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.
Highlights
Over the course of the last decades, income inequality has been rising in many countries
While research often blames economic globalization for rising income inequality (Autor et al 2013; Helpman et al 2010), this paper shows that the political dimension of globalization plays an important role for this contemporary trend
Which distributional effects should be expected from these reforms? The remainder of this paper examines the hypothesis that International Monetary Fund (IMF) programs increase inequality
Summary
Over the course of the last decades, income inequality has been rising in many countries. While multiple factors have contributed to this development, there is a broad consensus that changing national policies explain a substantial part of it (OECD 2011; World Bank 2016; World Inequality Lab 2017). Quite naturally, this prompts the question as to why so many countries changed their policies in a way that inequality increased. While the literature has often searched for answers by examining the pressures that economic globalization exerts on policies that ensure a more equal
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