Further, pension and social security reforms also tend to follow with a more flexible labour force, again placing the more marginalised workers at risk of falling into the poor ranks. 2009), indicating that there is a mismatch of communication and practice for IMF policies (Grabel 2017: 123; Kentikelenis et al. Wallace (2017) Are IMF lending programs good or bad for democracy?, Review of International Organizations 12(4): 52358. Relatedly, Forster et al. Because they are comprehensive, the reforms contain intrusive conditions that inhibit borrowers from modifying them to mitigate their negative effects on poverty. IMF (2016) IMF lending, October 3, Washington: International Monetary Fund, available at http://www.imf.org/en/About/Factsheets/IMF-Lending (last accessed on 12 March, 2022). 2013), ignoring the plight of poor voters. 2003; Lora 2012), we maintain that structural reforms contain deep and comprehensive changes involving trade and exchange policies, labour reforms, privatisation, financial/fiscal sector issues, revenue and tax policies, and/or institutional reforms. While the results for stabilisation conditions are insignificant, we show that a country entering into an agreement with the median, or 75th percentile, of structural conditions should expect an increase in poverty of about 2.4% and 4.7% respectively, 2 years after programme implementation.Footnote 19 This suggests that there is something unique about structural conditionality, as it is associated with increasing poverty in developing countries.Footnote 20, The effects of IMF conditions on poverty in developing countries stabilisation. We present the evolution of structural and stabilisation loan conditions across time and disaggregated by regions in Fig. Likewise, Nelson (2014a) showed that shared economic beliefs between the IMF staff and management and top policymakers in borrower countries affected loan size, conditionality, and enforcement, with market-oriented reforms carrying the day. We use all developing countries and years for which data are available for the IMF conditionality measures and our key control variables.Footnote 8, To assess the impact that IMF conditionality has on the poor in developing countries, we use the World Banks (2018) poverty headcount ratio, or the percentage of the population living below the national poverty line, logged as our primary dependent variable.We log poverty due to the high level of positive skew in the data. 2019; Garuda 2000; Oberdabernig 2013: 123; Vreeland 2002). Established following World War II to help with post-war recovery, the International Monetary Fund (IMF) serves as a lender to modern governments and an overseer of international financial markets. One possible limitation of our finding is that we are primarily looking at the number of arrangement conditions and unable to fully account for programme compliance. Forster, Timon, Alexander E. Kentikelenis, Bernhard Reinsberg, Thomas H. Stubbs and Lawrence P. King (2019) How structural adjustment programs affect inequality: A disaggregated analysis of IMF conditionality, 19802014, Social Science Research 80: 83113. What Is the International Monetary Fund (IMF)? However, overall population growth could lead to increased poverty, as a rising population (ceteris paribus) puts pressures on wages and jobs. Programme condition probability is defined as the fraction of years the country has been under a programme between when they enter the sample and year t. As such, we generate three instrumental variables. 2020), as the poor comprise a sizable portion of the electorate (Geddes 1994). Currently, around 24 emerging and developing economies (EMDEs) have active parallel currency markets. We include a dummy variable for IMF participation in addition to the condition variables to ensure that our estimates are capturing the effects of conditionality and not some other components of IMF intervention (moral hazard, policy advice, technical assistance, etc.). Inequality within most advanced and emerging markets and developing countries (EMDCs) has increased, a phenomenon that has received considerable attentionPresident Obama called widening income inequality the "defining challenge of our time." Dreher, Axel, Jan-Egbert Sturm, and James Raymond Vreeland (2015) Politics and IMF conditionality. Journal of Conflict Resolution 59(1): 120148. Kurtz, Marcus J., and Sarah M. Brook. Failure to play an effective role in international monetary matters is one of the disadvantages of IMF: 1.8 8. We also tested the effect that different stabilisation conditions have on poverty and report the results in Online Appendix C. Among the stabilisation conditions, only external debt has a significant effect on poverty. Conditions of loans On giving loans to countries, the IMF make the loan conditional on the implementation of certain economic policies. However, the level of collinearity does not exceed 0.7, the conventional level of high collinearity (Neter et al. Slider with three articles shown per slide. Structural arrangements include structural performance criteria or structural benchmarks, while stabilisation conditions contain quantitative performance criteria or indicative benchmarks (Reinsberg et al. 2019a, b), our results show how international pressures, as reflected by IMF conditions, can hurt the poor but that what matters most for addressing poverty is whether countries initiate structural reforms. All told, the findings presented here hold important policy implications and substantive meaning, given that 1.28 billion people (or 32.7% of the cases in our sample) live in poverty. Soto, Hernando de (2000) The mystery of capital: why capitalism triumphs in the West and fails everywhere else, New York: Basic Books. The average cost of capital for a select group of 58 climate-vulnerable countries is 10.5% according to report published in April by the Boston University Global Development Policy Center. In Models 24, we test the effects of conditionality on countries whose agreements only include stabilisation conditions, only include structural conditions, or include both, respectively. Want to know more, watch this CNBC explains video . Now the IMF provides loans to help member nations fixperceived balance of paymentsproblems and fight off crises. While the excludability of instruments must be justified theoretically, the relevance can be tested empirically. With economies around the world on the verge of collapsing. Skeptics maintain that a country in a financial crisis might ask the IMF for a bailout, but it's unclear whether the country is in crisis because it made poor policy decisions knowing that IMF aid would serve as a backstop.. This paper investigates the effects of IMF loan conditions on poverty. Similar to the above approach, we employ a partial first differenced model in the second stage. Borrower countries also have political incentives not to implement fiscal consolidation policies that substantially increase poverty, and especially during election years (Hbscher 2016; Hbscher et al. According to the IMF, more than one hundred countries have requested emergency financing, and the fund has provided more than $100 billion in financial assistance to more than eighty countries . Grabel, Ilene (2017) When things dont fall apart: Global financial governance and developmental finance in an age of productive incoherence, Cambridge, MA: MIT Press. The great powers that built and sustained the free trade system now have other priorities. According to Reinsberg et al. Easterly, William (2003) IMF and World Bank structural adjustment programs and poverty, in M. P. Dooley and J. The great powers that built and sustained the free trade system now have other priorities. However, social spending does not have to contract to the point that it pushes many more people into poverty. Lang, Valentin (2021) The economics of the democratic deficit: The effect of IMF programs on inequality, Review of International Organizations 16(3): 599623. Correspondence to Further, we find evidence that stabilisation conditions may also be affecting poverty, but only for countries whose agreements include both structural and stabilisation conditions. Indeed, the . Stabilisation loan conditions imposed by the IMF are not significantly related to poverty. Conversely, we observe that loan arrangements promoting stabilisation reforms have less impact on the poor because borrower states hold more discretion over their macroeconomic targets. IMF - Advantages and Disadvantages. Expertise. Mercer-Blackman, Valerie and Anna Unigovskaya (2004) Compliance with IMF program indicators and growth in transition economies, Emerging Markets Finance and Trade 40(3): 5583. The IMF has been criticized for having several disadvantages, especially to developing countries. We discuss financial and fiscal reforms under stabilisation below. The International Monetary Fund (IMF) is an international organization that represents 190 member countries. As Reinsberg et al. Vreeland, James R. (2003b) Why do governments and the IMF enter into agreements? Vreeland, James R. (2003a) The IMF and economic development, Cambridge: Cambridge University Press. Emerging market and developing countries (excluding China) accounted for a relatively small share of the increase. We obtain loan data from the IMF, and data on specific conditionality from Kentikelenis et al. Our analysis of different lag structures, available in the Online Appendix, yield interesting results. These monetary and debt measures typically raise interest rates, increasing the cost of borrowing, and making it more expensive for businesses to expand. Economic circumstances are precarious for individuals just above the poverty line, and changes in GDP, inflation, natural resource stocks, and trade are likely to increase the number of impoverished people. Panizza, Ugo, Federico Sturzenegger and Jeromin Zettelmeyer (2009) The economics and law of sovereign debt and default, Journal of Economic Literature 47(3): 147. Stringent conditions by IMF is one of its disadvantages 1.7 7. Kus, Basak (2010) Regulatory governance and the informal economy: cross-national comparisons, Socio-Economic Review 8(3): 487510. Easterly 2000). Vreeland, James R. (2002) The effect of IMF programs on labor, World Development 30(1): 12139. Advances in technology affect trade and vice versa. We also cluster by country and employ bootstrapped standard errors to correct for inconsistencies created by uneven cluster size in the two-stage modelling procedure. Kentikelenis, Alexander E., Thomas H. Stubbs and Lawrence P. King (2016) IMF conditionality and development policy space, 19852014, Review of International Political Economy 23(4): 54382. 2004; Conway 2007). Garuda, Gopal (2000) The distributional effects of IMF programs: A cross-country analysis, World Development 28(6): 103151. Department of Political Science, University of North Texas, Denton, TX, USA, Department of Sociology and Political Science, Tennessee Tech University, 1 William L Jones Drive Box 5052, Cookeville, TN, 38501, USA, You can also search for this author in Stiglitz, Joseph E. (2002) Globalization and its discontents, New York: Norton. Moreover, given that the poor represent a large share of the electorate in developing countries (Geddes 1994), governments with greater policy discretion hold political incentives to cut government spending, as part of fiscal consolidation policies, that fall less heavily on those near the poverty line, and especially during election years (Hbscher 2016; Hbscher et al. Rudra, Nita (2002) Globalization and the decline of the welfare state in less-developed countries, International Organization 56(2): 41145. (2001), which we updated to the more current period. Their approaches to achieving this shared goal are complementary: the IMF focuses on macroeconomic and financial stability while the World Bank concentrates on long-term economic development and poverty reduction. The International Monetary Fund (IMF) is an international organization that promotes global financial stability, encourages international trade, and reduces poverty. 1. In Model 1, the undifferentiated specification indicates that all IMF arrangements have a positive effect on poverty, a finding that is consistent with Easterly (2003) and Oberdabernig (2013). Results available in Online Appendix B. Thus, even if there was endogeneity between the time-variant level variable and the outcome, the exclusion restriction would only be violated if the unobserved variables driving this endogeneity were correlated with the country-specific likelihood (for econometric details see Nizalova and Murtazashvili 2016). Bretton Woods Agreement and the Institutions It Created Explained, Group of Ten (G10): Definition, Purpose, and Member Countries, Asian Financial Crisis: Causes, Response, Lessons Learned. Caraway, Teri L., Stephanie J. Rickard and Mark S. Anner (2012) International negotiations and domestic politics: The case of IMF labor market conditionality, International Organization 66(1): 2761. A dynamic panel data analysis for sub-Saharan African countries. Kaufman, Robert R., and Alex Segura-Ubiergo (2001) Globalization, domestic politics, and social spending in Latin America: a time-series cross-section analysis, 197397. World politics 53(4): 553587. Unlike structural reforms, governments under stabilisation reforms can generally pursue a range of alternatives to meet the conditions set by the IMF that are less likely to impinge on borrower sovereignty (Easterly 2005; Reinsberg et al. However, the inclusion of potential post-treatment controls increases the likelihood that we induce post-treatment bias into our models if the variables are themselves endogenous (Montgomery et al. Answer (1 of 6): Advantages of the International Monetary Fund (IMF) for developing countries: 1. This safety net, critics charge, delays needed reforms and creates long-term dependency. Second, the fact that no empirical work has fully tested the influence of all different conditional arrangements on poverty reinforces the benefits of disaggregating fund programmes to show the adverse consequences of structural conditions and the limited impact of stabilisation policies. 2012; Rickard and Caraway 2014). IMF (2004) Classification of exchange rate arrangements and monetary policy frameworks, Washington: International Monetary Fund, available at https://www.imf.org/external/np/mfd/er/2004/eng/0604.htm (last accessed on 12 March, 2022). However, in the early 2000s and into the Great Recession, a backlash erupted against the IMF, with some arguing that the staff had changed its perspectives regarding strict adherence to fiscal austerity (Ban 2015; Barta 2018; Clift 2018). The problem stems from an inability to identify instruments for specific condition types that do not also predict IMF programmes more generally, as any type of condition necessitates the presence of an IMF programme, causing them to be highly correlated. Giddens, Anthony (2013) The consequences of modernity, Hoboken, NJ: John Wiley and Sons. Economists also frequently criticize the IMF for creating a moral hazard on national scales. Second, the findings advance theoretical debates in the globalisation literature. (2015) reporting that the very poor countries of sub-Saharan Africa differ from other locales. First, the majority of IMF monetary flows from any specific country are not sizable enough to significantly affect the liquidity ratio, given that most monies purchased or repurchased rarely represent more than 1% of total IMF quotas. The IMFs provision of concessional financial support through the Poverty Reduction and Growth Trust for low-income countries is evidence of the Funds interest in lowering poverty (IMF 2021). The IMF even began to incorporate social benchmarks into funding guidelines (Vetterlein 2015). (2019) report that fiscal policy reforms that limit government expenditure, mandate trade and capital account liberalisation as well as financial sector reforms, and constrain external debt have adverse distributional consequences. Of this, about $3.5 trillion is for principal repayments. 2016), the IMF has experienced an evolution of ideas toward more discretionary fiscal stimulus and gradual fiscal austerity. The largest substantive effect we find is from increases in the number of institutional reform conditions. We are particularly interested in the effect of structural conditions on poverty. Still, others indicate that while the Funds poverty reduction programmes have no adverse effects on the poor in borrower countries, they have limited impact on lessening poverty (Hajro and Joyce 2009; Lang 2021). Prior research has indicated that IMF programmes may have differing effects for developing and emerging economies (Easterly 2003; Mercer-Blackman and Unigovskaya 2004). 2009), or short-lived (Borensztein and Panizza 2009), limiting their effects on poverty. Second, the timing of such transactions is agreed upon years in advance. 2020). All predicted effects are calculated at the mean number of conditions. 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