Social Studies

The Ins and Outs of the IMF

Stephanie J Rickard and Teri L. Caraway. 2019. “International demands for austerity: Examining the impact of the IMF on the public sector.” The Review of International Organizations

The International Monetary Fund (IMF) is a major world player in providing loans to developing countries. Research from London School of Economics and Political Science Professor Stephanie J. Rickard and University of Minnesota Political Science Professor Teri Caraway considers how the conditions attached to IMF loans affect state spending in the countries who receive such loans.

The term “wage bill” represents a government’s expenditures on public functions and state services. Following the rise of small-state, anti-intervention, “neoliberal” philosophies, the IMF sometimes attaches conditions such as shrinking the wage bill to the loans that they provide to developing countries. As the authors describe, state leaders may be reluctant to make such cuts for fear of political backlash or unpopularity, but such steps may be IMF-stated requirements for some nations’ much-needed loans.

Analyzing 34 years of data from 1980 to 2014 through a combination of time-series analysis and error-correction models, the authors model short-term and long-term effects of IMF loans with public sector conditions on recipient countries’ wage bills. Overall, the results indicate that countries which receive an IMF loan with public-sector conditions are more likely to cut their wage bill than countries without such loans. The authors also find, however, that this mostly a short-term picture. Over time, deep cuts to the wage bills do not persist. perhaps because politicians and leaders are reluctant to face backlash over making cuts to public services, state infrastructures, and social spending.

It is possible that the countries which received loans with conditions may be systematically different than those which receive loans without such conditions, which would mean that changes in nations’ wage-bills may come from factors apart from IMF loans. To account for this, the authors control for countries’ regime type, economic growth, and GDP per capita; these controls do not greatly impact the relationships they find between IMF loan conditions and short-term impacts on the wage bill. Overall, this research shows that the conditions attached to IMF loans play a crucial role in their impacts.

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