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

Stephanie J. Rickard,Teri L. Caraway

doi:10.1007/s11558-017-9295-y

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.

Highlights

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 ongoing disagreement over the effects of IMF loans
We argue that because loan conditions vary between IMF programs, IMF loans do not have a single, invariant effect on all borrowers

Summary

Introduction

What effects do International Monetary Fund (IMF) loans have on borrowing countries? Even after decades of research, no consensus exists. We argue that different loans have different effects because of the varied conditions attached to IMF 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. Scholars disagree about the mechanisms through which IMF loans work (Dreher 2009; Vreeland 2006). The Bconditions^ attached to countries’ loan programs stipulate policy reforms required in exchange for IMF financing. Most investigations of IMF lending fail to account for the variation in loan conditions Instead, they treat all IMF programs as being identical and expect them to have a single, invariant effect on borrowers. Compliance, in other words, is not an all or nothing proposition

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