IMF Programs, Democracy, and Income Inequality By Rachel Azafrani and Leo Zucker

Literature: IMF Participation... ...increases poverty (Handa & King 1997; Oberdabernig 2012) ...adversely affects income inequality (Pastor 1987; Garuda 2000; Vreeland 2002, 2003) Talking about POOR countries

Question Do the effects of IMF programs depend on regime type? Nooruddin & Simmons (2006): Democracies begin to look more like autocracies under IMF programs

Hypothesis H1: The effect of participation in IMF programs on income inequality depends on regime type. H2: As a result of program participation, democracies will experience greater growth (or less reduction) in income inequality than autocracies will.

Convention: Democracies help the poor In democracies, large winning coalitions: More social spending; appeal to median voter Mitigate conditionality; don’t cut social spending IMF Program Decrease income inequality Government more redistributive. They need the taxes, they are beholden to their constituents. Cut other parts of their budget, possibly increase social spending

2) Our Hypothesis: Democracies increase inequality Nooruddin & Simmons (2006) hypothesis: When money is scarce, everyone fights for a piece of the pie Interest groups win Poor face a collective action problem Social spending cuts IMF Program Increase income inequality pro-poor policies provide diffuse benefits and costs Further constraints because we have POOR countries in our sample

What of autocracies?

1) Convention: Autocracies hurt the poor In autocracies, small winning coalitions: Less social spending; polarized distribution of wealth Cut social spending under conditionality IMF Program Increase income inequality Also spend on elite constituents

2) Autocracies decrease inequality Social spending benefits the upper and middle classes Conditionality decreases income of the upper and middle classes IMF Program Decrease income inequality Subsidy to middle and upper classes - net Gini (post tax, post transfer) Huge gap, it closes

Methodology Dependent Variable: Standardized Gini coefficient Independent Variables: Democracy, IMF Program Participation, Different Program Types Interaction term Kuznets (1955) determinants of income inequality Time series regressions Fixed-effects Up to 5 year lag Interaction term gauges the effect of IMF participation on income inequality (***Dramatic pause****) conditioned on regime type.

Descriptive Data Negligible difference.

Results Focus on the marginal effect Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Focus on the marginal effect

Marginal Effects Democracies: -0.457 insignificant Autocracies: -1.377*** reduce income inequality ℘ Holds across all lags up to 3 years

Marginal Effects: Continued Insignificant from 0, do not appear in this graph

Conclusions No significant effect for democracies Autocracies reduce income inequality Lowering income of the upper classes Same effect and significance in Extended Structural Adjustment Facilities (ESAFs): robust Democracies have greatest leeway in ESAFs because of lower conditionality - mention program implementation failure Logic for autocracies? Any reduction in the income in the upper classes of these poor autocracies will have a significant effect on reducing income inequality

Questions Thank you!