The Distributional Effects of Privatization in IMF Programs

• In Event: IMF, Conditionality, and Intellectual Authority

Abstract

There is a rich body of literature examining the impact of International Monetary Fund (IMF) programs on its borrowing countries, however, only a small number of studies to date have systematically investigated the distributive impacts of IMF program conditions. Existing studies tend to focus on aggregate indicators of inequality, such as the Gini coefficient or redistributive indicators like welfare spending and outcomes. Nevertheless, recent advances in Economics suggest that patterns of capital ownership and control are just as, if not more important, for inequality than redistributive measures. In this paper, we incorporate these new insights, and use a disaggregated approach to IMF programs to investigate the impact of privatization conditionalities on inequality in recipient countries.

We focus on privatization of state-owned enterprises (SOEs) because they are amongst the most significant, and also politically contentious types of IMF conditionality as they not only require changes in the institutional framework of the recipient country, but also lead to major structural changes in its economy through transferring ownership and control. Privatization of SOEs have been a defining feature of IMF programs since the 1980s, often justified on the basis that privatization increases the efficiency of production and reduces fiscal burdens. Since the borrowing countries have to implement the conditions attached to their IMF loans, privatization cases increase under IMF monitoring.

We first explore the causal mechanisms at work through case studies of privatizations in two key developing countries, namely Pakistan and Turkey, both of which implemented numerous IMF programs that required privatizing SOEs in strategic sectors. A significant impact of privatization of key productive and utilities SOE in both countries was the weakening of public sector trade unions. Where trade unions were unable to resist privatization, workers were fired and later hired back through subcontractors at lower wages and with fewer rights. This resulted in a greater share of revenues being paid to foreign and domestic shareholders as dividends, less to workers as wages, and less invested back into production. Worker’s reduced bargaining power led to reduced income. Furthermore, the depression of wages in key strategic industries put downward pressure on wages in related private industries through competition.

To test our theory in a large-N setting, we then employ regression analysis on a novel dataset including all IMF programs from 1980 to 2015. We analyze the effect of privatization conditionalities on returns to the activity of labor (the primary source of income for the vast majority of the population) versus returns to ownership (a more important source of income for the wealthy). Disaggregating by sector, we analyze whether the IMF’s privatization conditionalities can be linked to changes in the functional distribution of income in the privatized industries both over time and relative to industries that remained predominantly state owned. This approach is better able to isolate a key mechanism through which IMF conditionality affects inequality than studies that rely on aggregate data and do not disentangle the effects of various conditionalities. Furthermore, the existing literature, to a large extent, has either focused on IMF program design or program implementation stages. This paper analyzes both stages by taking into account the condition waivers the borrowing country receives.

Our study contributes to multiple literatures in political economy by using a disaggregated approach to IMF conditionality and privatization of SOEs, which has been a standard recipe given to developing countries, by international financial institutions as part of structural adjustment programs.

Authors

• Natalya Naqvi, London School of Economics

• Merih Angin, Koç University