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

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.

How to evaluate the effects of IMF conditionality

“…12 Indeed, three of the 11 studies do not provide any treatment for endogeneity of conditionality (Rickard and Caraway 2018;Stubbs et al 2017b;Woo 2013). It is also worth noting that these studies vary in the effect they wish to capture: five include an IMF participation variable in addition to the IMF conditionality variable, thereby capturing the total effect-or ATE-of IMF intervention (Bulír and Moon 2004;Chapman et al 2017;Crivelli and Gupta 2016;Stubbs et al 2017b;Wei and Zhang 2010); whereas six restrict analyses of conditionality to observations with IMF participation only, thereby capturing the conditioned effect-or ATET-of IMF intervention (Beazer and Woo 2016;Casper 2017;Dreher and Vaubel 2004;Ivanova et al 2006;Rickard and Caraway 2018;Woo 2013). The latter option is intuitive, and yields findings that are easier to interpret, since one need only consider the effect of IMF conditionality variables.…”

“…Prescient of the fact that these methods might soon reach their frontier, Vreeland (2006) called for the adoption of such a disaggregated approach to IMF conditionality over a decade ago. Scholars have responded to this call, assisted by the release of the IMF's Monitoring of Fund Arrangements (MONA) database of conditions and new panel datasets developed by independent scholars (Beazer and Woo 2016;Caraway et al 2012;Copelovitch 2010a;Kentikelenis et al 2016;Rickard and Caraway 2018). Given this marked increase in the range and detail of data available on conditionality, along with growing interest in the topic since the controversies surrounding the IMF's handling of the global financial crisis (Grabel 2011), the stage is set to undertake fine-grained quantitative analyses of the impact of conditionality per se.…”

The political economy of labor market deregulation during IMF interventions

“…Labor conditions can also modify contractual provisions in the public sector (Nelson 1992, 229). While most of these conditions entail reductions in the public sector wage bill, some also affect pensions and other employee entitlements (Rickard and Caraway 2018).…”

“…Recent works have addressed this lacuna, albeit incompletely. For instance, Rickard and Caraway (2018) created a new dataset on labor conditions, but focused on wages, rather than labor rights, as the outcome of interest. Gunaydin (2018) is the first to examine labor conditions, but equates labor market reform with the degree to which borrowing countries comply with labor conditions, rather than tracing changes in labor laws.…”

Beyond Conditionality: Policy Reversals in Southern Europe in the Aftermath of the Eurozone Crisis

“…Campos and Horváth (2012) study liberalisation and privatisation reform efforts for 25 Eastern European and former Soviet Union economies between 1989 and 2001 and show that reversals occur in 14-20 per cent of the cases depending on the reform indicators. Rickard and Caraway (2019) look specifically at the reversals of reforms induced by IMF conditionality in the period from 1980 to 2014, and observe that cuts to the public sector wage do not persist in the longer-term.…”