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New research delves into how governments leverage IMF bailouts as a tool to undermine political opponents.

In March, Sri Lanka secured a $3 billion bailout from the International Monetary Fund (IMF) amid rising inflation, debt, and a sovereign default. However, the conditions attached, including spending cuts and financial reforms, have disproportionately affected ethnic minorities, who are generally the poorest and often support the opposition. The government, led by Ranil Wickremesinghe, has shielded the elite, mainly Buddhist Sinhalese, from wealth taxes, opting for small increases in corporation tax. Austerity costs have been shifted to low-income individuals, such as ethnic minorities, through measures like doubling the value-added tax rate and increasing taxes on pension-fund returns. This aligns with a global pattern highlighted in the book “IMF Lending: Partisanship, Punishment and Protest,” revealing how governments use IMF programs for political advantage.

There is already a considerable body of academic literature demonstrating that governments often use their discretion to inject politics into development loans. For instance, recent research suggests that projects funded by Chinese capital are more likely to be initiated in the birth region of a political leader.

While it’s commonly assumed that IMF programs restrict the policy options of borrowing governments, the reality is more nuanced. Borrowers have less overall freedom over economic policy, but they retain considerable discretion in how they implement loan conditions. This study is the first to quantify how this discretion is utilized and to explore the resulting consequences for protests within the countries involved.

The study collected individual survey data from over 100 countries spanning a 40-year period up to the late 2010s, using sources like Afrobarometer, Asian Barometer, Latinobarómetro, and the World Values Surveys. The analysis focused on whether opposition supporters experienced reforms differently from government supporters, and indeed, the experiences of the former were more negative.

To address the potential bias of opposition supporters being generally more critical of their governments, the study compared countries that had recently undergone a restructuring program with those that had not. The findings revealed that sentiment among opposition supporters was significantly more negative in borrower countries. The study illustrated this with a graph showing that opposition supporters in countries on IMF programs experience relatively more deprivation compared to government supporters, particularly when contrasted with countries not in IMF programs.

The “partisan gap” in deprivation was even more pronounced in countries that underwent a more challenging recent IMF adjustment, providing further evidence for the same conclusion. The severity of IMF restructuring seems to correlate with a wider partisan gap in the experiences of deprivation.

The expectation that the highly unequal treatment, particularly when fueled by opposition politicians, would raise the likelihood of protest was strongly substantiated across the surveys. In Africa, individuals who perceived themselves as worse off due to the structural adjustment program were more inclined to participate in protests. Furthermore, opposition supporters, in general, were more prone to engage in protests, particularly in countries that had recently undergone a more rigorous IMF program. Although the data from 1999-2001 was specific to Africa, other surveys indicated a similar pattern, suggesting that protest tendencies were higher among opposition supporters, particularly during periods of intense pressure for adjustment.

The escalation of inequality resulting from IMF programs is typically attributed to loan conditions, but it’s evident that governments’ policy choices exacerbate these effects. Addressing this situation poses challenges. The IMF could mandate non-partisan imposition of loan conditions, but this may conflict with its mandate and be difficult to enforce. Alternatively, the IMF could moderate its demands on borrower countries, reducing the burdens on opposition supporters. While critics might argue this encourages fiscal irresponsibility, proponents assert it could enhance program completion, bolstering economic resilience. Another approach is to involve opposition parties and civil society in bailout negotiations, fostering shared ownership and potentially limiting political exploitation of policy conditions.

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