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The Economics of the Democratic Deficit: The Effect of IMF Programs on Inequality

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  • Lang, Valentin

Abstract

This study investigates the distributional effects of international organizations within their member countries. It addresses the issue empirically by examining the causal effect of International Monetary Fund (IMF) programs on income inequality. Introducing a new instrumental variable for IMF programs, I exploit time variation in the IMF’s liquidity and cross-sectional variation in a country’s probability of having a lending arrangement with the IMF. Using panel data for 155 countries over the 1973–2013 period, the results show that IMF programs substantially increase income inequality in democracies, while having no such effect in non-democracies. The size of this effect on democracies is smaller the more democratized the IMF’s decision-making processes are. These results are consistent with the theory that powerful, ‘democratically deficient’ international organizations that interfere in domestic politics are capable of restricting the responsiveness of democratic governments to the preferences of their citizens.

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  • 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.
    • Handle: RePEc:awi:wpaper:0617
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    6. Forster, Timon & Kentikelenis, Alexander E. & Stubbs, Thomas H. & King, Lawrence P., 2020. "Globalization and health equity: The impact of structural adjustment programs on developing countries," Social Science & Medicine, Elsevier, vol. 267(C).
    7. Axel Dreher & Sarah Langlotz, 2020. "Aid and growth: New evidence using an excludable instrument," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(3), pages 1162-1198, August.
    8. Axel Dreher & Katharina Michaelowa, 2008. "The political economy of international organizations," The Review of International Organizations, Springer, vol. 3(4), pages 331-334, December.
    9. Adel Daoud & Anders Herlitz & SV Subramanian, 2020. "Combining distributive ethics and causal Inference to make trade-offs between austerity and population health," Papers 2007.15550, arXiv.org, revised Aug 2020.
    10. Kern, Andreas & Reinsberg, Bernhard & Rau-Göhring, Matthias, 2019. "IMF conditionality and central bank independence," European Journal of Political Economy, Elsevier, vol. 59(C), pages 212-229.
    11. Muayad Ismail, 2020. "Evaluating the Macroeconomic Impact of IMF Programs in Sudan," Economics Discussion Papers em-dp2020-21, Department of Economics, University of Reading.
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    14. Eichenauer, Vera Z. & Fuchs, Andreas & Brückner, Lutz, 2021. "The effects of trade, aid, and investment on China's image in Latin America," Journal of Comparative Economics, Elsevier, vol. 49(2), pages 483-498.
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