Poverty, Inequality and the IMF: How Austerity Hurts the Poor and Widens Inequality

In offering loans to developing countries in exchange for policy reforms, the International Monetary Fund (IMF) typically sets the fiscal parameters within which development occurs. Among the drivers of socio-economic development, a new working paper focuses on an important, yet insufficiently understood, international-level determinant: the spread of austerity policies to the developing world by the IMF.

In a new working paper, Thomas Stubbs, Alexander Kentikelenis, Rebecca Ray and Kevin P. Gallagher use an original dataset of IMF-mandated austerity targets to examine how policy reforms prescribed in IMF programs affect inequality and poverty. Their empirical analyses span a panel of up to 79 countries for the period 2002-2018. Using instrumentation techniques, the authors control for the possibility that these relationships are driven by the IMF imposing harsher austerity measures precisely in countries with more problematic economies.

Their findings show that stricter austerity is associated with greater income inequality for up to two years, and that this effect is driven by concentrating income to the top ten percent of earners, while all other deciles lose out. The authors also found that stricter austerity is associated with higher poverty head-counts and poverty gaps. Taken together, their findings suggest the IMF has neglected the multiple ways its own policy advice contributes to social inequity in the developing world.

In December 2021, this working paper was published as a journal article in the Journal of Globalization and Development.