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

University of Heidelberg Department of Economics Working Paper No. 617

44 Pages Posted: 9 Dec 2016 Last revised: 10 Dec 2016

Date Written: September 1, 2016

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.

Keywords: International Organizations, International Monetary Fund (IMF), Income Inequality, Democracy

JEL Classification: F33, F53, O15, O19

Suggested Citation

Lang, Valentin F., The Economics of the Democratic Deficit: The Effect of IMF Programs on Inequality (September 1, 2016). University of Heidelberg Department of Economics Working Paper No. 617. Available at SSRN: https://ssrn.com/abstract=2883120 or http://dx.doi.org/10.2139/ssrn.2883120

Valentin F. Lang (Contact Author)

Heidelberg University ( email )

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