IMF and income inequality

Sri Lanka in the throes of the worst economic crisis since Independence has resorted to some desperate action; it has for the first time in its history declared bankruptcy, suspended debt repayment, secured an IMF bailout for the 17th time, and agreed to extremely stringent loan conditions, which have already caused social unrest with people getting on to the streets. Tax and tariff hikes and steep rises in bank rates have caused considerable apprehension among the vulnerable sections of the society. The affected people seem to be unrelenting in their demand that these IMF enforced conditions be immediately revoked. They are staging public demonstrations and resorting to trade union action in protest against the measures. It may be opportune to look at results of recent research on the causal relationship between IMF programmes and global income inequality.

It may be necessary to say by way of introduction that capital development at the expense of labour and environment has reached its zenith in the developed countries. The richest cannot accumulate more without causing abject poverty in their own countries, and worse, destroying the world. World Inequality Report, based on a worldwide study by 100 researchers, presented in Paris (Andrea Barolini 28 Jun 2018), reveals how the rich get richer at the expense of the poor. During 1993 to 2013, in Italy, the poorest 90% lost 15% of their wealth which was pocketed by the top 10% . In the developed countries, the richest 1% are twice as wealthy as the poorest 50%. In China, the top 10% own 41% of the wealth, in Russia 46%, in the US 47%. This increase in inequalities more or less parallels the decrease of public wealth, compared to private wealth. These facts and figures show how diligently these countries have followed neo-liberalist policies, dictated by the IMF.

There are leading economists who think that one of the driving forces of the present inequity ridden global economy is international debt (Forster, et al, 2019). The 2008 recession was overcome by the granting of huge amounts of debt. By 2018 the global debt volume had risen to USD 250 trillion which is three times the annual global output. The developing countries’ share of this debt had risen from 7% in 2007 to 26% in 2017. Several leading economists who have studied the impact of debt on economic growth have reported that increasing public debt has a negative effect on economic growth (Reinhart & Rogoff 2010). A 1% increase in public debt could result in a 0.012% slowing down of growth. The reasons for this could be 1) discouragement of private investment as government borrowing competes for funds in country’s capital markets, 2) higher long-term interest rates caused by an excess supply of government debt, 3) higher taxes to fund rising debt repayments and 4) increase in the rate of inflation. While the recipients of debt end up with negative growth the the system ensures that the flow of wealth is from the poor to the rich. This is how two thirds of the wealth created by the poor finds its way into the pockets of the billionaires.

To come to the research mentioned above Valentine Lang (2021) has studied the possible relationship between income inequality and IMF loans. He has analysed, using sophisticated statistical methods, data retreaved from the Standardised World Income Inequality Database, IMF Quota Reports, trends in global poverty, etc. to determine whether IMF loans and their conditionality has a causal relationship with income inequality.

As shown above the latter has been inordinately rising and the IMF apparently has not been able to do anything significant in that regard though they have been trying. Lang has reported that during the period of operation of an IMF programme, countries experience a significant increase in income inequality compared to similar periods without such programmes. His statistical methods appear to have eliminated other possible factors that could impact on income. Lang has found that in Argentina which was under one of the economically largest and the longest IMF programmes from 1983 to 2004 the Gini coefficient, which measures the inequality among values of a frequency distribution and could be used to measure income disparity, rose from 38 to 45 during that two decade period reflecting a significant rise in the gap between the rich and the poor. The Gini coefficient dropped back to 38 after the IMF programme had ended. The study had also found that the effect of an IMF programme of one-year duration on income distribution could last for five years indicating a slowness in recovery.

I cannot do better than to quote from the abstract of the publication. “Does the International Monetary Fund (IMF) increase inequality? To answer this question, this article introduces a new empirical strategy for determining the effects of IMF programmes that exploits the heterogeneous effect of IMF liquidity on loan allocation based on a difference-in-differences logic. The results show that IMF programmes increase income inequality. An analysis of decile-specific income data shows that this effect is driven by absolute income losses for the poor and not by income gains for the rich. The effect persists for up to five  years, and is stronger for IMF programmes in democracies, and when policy conditions, particularly those that demand social-spending cuts and labour-market reforms, are more extensive. These results suggest that IMF programmes can constrain government responsiveness to domestic distributional preferences.”

Pressure that international lending organisations exert on the national policies are not as strong as under IMF programmes. Since its inception IMF has initiated more than 130 programmes and the recipient countries have undergone fundamental economic reforms that IMF usually enforces but unfortunately the initial problems that necessitated IMF intervention have remained unabated though it had assuaged the acute economic collapse. Keeping with their general stringent policies the IMF has installed a set of harsh conditions that could have political repercussions. However, there may not be an alternative and even if there was, the acuteness of the problem would rule out any measures that do not entail a bail out.

This crisis should serve as a lesson to the leaders and also the people about the mistakes of the past that had caused it, mistakes of electing corrupt rulers who mismanaged, wasted, robbed and lived in clover while the poor became poorer and the country ended bankrupt. If at least we had tried and achieved self-sufficiency in food and other essentials that could be produced locally, as suggested by Joseph Stiglitz the former head of the IMF, we would not have been bankrupt, also perhaps it may have been possible to look for alternatives to IMF and moreover we would have been in a stronger position to negotiate with the IMF and other lenders to mitigate the effect of conditions. But that is a big IF given the corrupt political culture and the gullibility of the people.

N.A.de S. Amaratunga