions under Dictatorship," Cambridge Books, Cambridge University Press, number 9780521155717, September.
    43. Wei, Shang-Jin & Zhang, Zhiwei, 2010. "Do external interventions work? The case of trade reform conditions in IMF supported programs," Journal of Development Economics, Elsevier, vol. 92(1), pages 71-81, May.
    44. Nooruddin, Irfan & Simmons, Joel W., 2006. "The Politics of Hard Choices: IMF Programs and Government Spending," International Organization, Cambridge University Press, vol. 60(4), pages 1001-1033, October.
    45. Kentikelenis, Alexander E. & Stubbs, Thomas H. & King, Lawrence P., 2015. "Structural adjustment and public spending on health: Evidence from IMF programs in low-income countries," Social Science & Medicine, Elsevier, vol. 126(C), pages 169-176.
    46. Gould, Erica R., 2003. "Money Talks: Supplementary Financiers and International Monetary Fund Conditionality," International Organization, Cambridge University Press, vol. 57(3), pages 551-586, July.
    47. Copelovitch,Mark S., 2010. "The International Monetary Fund in the Global Economy," Cambridge Books, Cambridge University Press, number 9780521143585, September.
    48. International Monetary Fund, 2010. "Evaluating Government Employment and Compensation," IMF Technical Notes and Manuals 10/15, International Monetary Fund.
    49. Graham Bird & Thomas D Willett, 2004. "IMF Conditionality, Implementation and the New Political Economy of Ownership," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 46(3), pages 423-450, September.
    50. Caraway, Teri L. & Rickard, Stephanie J. & Anner, Mark S., 2012. "International Negotiations and Domestic Politics: The Case of IMF Labor Market Conditionality," International Organization, Cambridge University Press, vol. 66(1), pages 27-61, January.
    51. Joseph P Joyce, 2004. "Adoption, Implementation and Impact of IMF Programmes: A Review of the Issues and Evidence1," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 46(3), pages 451-467, September.
    52. Rickard, Stephanie J. & Caraway, Teri L., 2014. "International Negotiations in the Shadow of National Elections," International Organization, Cambridge University Press, vol. 68(3), pages 701-720, July.
    53. Doyle, David, 2015. "Remittances and Social Spending," American Political Science Review, Cambridge University Press, vol. 109(4), pages 785-802, November.
    54. Stevenson, Gail, 1992. "How public sector pay and employment affect labor markets : research issues," Policy Research Working Paper Series 944, The World Bank.
    55. Dani Rodrik, 2000. "What Drives Public Employment in Developing Countries?," Review of Development Economics, Wiley Blackwell, vol. 4(3), pages 229-243, October.
    56. Copelovitch,Mark S., 2010. "The International Monetary Fund in the Global Economy," Cambridge Books, Cambridge University Press, number 9780521194334, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Reinsberg, Bernhard & Kern, Andreas & Rau-Göhring, Matthias, 2021. "The political economy of IMF conditionality and central bank independence," European Journal of Political Economy, Elsevier, vol. 68(C).
    2. Bernhard Reinsberg & Thomas Stubbs & Alexander Kentikelenis, 2022. "Compliance, defiance, and the dependency trap: International Monetary Fund program interruptions and their impact on capital markets," Regulation & Governance, John Wiley & Sons, vol. 16(4), pages 1022-1041, October.
    3. Krishna Chaitanya Vadlamannati & Samuel Brazys, 2023. "Does cultural diversity hinder the implementation of IMF-supported programs? An empirical investigation," The Review of International Organizations, Springer, vol. 18(1), pages 87-116, January.
    4. Gyldas A. Ofoulhast‐Othamot, 2022. "The perils of a bureaucratic fad in Africa: Examining the effects of the agencification of the state apparatus in Gabon," Public Administration & Development, Blackwell Publishing, vol. 42(3), pages 179-189, August.
    5. Bomprezzi, Pietro & Marchesi, Silvia, 2023. "A firm level approach on the effects of IMF programs," Journal of International Money and Finance, Elsevier, vol. 132(C).
    6. Chletsos, Michael & Sintos, Andreas, 2023. "The effects of IMF conditional programs on the unemployment rate," European Journal of Political Economy, Elsevier, vol. 76(C).
    7. Chletsos, Michael & Sintos, Andreas, 2021. "Hide and seek: IMF intervention and the shadow economy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 292-319.
    8. Brendan Skip Mark & Huei-Jyun Ye & Andrew Foote & Tiffani Crippin, 2021. "It’s a Hard-Knock Life: Child Labor Practices and Compliance with IMF Agreements," Social Sciences, MDPI, vol. 10(5), pages 1-21, May.
    9. 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.
    10. Kern, Andreas & Nosrati, Elias & Reinsberg, Bernhard & Sevinc, Dilek, 2023. "Crash for cash: Offshore financial destinations and IMF programs," European Journal of Political Economy, Elsevier, vol. 78(C).
    11. Demir, Firat, 2022. "IMF conditionality, export structure and economic complexity:The ineffectiveness of structural adjustment programs," Journal of Comparative Economics, Elsevier, vol. 50(3), pages 750-767.
    12. Iasmin Goes, 2023. "Examining the effect of IMF conditionality on natural resource policy," Economics and Politics, Wiley Blackwell, vol. 35(1), pages 227-285, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rickard, Stephanie J. & Caraway, Teri L., 2019. "International demands for austerity: examining the impact of the IMF on the public sector," LSE Research Online Documents on Economics 86636, London School of Economics and Political Science, LSE Library.
    2. Thomas Stubbs & Bernhard Reinsberg & Alexander Kentikelenis & Lawrence King, 2020. "How to evaluate the effects of IMF conditionality," The Review of International Organizations, Springer, vol. 15(1), pages 29-73, January.
    3. 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.
    4. Iasmin Goes, 2023. "Examining the effect of IMF conditionality on natural resource policy," Economics and Politics, Wiley Blackwell, vol. 35(1), pages 227-285, March.
    5. Chletsos, Michael & Sintos, Andreas, 2021. "Hide and seek: IMF intervention and the shadow economy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 292-319.
    6. Brendan Skip Mark & Huei-Jyun Ye & Andrew Foote & Tiffani Crippin, 2021. "It’s a Hard-Knock Life: Child Labor Practices and Compliance with IMF Agreements," Social Sciences, MDPI, vol. 10(5), pages 1-21, May.
    7. Chletsos, Michael & Sintos, Andreas, 2023. "The effects of IMF conditional programs on the unemployment rate," European Journal of Political Economy, Elsevier, vol. 76(C).
    8. Bomprezzi, Pietro & Marchesi, Silvia, 2023. "A firm level approach on the effects of IMF programs," Journal of International Money and Finance, Elsevier, vol. 132(C).
    9. Lang, Valentin, 2016. "The Economics of the Democratic Deficit: The Effect of IMF Programs on Inequality," Working Papers 0617, University of Heidelberg, Department of Economics.
    10. Dreher, Axel & Walter, Stefanie, 2010. "Does the IMF Help or Hurt? The Effect of IMF Programs on the Likelihood and Outcome of Currency Crises," World Development, Elsevier, vol. 38(1), pages 1-18, January.
    11. Krishna Chaitanya Vadlamannati & Samuel Brazys, 2023. "Does cultural diversity hinder the implementation of IMF-supported programs? An empirical investigation," The Review of International Organizations, Springer, vol. 18(1), pages 87-116, January.
    12. Martin Steinwand & Randall Stone, 2008. "The International Monetary Fund: A review of the recent evidence," The Review of International Organizations, Springer, vol. 3(2), pages 123-149, June.
    13. Daoud, Adel & Herlitz, Anders & Subramanian, S.V., 2022. "IMF fairness: Calibrating the policies of the International Monetary Fund based on distributive justice," World Development, Elsevier, vol. 157(C).
    14. Stubbs, Thomas & Kentikelenis, Alexander & Stuckler, David & McKee, Martin & King, Lawrence, 2017. "The impact of IMF conditionality on government health expenditure: A cross-national analysis of 16 West African nations," Social Science & Medicine, Elsevier, vol. 174(C), pages 220-227.
    15. Stephen C. Nelson & Geoffrey P. R. Wallace, 2017. "Are IMF lending programs good or bad for democracy?," The Review of International Organizations, Springer, vol. 12(4), pages 523-558, December.
    16. James Vreeland, 2006. "IMF program compliance: Aggregate index versus policy specific research strategies," The Review of International Organizations, Springer, vol. 1(4), pages 359-378, December.
    17. Marijana Andrijić & Tajana Barbić, 2021. "When the Going Gets Tough … the Effect of Economic Reform Programmes on National Well-Being," Sustainability, MDPI, vol. 13(20), pages 1-19, October.
    18. Luca Papi & Andrea F Presbitero & Alberto Zazzaro, 2015. "IMF Lending and Banking Crises," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(3), pages 644-691, November.
    19. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2010. "Does Membership on the UN Security Council Influence IMF Conditionality?," KOF Working papers 10-262, KOF Swiss Economic Institute, ETH Zurich.
    20. Presbitero, Andrea F. & Zazzaro, Alberto, 2012. "IMF Lending in Times of Crisis: Political Influences and Crisis Prevention," World Development, Elsevier, vol. 40(10), pages 1944-1969.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:revint:v:14:y:2019:i:1:d:10.1007_s11558-017-9295-y. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.