Nooruddin 2006

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The Politics of Hard Choices: IMF Programs and Government Spending
Irfan Nooruddin and Joel W. Simmons
International Organization / Volume 60 / Issue 04 / October 2006, pp 1001 - 1033

DOI: 10.1017/S0020818306060334, Published online: 25 October 2006
Link to this article: http://journals.cambridge.org/abstract_S0020818306060334
How to cite this article:

Irfan Nooruddin and Joel W. Simmons (2006). The Politics of Hard Choices: IMF Programs and Government Spending.
International Organization, 60, pp 1001-1033 doi:10.1017/S0020818306060334
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The Politics of Hard Choices: IMF
Programs and Government Spending
Irfan Nooruddin and Joel W+ Simmons
Abstract A central component of International Monetary Fund ~IMF! programs

is reducing government budget deficits+ We ask how domestic political consider-
ations shape the distribution of cuts made by governments in IMF programs+ Our
central finding is that IMF programs shrink the role played by domestic politics+ While
democracies allocate larger shares of their budgets to public services in the absence
of IMF programs, the difference between democracies and nondemocracies disap-
pears under IMF programs+ This result has important implications for our understand-
ing of government spending priorities under different resource constraints+
Critics of the International Monetary Fund ~IMF! typically focus on the nature of
conditionality imposed in exchange for loans+ The IMF ’s programs are criticized
for being insensitive to the burden adjustment places on the poor and most vulner-
able in society+ But while the effect of the IMF ’s structural adjustment programs
on various macroeconomic targets has been the subject of intense focus over the
past twenty-five years, attention to their effect on the poor is relatively limited and
reaches mixed conclusions+ This article addresses the critique that IMF adjust-
ment programs force reductions in social spending from which the poor particu-
larly benefit, but does so with an eye toward whether the effects of such austerity
programs are mediated by domestic political factors in the recipient country+ One
drawback of the current literature is the absence of any serious theorizing about
the role of domestic politics in shaping the effects of IMF programs+ As we show
below, however, there is good reason to believe that the domestic political envi-
ronment influences the effects of austerity+ In short, our research addresses the
related questions of whether IMF programs do indeed hurt the poor, whether these
We dedicate this article to the memory of Harold K+ Jacobson+ Robert Kaufman, Lisa Martin, Joan
Nelson, and two anonymous reviewers for IO provided valuable comments on earlier drafts, and Chris
Achen, Chris Adolph, Leah Anderson, Carew Boulding, Sarah Brooks, Chelsea Brown, Lawrence Broz,
Eric Chang, Dan Corstange, Rob Franzese, Nate Jensen, Marcus Kurtz, Margaret Levi, Autumn Pay-
ton, Nita Rudra, Heidi Sherman, and James Vreeland offered helpful advice+ We thank Autumn Payton
for research assistance+ Earlier versions were presented at the 2004 Midwest Political Science Associ-
ation Meetings, the 2004 American Political Science Association Meetings, the 2005 workshop on
“Distributive Politics and Social Protection in the 21st Century” at Ohio State’s Mershon Center, and
the 2005 International Studies Association Meetings+ All errors remain our own+
International Organization 60, Fall 2006, pp+ 1001–1033

© 2006 by The IO Foundation+ DOI: 10+10170S0020818306060334
1002 International Organization
effects are conditional on regime type, and the direction of conditionality, if it

exists+ Our findings are noteworthy+ Contrary to recent research by the IMF, we
show that IMF programs do cause reductions in social spending, and, perhaps coun-
terintuitively, that this effect is particularly pronounced in democratic countries+
We also demonstrate that observed differences between democracies and nondem-
ocracies in terms of their spending priorities diminish or vanish in the presence of
IMF programs+ These empirical patterns, we argue, are the result of a political
calculus whereby democracies decrease spending on those programs associated
with the least organized interests+
We organize the article as follows+ The next section surveys the relevant research
on the IMF, focusing especially on the nature of conditionality and recent empir-
ical research on its effects—particularly as they relate to the poor+ We then develop
a theoretical argument for why we might expect effects of IMF programs to be
conditional on the recipient country’s regime type+ Hypotheses suggested by this
argument are tested using cross-national, time-series data from 1980–2000, and
we report results from a series of robustness checks in the penultimate section+
We conclude with a consideration of the implications of our findings for future
research on the IMF and government provision of public services+
Policy Conditionality and Its Effects on the Poor
Prior to the debt crisis of the early 1980s, the IMF ’s role in developing countries
focused on providing temporary infusions of capital to alleviate problems with
inflation, budget deficits, or balance of payments+ After the debt crisis, however,
lenders and policymakers in the developed world became convinced that the econ-
omies of developing countries required far-reaching structural reforms to remedy
their underlying problems+1 The use of conditionality has increased accordingly
over the past twenty years+ Buira cites previous research showing the “average
number of @IMF# conditions rose from about six in the 1970s to ten in the 1980s,”
and claims that this trend has continued through the 1990s with programs enacted
between 1995 and 1999 averaging 12+1 conditions+2 This increase in the number
of conditions has occurred irrespective of the type of country or program+3
Of particular interest to this article, given its focus on the effect of IMF pro-
grams on the provision of government public services, is the role fiscal adjust-
ments play in IMF programs+ While IMF programs differ across countries, they
1+ See Bird 2003; Crisp and Kelly 1999; Stone 2002; and Vreeland 2003+
2+ Buira 2003a, 61, fig+ 1+
3+ Ibid+, 62, fig+ 2+ Dreher and Jensen also document an increase in the number of structural condi-
tions over time, though the average number of conditions per program they cite is slightly lower than
those stated by Buira; see Dreher and Jensen forthcoming+ According to their research, in 1987, the
average number of conditions per IMF program was about three, and it rose to about nine in the late
1990s+
IMF Programs and Government Spending 1003
share an emphasis on reducing the role played by the state in the economy+4 Cor-
nia cites a 1986 IMF finding that reducing central government expenditure was
mandated in 91 percent of programs and reducing budget deficits as a share of
gross domestic product ~GDP! was required in 83 percent+5 Edwards, in his 1989
survey of thirty-four upper-tranche IMF programs, reached similar conclusions,
finding that 76 percent of programs contained controls on government expendi-
tures+ These downward pressures on government spending were further exacer-
bated by the loss of revenues resulting from privatization of state-owned enterprises,
especially if these had been successful+6 More recent surveys confirm the central-
ity of fiscal reforms to IMF programs+7
Given that fiscal deficits are typically regarded as a central cause of macroeco-
nomic imbalance, it is hardly surprising that fiscal policy “is often a centerpiece
of program design, with quantified targets included as key elements of condition-
ality+” 8 Fiscal reforms recommended by the IMF are wide-ranging but principally
emphasize the rationalization of tax policy, reductions in government expenditure,
and the reform of public enterprises and pricing policies ~removal of subsidies,
for example!+ Governments can eliminate deficits by cutting expenditures and0or
raising revenues+ Revenues are harder to increase since many developing coun-
tries lack the necessary extractive capacity and raising taxes is often viewed as
distortionary+9 Therefore, governments seeking to reduce deficits are more likely
to emphasize cutting spending “by decreasing subsidies, public-enterprise deficits,
public employment, public-sector wages, and government expenditures on invest-
ment+” 10 Indeed, Cho finds that, under IMF programs, governments most often do
not reduce their deficits successfully, but only because they fail to increase their
revenues even as they do succeed in cutting expenditures+11
This emphasis on lower government expenditures is one reason the IMF has
been criticized harshly+ IMF “austerity programs” are argued to cause tremendous
dislocation within the economy, especially for the poorest and most vulnerable
sectors of society that are most dependent on the state for valuable public services
such as health and education+12 For example, Cornia cites “the cancellation of a
4+ Biersteker 1990, 477+

5+ Cornia 1987, 50–51+ Mahdavi 2004 argues similarly that fiscal deficit reduction has been a cen-
tral component of conditions placed on developing countries seeking to restructure their debts or receive
debt relief+
6+ Biersteker 1990, 490+
7+ See Bird 1996 and 2003; Krueger 1998; and Buira 2003b+
8+ IMF 2003, 14+
9+ Mahdavi 2004, 1139+
10+ Bienen and Gersovitz 1985, 737+
11+ Cho 2004+
12+ See Remmer 1986, 7; Crisp and Kelly 1999, 534, 542; Garuda 2000, 1031; Bird 2003, 253; and
IMF 2003, 14+ Another effect that is often mentioned is the reduction in food subsidies+ However, the
lack of cross-national, time-series data on government spending on food subsidies targeted at the poor
makes it impossible to include this factor in our analysis+ It remains an important question for future
research+
budget-financed child-feeding programme @as# part of an overall attempt to reduce

the fiscal deficit,” which he alleges led to a statistically significant national increase
in child mortality+13 Similarly, Pinstrup-Andersen, Jaramillo, and Stewart find that
the burden of cuts in government expenditures as a result of adjustment programs
fall mostly on economic services and least on defense, with education and health
falling in between+14
The IMF has recognized the urgency of such critiques and, in 2003, its Inde-
pendent Evaluation Office ~IEO! published a comprehensive review of its fiscal
adjustment programs+ Its findings suggest that many of the criticisms reviewed
above are baseless+15 First, the IEO refutes claims that the IMF imposes a “one-
size-fits-all” austerity plan on recipient countries, stating that “the evidence + + +
does not support the perception that programs always involved austerity by target-
ing reductions in current account fiscal deficits or in public expenditures+” 16 While
70 percent of programs reviewed by the IEO did target an improvement in the
fiscal balance, the remainder “envisaged a widening of the fiscal deficit” and “in
40 percent of cases, total public spending as a percentage of GDP was actually
targeted to increase+” 17 Moreover, when fiscal deficit reductions were called for,
relatively small ~1+2 percent of GDP! expenditure reductions were targeted+18 In
practice, however, IMF programs diverged from these targets+ The IEO found that,
while targets in deficits were aimed to be achieved by a combination of revenue
increases and spending reductions, realized revenue increases were much smaller
than targeted+19 This led to a heavier reliance on expenditure cuts because “the
deficits could not be financed and large expenditure cuts became unavoidable when
revenue measures did not yield results quickly enough+” 20
Second, while the IEO criticizes the IMF for being too vague in specifying how
best to protect social spending, it rejects the criticism that fiscal austerity leads to
reductions in spending on education and health+ In 1995, Killick also argued that
existing research showed “that social services are among the more protected cat-
egories” during IMF programs+21 But as with many previous studies, his claims
were suspect because of a failure to control for possible selection bias+ The 2003
IEO study, on the other hand, is methodologically rigorous, accounts for possible
selection effects, and concludes:
The results show that the presence of an IMF-supported program does not
reduce public spending on either health or education—measured as a share
13+ Cornia 1987, 67+

14+ Pinstrup-Andersen, Jaramillo, and Stewart 1987, 77+
15+ IMF 2003+
16+ Ibid+, 4+
17+ Ibid+, 19+
18+ Ibid+, 17, tab+ 2+2+
19+ Ibid+, 17+
20+ Ibid+, 34+
21+ Killick 1995, 51+
of total public spending, GDP, or in per capita real terms+ In fact, we estimate
that during program periods, and with all other factors being the same, public
spending in each of the health and education sectors increased by about 0+3
to 0+4 percentage points of GDP compared to a situation without a program+22
It would seem that the IMF ’s critics have been incorrect and unfair+
Vigorous debate therefore continues over the effects of IMF policies on the poor+
A striking feature of this debate is the absence of any serious theorizing about the
role played by domestic politics in the country receiving IMF credit+ In trying to
explain why some countries are less likely to complete their IMF programs, or
implement the mandated reforms, scholars have invoked the notion of “political
will,” 23 but there is no study of which we are aware that systematically tests whether
and how political considerations shape how IMF programs are implemented+ In
the next section, we develop an argument that focuses on explicitly political answers
to this article’s central questions: does politics—specifically, a country’s regime
type—mediate how conditionality programs affect expenditure reductions, and if
so, in what direction?
The Conditional Impact of IMF Conditionality
To start, we establish that domestic political factors can influence the effects of
IMF programs+ Critics often accuse the IMF of fostering a “democratic deficit”—
a transfer of national sovereignty to the IMF—by reducing the autonomy of domes-
tic governments+ To be sure, conditionality does require governments to take actions
they might otherwise avoid, but the argument of a democratic deficit is too quick
to accuse the IMF of imposing its will on “helpless” governments, and fails to
recognize that domestic politics can also shape how IMF programs are imple-
mented in recipient countries+ Recall first that the IMF can only establish a pro-
gram at the request and consent of the recipient country+ This is a particularly
important point because it means austerity conditions are not imposed on coun-
tries exogenously+ Rather, observed program content is the outcome of arduous
bargaining between recipient governments and the IMF+ As such, the content of
austerity is endogenous to the features of the IMF and the recipient country that
influence their reservation points in the bargaining process+ Conway makes this
point well: “@IMF austerity# is a negotiated agreement between the IMF and the
participating country, and thus should be considered endogenously determined+
The conditions, rather than being an independently set list of policy reforms to
achieve economic growth and external balance, are the outcome of bargaining
between the IMF and the participating country+” 24 That bargaining determines the
22+ IMF 2003, 8, emphasis added+

23+ See Bird 1996 and 2003; and Vreeland 2003+
24+ Conway 2003, 3+ See also Drazen 2001+
content of these programs means that politicians in borrowing countries retain some
leverage over what spending programs are cut and the extent of these spending
reductions+ Presumably, political leaders in borrowing countries expect that aus-
terity will require structural reforms with serious distributional consequences+ The
fact that they retain leverage over the nature of the austerity package, then, is
critically important as it enables incumbents to influence the reform package in
ways that minimize the expected costs of the budget reductions+ Which policies
fulfill this goal is, however, still an open question and is the issue at the heart of
our research agenda here+
Kahler gives persuasive anecdotal evidence of such bargaining behavior+ As we
do here, he argues that countries’ reservation points are a function of the domestic
political setting and, as such, domestic politics affects which policies receive pro-
tection from cuts by shaping how hard politicians are willing to work to take some
budgetary items off the bargaining table entirely+ He writes, “Coalition-building
@on the part of IMF staffers to make the program politically palatable# may mean
sparing budgetary sacred cows that permit senior politicians to support an adjust-
ment program: chief among these politically sensitive items are food subsidies
and military spending+” 25 Kahler’s case studies of Jamaica and Somalia demon-
strate that bargaining between the IMF and the recipient country is quite extensive
and, more importantly, allows even governments in relatively small countries ~in
economic terms! to exclude their favored programs from serious cuts and other
structural reforms+
Somewhat related to the bargaining process over such a politically sensitive issue
as budget reductions is that the contents of IMF programs are often quite vague,
which allows domestic politicians greater leeway in the process of program imple-
mentation and hence how budgetary cuts are distributed+ Initially, IMF programs
were intent on setting targets for expenditure reductions but were less inclined to
dictate which programs should be cut and which protected+ Bienen and Gersovitz
cite a study ~based on internal IMF sources! of IMF agreements between 1969 and
1978 which found that only three of 105 agreements mandated specific expendi-
ture measures+26 Similarly, Dreher and Jensen write that, on average, the number
of structural conditions included in agreements has been rather low+ They find that,
in 1987, the average number of conditions included in IMF programs was about
three, and rose to about nine by the late 1990s+27 Furthermore, when agreements
did specify where cuts were to be made, they did so oftentimes only in the vaguest
terms+ Based on an analysis of fifteen IMF programs, the IEO concluded that IMF
programs are often too vague in specifying what spending categories should be
affected under the program and by how much+28 The evaluation states, for exam-
ple, that while the vast majority of programs studied ~93 percent! specify that some
25+ Kahler 1993, 376+

26+ Bienen and Gersovitz 1985, 737+
27+ Dreher and Jensen forthcoming+
28+ IMF 2003, chap+ 6+
protection be offered to the realm of social spending, not a single one of the pro-
grams adequately defined what programs fall under the heading “social spending,”
leaving it to the discretion of domestic politicians to make those crucial choices+29
In the final analysis, then, we believe that it is not entirely accurate to argue, as
many critics do, that IMF programs are simply imposed on countries in economic
turmoil and hence that the IMF is entirely culpable in whatever negative effects
these programs have on the poor ~if such effects are indeed negative at all!+ Rather,
the upshot of this brief discussion is that the available theoretical and empirical
observations show persuasively that the bargaining process allows recipient coun-
try governments to retain some influence over IMF program content and hence the
distributional implications of those programs+ If the effects of IMF policies on the
poor are indeed negative, as the critics argue, borrowing country governments might
need to shoulder some of the blame+ As such, studies of the effects of IMF pro-
grams on the poor would do well to turn their attention to how the constellation of
domestic interests and institutions affects how politicians in borrowing countries
are likely to bargain over the content of austerity plans and hence how they are
likely to distribute the costs of budgetary reductions+ In the next section, we take
up precisely this task+
Democracy and Conditionality
Considerable recent research in political science has theorized that certain types
of governments should be more likely to emphasize social ~or public services!
spending+ Bueno de Mesquita and colleagues argue that political institutions affect
government spending policy by shaping the incentives politicians have to cater to
larger versus smaller constituencies+30 They argue that the size of the winning coali-
tion relative to the size of the selectorate is the relevant variable for understanding
government policy+ Where this ratio is high, that is, the government must build a
winning coalition that is large ~or, more accurately, a majority!, they argue it is
more efficient for the government to provide public goods than to try to win the
support of individual members of the necessary winning coalition by providing
private goods+ Where this ratio is small, for instance in extremely personalistic
dictatorships, the dictator can retain office by keeping the support of a very small
number of individuals+ In this latter case, the dictator will buy support by provid-
ing private goods rather than spending on social programs such as education and
health+ This line of reasoning leads the authors to argue that democracies are more
likely to provide public goods than are nondemocracies, since democracies are
typically characterized by universal franchise, forcing leaders to win the support
of a majority of the population+
29+ Ibid+ 2003, 55–56+

30+ Bueno de Mesquita et al+ 2003+
Employing a different theoretical framework, Lake and Baum argue that democ-
racies are more likely to provide public services than are nondemocracies+31 They
suggest that democratic leaders, because they face greater levels of competition,
will spend more on public services than their nondemocratic counterparts+ In their
framework, states are comparable to revenue-maximizing firms and act accord-
ingly+ Moreover, states’ revenues depend on the public services supplied to citi-
zens; an undersupply generates rents in the form of bribes while an oversupply
generates relatively fewer rents+ That states operate in a contestable market, how-
ever, constrains the supply of policy+ Where there are low levels of competition
~that is, authoritarian regimes!, political leaders have an incentive to exercise their
monopoly power and undersupply public services, thereby increasing rents to the
government+ In contrast, as democracy facilitates political competition, leaders in
these political systems act as regulated monopolies, supplying more public ser-
vices in an effort to maintain an advantage over their rivals+
We are left then with the conclusion that, ceteris paribus, democracies—
characterized by more political competition and larger winning coalitions than auto-
cratic regimes—should allocate more of their budget to public services such as
education and health+ There is strong evidence in support of this conclusion+ Both
Bueno de Mesquita and colleagues and Lake and Baum report results supporting
their propositions+32 Furthermore, several recent articles report a significantly pos-
itive effect of regime type on education spending+33
Of interest to us is whether it necessarily follows from these arguments that, in
periods of fiscal austerity such as those required by IMF conditionality, demo-
cratic governments “protect” public services against cuts+ That is, should we expect
that, even under circumstances where governments are required to trim spending,
these regime differences persist and democratic governments will dedicate a larger
share of their budgets to public services than do their nondemocratic counterparts?
The conclusions of existing research on regime type’s impact on spending pat-
terns would suggest that democracies should protect public services against cuts,
even in the face of austerity programs mandated by IMF programs+ Cuts to public
service spending adversely affect the poorer sections of society most of all because
their demand for such services is fairly income-inelastic and they are less able to
exit to the private sector+ One might expect, therefore, that democratic govern-
ments, which after all are accountable to the populace, might protect these citi-
zens by finding other areas of the budget to trim while preserving the emphasis
given to education and health provision+ Perhaps more importantly, taken as stated
above, there is little reason to believe that the incentive structures political leaders
face in periods of IMF austerity are substantially different than in periods of greater
31+ Lake and Baum 2001+

32+ See Bueno de Mesquita et al+ 2003; and Lake and Baum 2001+
33+ See Avelino, Brown, and Hunter 2005; Brown and Hunter 2004; Kaufman and Segura-Ubiergo
2001; Rudra and Haggard 2005; and Stasavage 2005+
economic well-being+ The above arguments are fundamentally about the effects of
institutions, and one should expect that the presence of political institutions that
increase the size of the winning coalition required to retain office and those that
subject incumbents to stiff political competition should have similar results with
respect to public service spending in a variety of heterogeneous political and eco-
nomic environments+ That is, the institutional incentives of the size of the winning
coalition relative to the selectorate or the presence of political competition are
constant across periods of “good” and “hard” times, and therefore the expectation
is that the differences in spending attributed to regime type should persist regard-
less of the available fiscal resources+
It is not altogether clear, however, whether this motivation to provide public
services will prevail when budgets have to be trimmed substantially+ A simple
fact about politics is that the probability of political participation and the effi-
cacy of that participation vary greatly across individuals and societal interest
groups+ As such, all things constant, we should expect office-seeking political
incumbents to pay more attention to those segments of society that are more
efficacious participants in the political sphere+ As Schattschneider eloquently put
it, the “pressure system has an upper-class bias,” 34 yielding favorable policies
to those groups that can organize most effectively on behalf of their interests,
while those groups that cannot overcome the problems of collective action or
mobilize sufficient influence fail to get their preferred resource allocation+ Impor-
tantly, pro-poor policies such as education and health services provide diffuse
benefits and costs, and on a continuum are nearer to pure public goods than pure
private ones+ Therefore, there is typically less organization on the part of citizens
to preserve these services, and instead citizens “free ride” off the lobbying efforts
of others+
This matters because in an environment where resources are constrained and
politicians must cut spending, one might expect politics to be characterized by
fierce interest-group politics over the distribution of the even-more-scarce govern-
ment resources+ Every societal interest group wants to maximize its allocation of
favorable policies and, for each, the imposition of deficit-reduction conditionality
carries with it the possibility of a reduction in the resources it receives from the
government+ Thus, the military fears a reduction of its allocation of government
spending, public employees fear wage contraction and layoffs, and the public in
general ~and the poor especially! fears cuts in essential government services such
as food subsidies, education, and health+ Furthermore, the spending game under
such conditions is very much zero sum, and should one group manage to maintain
the status quo level of resource allocation, cuts are inevitably passed along to some
other spending category+ Ultimately, the proverbial “buck” stops at the least orga-
nized societal interests+ Since politicians retain discretion over how to distribute
these cuts, each group has an incentive to lobby the government in an effort to
34+ Schattschneider 1960, 32; see also Olson 1982+

minimize the cuts it sustains+35 What we are left with is a scenario in which every
group presses the government to minimize the cuts to its particular interest and to
pass those cuts along elsewhere+ Garuda recognizes this dynamic explicitly when
he writes that “governmental authorities are not usually completely free to deter-
mine how the burden of increased taxes and decreased fiscal benefits is to be
borne+” 36 Rather, the choice of policy instruments is influenced by the political
power of the various groups and “special interests” affected by the cuts+37
Under such conditions, one might well expect governments to be more respon-
sive to well-organized and powerful interest groups than to the poor, whose polit-
ical resources are far more limited+ For example, the costs of spending cuts on
other categories such as the military or government wages are far more concen-
trated+ Most defense expenditures in most developing countries are not for pur-
chasing new weapons but rather allocated to personnel+ Thus, “the recurrent
component of defense expenditures, especially personnel, is high and this reduces
the ability of governments to cut defense expenditures during times of economic
stringency+” 38 Similarly, while conditionality has imposed short-term quantitative
targets to reduce public employment or limit public-sector wage increases, such
measures are short-lived because they are easily reversed and the IMF has had
little success getting countries to reform their civil services or public administra-
tion apparatuses+39 The vested interests of such groups are simply too well-organized
and close to the halls of power to be subjected to deep cuts+40
The upshot of this analysis is that cutting “politically easy targets” such as edu-
cation and health, while certainly unpopular with citizens, is less likely to hurt
policymakers than cutting programs that are associated with well-organized and
powerful lobbies+41 Lustig, who directed the World Development Report 2000/01
on “Attacking Poverty,” concurs with this assessment:
35+ As noted above, the IMF ’s IEO has criticized previous programs for not being proactive in
identifying where cuts should be made in order to protect social spending+ In 1997, the IMF issued
new Guidelines on Social Expenditures that required IMF programs to state explicitly how social ser-
vices will be maintained and to monitor trends in social spending and human development outcomes
such as enrollment and child mortality rates+ We discuss this initiative explicitly in our empirical sec-
tion below+
36+ Garuda 2000, 1033+
37+ See Bird 1997, 1411; Bird 2003, 258; and Garuda 2000, 1033+
38+ Harris et al+ 1988, 166+
39+ IMF 2003, 10+
40+ Birn and colleagues echo a common variant of this argument when they allege that the IMF
“ensures government commitment to paying interest on the national debt by making further loans con-
ditional on meeting interest payments”; see Birn, Zimmerman, and Garfield 2000, 115+ Here the inter-
national financial institutions and commercial lenders are the powerful group demanding their share of
the pie+
41+ See Darrow 2003, 73+ Anderson and Smirnova 2004 find evidence for precisely this logic in
their study of budget deficit reduction plans enacted by the City of New York+ Even though public
opinion polls show that public service agency cuts are the second most costly in terms of political
support ~increased taxes are least popular!, they are the most frequently used budget gap closing option
during the 1981–2004 fiscal years+
One particular concern is that spending on primary education and health

and spending on programs that target the poor tend to be cut back along
with other government expenditures+ This happens because the fiscal adjust-
ment has to be undertaken quickly+ Governments face great pressure from
a variety of political interest groups at such times+ Proportional cuts are
easier to implement quickly both in technical terms and in terms of raw
politics+ However, since poor people do not usually form organized
groups, and so lack a political voice, spending cuts on social protection
and other programs that benefit the poor often tend to be larger in relative
terms+42
In opposition to the institutional arguments proposed above, this logic sug-

gests that democracies will not necessarily protect spending on pro-poor policies
such as education and health during IMF programs+ Rather, interest group poli-
tics will oblige incumbents, even in countries characterized by democratic insti-
tutions, to cut spending on those policies associated with poorly organized interests+
This is not to say, however, that an altogether different logic dictates spending
on public services in good or bad times; both institutions and the organization of
interests groups shape what policies incumbents employ+ What remains, rather,
is the proposition that during IMF programs, the obligation to decrease spending
places a greater political premium on protecting those policies characterized
by organized interests+ When governments retain some semblance of fiscal flex-
ibility, all interest groups can get a reasonable share of spending, even if the
more organized groups get a disproportionate share of the available resources+
By contrast, when budgets must be trimmed, as they must during IMF austerity
plans, the more organized sectors of society have the political clout to minimize
the cuts they sustain+ In short, during austerity, office-seeking incumbents have
incentives to place an even greater premium on appealing to the relatively more
organized interests than what they might absent such constraints on the fiscal
budget+
Formal models represent these ideas with “shrinking pie” games in which two
or more groups interact in the presence of declining available resources, resulting
from either some exogenous shock or an endogenous political process+ In such
games, social conflict over the distribution of resources exists when the distribu-
tion process is zero sum and some groups can be excluded from the pie+43 In the
present context, we suggest that, because the poorest of society—who need these
42+ Lustig 2000, 12, emphasis added+ Further, studies of the determinants of social spending indi-
cate that spending on the poor is more procyclical than is the rest of the budget; see Lustig 2000, 1+
Snyder and Yackovlev, based on an analysis of spending in the Latin American and Caribbean coun-
tries, find that, while overall social spending is procyclical, spending on education and health is par-
ticularly so; see Snyder and Yackovlev 2000, 4+ Snyder and Yackovlev also find that both democracies
and nondemocracies cut social spending during economic downturns, but that, if anything, “spending
seems to be more procyclic under democratic rule than under authoritarian rule”; see Snyder and Yack-
ovlev 2000, 31–32+
43+ Rodrik 1999, 9+
services the most, as they likely do not have access to private sources of supply—
are also the segment of society with the weakest political connections, social spend-
ing should be subject to larger cuts than categories with more powerful vested
interests+ As Lustig explains, the problems facing social protection during eco-
nomic crises are “political rather than economic+” 44
Empirically, our discussion thus far proposes that the effect of IMF programs
on social expenditures may well be conditional on the regime type of the recipient
country+ While the critics suggest that IMF programs hurt the poor, it seems as if
democratic countries have both the motivation ~that is, the institutional incen-
tives! and opportunity to protect pro-poor services, thus at the very least, estab-
lishing a policy regime that hurts the poor less than in nondemocracies+ On the
other hand, as Vreeland notes, “political will” is needed to protect the poor during
austerity, and there is reason to suspect that leaders in democracies often lack such
will even given democratic institutions+ Instead, when forced to make reductions,
leaders in democracies choose just these pro-poor categories to cut because the
groups that benefit from them are relatively weak politically+
We thus arrive at three hypotheses:
H1: The effect of IMF programs on social expenditures is conditional on the regime
type of the recipient country.
The direction of the conditional effect is, however, unclear given our two plau-
sible but distinct arguments+ An institutional argument such as that from Bueno de
Mesquita and colleagues or Lake and Baum would suggest the following+
H2: Under IMF programs, democracies should spend more on social services than
nondemocracies.
But there is also reason to believe that the institutional origins of spending are
trumped by the organization of various interests, and that in periods of fiscal aus-
terity, the political premium of appealing to the more organized sectors of society
is even larger+ Thus, we have the third testable proposition+
H3: Under IMF programs, increases in levels of democracy should have smaller
impacts on social expenditures.
The next section describes the data and research design used to test these hypoth-
eses, and presents the results from these tests+
44+ Lustig 2000, 13+

A Cross-National, Time-Series Analysis
Tests of claims that IMF programs hurt the poor by forcing reductions in social
spending have become increasingly rigorous+ While many early critics based their
allegations on single-country episodes or anecdotal evidence of specific instances
in which programs were cut, recent studies have attempted more systematic analy-
ses involving cross-national, time-series data+ However, until the 2003 IEO study,
most such studies had not accounted for possible selection effects, a short-coming
remedied by the IEO+ The conclusions of this most recent study suggest that the
IMF ’s critics have been misguided, and that the presence of an IMF program actu-
ally increases spending on education and health+
However, the IMF study, as well as those preceding it, suffers from a serious
flaw+ While many scholars recognize that whether and how governments cut spend-
ing in response to IMF austerity measures depends on political considerations,
none has accounted for this fact in its empirics+ Once this possibility is accounted
for in the analysis, two possibilities arise+ First, we may find that the effect of IMF
programs is conditional on the regime type of the recipient country, and possibly
that they have different effects in different political systems+ Second, we may find
that the precise impact of increasing the level of democracy in a given country on
its level of social spending depends on whether there is an IMF program in place+
The analysis presented in the preceding section thus suggests two new hypoth-
eses, as well as a first ancillary hypothesis+
First, nothing in our account contradicts the conventional expectation that an
increase in the level of democracy will increase a government’s level of social
spending+ Thus, we expect to see a positive relationship between democracy and
social spending in our data+
Second, we expect the effect of IMF programs on social spending to be condi-
tional on the level of democracy in the recipient country+ Specifically, we expect
IMF programs to have a negative impact on social spending as the country’s level
of democracy gets higher+ This follows from the argument that democratic gov-
ernments are likely to respond to pressure from more organized interests seeking
to preserve their share of government spending+45
45+ Note, however, that this argument need not be symmetrical+ That is, we do not argue that non-
democracies become more responsive to the poor under IMF programs+ Indeed, to anticipate our analy-
sis of per capita spending measures in a later section, IMF programs have no impact on per capita
education or health spending in nondemocracies, though they do have negative effects in more demo-
cratic states+ Why might this be? Why would nondemocracies not respond to IMF pressure by target-
ing those groups to which they are least beholden? While a full answer to this question falls beyond
the scope of this article, two arguments strike us as plausible and consistent with the framework devel-
oped here+ First, nondemocracies spend less on education and health than democracies in the first
place+ Therefore, trimming these programs will not yield much in the way of fiscal reductions+ Second,
considerable evidence exists that education and health spending in nondemocracies are biased toward
the upper classes rather than to the masses; see Lindert 2004+ Since these groups are more likely to
have political influence, a class bias in spending would also explain why nondemocracies do not target
these social services+
Third, combining our first and second hypotheses, we expect the effect of an
increase in democracy to be attenuated under IMF programs+
To test these hypotheses, we collect data for all countries for which data are
available for the period 1980–2000+46 Our dependent variables are two conven-
tional indicators of social spending: the share of total expenditures allocated to
education and health+47
We use regression analysis to assess the effects of IMF programs and democ-
racy on these two categories of social spending while controlling for a number of
other economic factors+48 In these regressions we control for ~1! the natural log of
the level of a country’s per capita gdp, an increase in which, according to Wag-
ner’s Law, is expected to increase the emphasis placed on social programs; ~2!
separate indicators for the share of population under the age of fourteen and over
the age of sixty-five: we expect the former to have a positive effect on both edu-
cation and health spending, and the latter to have a negative effect on education
and positive effect on health spending; 49 ~3! three measures of changes in
national output levels ~annual growth rate of GDP, a dummy variable for years
in which the country experienced negative growth, and a measure of growth-
rate volatility!, which together affect the resources available to the govern-
ment+ We expect growth to have a positive effect on social spending, while our
negative growth and output volatility variables are expected to have a neg-
ative effect on social spending; ~4! a time variable to capture any trending in the
variables that might generate spurious correlations+ Finally, to ensure that residual
country differences are not driving our findings, we report results from specifica-
tions with and without country fixed effects+50 As indicators of democracy and the
46+ Economic data are from World Bank 2004+ Data on regime type are from Marshall, Jaggers,
and Gurr 2004+ IMF participation data are from Vreeland 2003+ Descriptions and summary statistics of
all variables used are provided in the Data Appendix+ Due to missing data, not all countries are included
in the estimation samples of our regression models+ A list of countries included in the statistical analy-
sis is also in the Appendix+
47+ Data on education spending are available for the entire period+ Data on health spending are
available only since 1990+ Our results are robust to measuring the dependent variables in per capita
rather than share of spending terms, and we discuss these alternative specifications below+
48+ To ensure comparability of our results with those from the IMF 2003 study, we use as far as
possible the same set of covariates in our models+ We make two exceptions+ First, we include a lagged
dependent variable to capture any dynamic considerations+ Since, as Achen 2000 shows, the inclusion
of a lagged dependent variable can suppress the explanatory power of the other independent variables,
we consider ours a conservative test+ Second, we do not control for currency devaluation+ When we do
include this variable, our results hold, but we lose more than forty countries ~about 40 percent of our
total observations! due to missing data+ These results are available from the authors+
49+ Arguably, the population over sixty-five variable does not belong in the education spending
model, but we choose to include it to enhance comparability of our results with those of the IEO
report+ When we drop this variable from the model, our results hold+ These results are available from
the authors+ We thank an anonymous reviewer for making this point+
50+ Ideally, including a measure of labor strength would allow us to test an additional implication
of the argument, because unionized workers are particularly well-positioned to exercise political influ-
ence to resist cuts+ However, cross-national, time-series data on levels of unionization by sector are
not available, and we leave this for future research+
presence of IMF programs, we use the country’s polity score, which ranges from
⫺10 ~nondemocracy! to 10 ~democracy!,51 and Vreeland’s dichotomous imf par-
ticipation indicator+52
Conceptually, we use the following format for the regression model:
ED ⫽ C ' a ed ⫹ bimf
ed
IMF ⫹ bdem
ed
DEM ⫹ bided IMF{DEM ⫹ « ed
HC ⫽ C ' a hc ⫹ bimf
hc
IMF ⫹ bdem
hc
DEM ⫹ bidhc IMF{DEM ⫹ « hc ~1!
where ED is education’s share of spending, HC is health’s share of spending, C is

a vector of controls ~as described above and including a constant!, IMF and DEM
are our measures of the presence of an IMF program and the recipient country’s
level of democracy, and a and b are coefficients to be estimated+ As with the IEO,
we estimate these models using an error-correction framework in which the depen-
dent variable is expressed as its first difference, and all right-hand variables are
entered in their lagged levels, and, depending on theory, as contemporaneous
changes+
Our hypotheses can be expressed formally as:
1+ Democracy increases social spending ~ bdem . 0!+

2+ The impact of an IMF program is conditional on level of democracy ~ bid Þ 0!+
3+ The presence of an IMF program reduces the positive impact of democracy
~ bdem . bdem ⫹ bid r bid , 0!+
Since we know IMF participation is not randomly assigned to country-years,

we must estimate these equations in a way that corrects for possible selection bias+
The intuition behind the selection bias concern is one of endogeneity+ Bound, Jae-
ger, and Baker provide a precise statement of the problem: “Empirical researchers
often wish to make causal inferences about the effect of one variable on another+
Doing so in nonexperimental settings is frequently difficult, because some of the
explanatory variables are endogenous: that is, they are influenced by some of the
51+ The IMF study dichotomizes this variable and codes countries scoring 4 or higher as democ-
racy; see IMF 2003, 80+ We prefer not to discard the information in the full range of the variable and
so use it in its original interval form+ However, our results are robust to measuring democracy as a
dichotomy ~whether the threshold is 4 as in the IMF study or 6 as Jaggers and Gurr 1995 suggest! or
as a trichotomy ~where countries scoring lower than ⫺6 are coded as nondemocracies and those between
⫺6 and 6 are coded as anocracies!+
52+ There are four main types of IMF programs: ~1! Stand By Arrangements ~SBA!; ~2! Structural
Adjustment Facility ~SAF!; ~3! Extended Structural Adjustment Facility ~ESAF!; and ~4! Extended
Fund Facility ~EFF!+ We do not distinguish between these programs, especially because “evidence
suggests that there is little significant difference @in severity# between IMF programmes;” see Bird
2003, 94+ See also Bird 2003, 52; Jensen 2004; Sturm et al+ 2005; and Vreeland 2003 for other uses of
a dichotomous IMF indicator+
same forces that influence the outcome under study+” 53 Applied to our inquiry, the
concern is that, if some of the factors related to entry into IMF programs are cor-
related with social spending priorities, ordinary statistical techniques for estimat-
ing the relationship between IMF programs and those priorities are suspect+54
More formally, consider an equation of interest for country i, in our case with
relative spending ~S ! on category j as the dependent variable with a vector of
covariates x and stochastic term «: 55
Sij ⫽ x ij' b ⫹ dIMFi ⫹ «i ~2!
Not all countries enter IMF programs+ Assume IMF participation is a linear func-
tion of some covariates ~v! and a stochastic component ~m!:
IMFi* ⫽ vi' g ⫹ m i ~3!
We only observe participation in IMF programs as a dichotomous variable such

that IMF ⫽ 1 if IMF * . 0 ~IMF ⫽ 0 otherwise!+
If selection bias is present, that is, m i and «i are correlated, then, estimating
equation ~2!, we find that
E~Sij 6IMFi ⫽ 1, x i , vi ! ⫽ xij' b ⫹ d ⫹ E~«i 6IMFi ⫽ 1, x i , vi !
⫽ xij' b ⫹ d ⫹ rs« l~⫺vi' g! ~4!
Heckman’s correction for selection proceeds in two steps+ First, estimate equa-
tion ~3! predicting IMF participation+ Using the estimated g, compute lZ i ⫽
[
f~vi' g!0Q~v [ for each observation in the sample+ Second, estimate b and
i g!
'
bl ⫽ rs« in equation ~4! by least squares regression on x and the selectivity

correction, lZ i +
The first step, therefore, is to build a statistical model of participation in IMF
programs+ We follow the IEO’s strategy and construct a linear probability model
53+ Bound, Jaeger, and Baker 1995, 443+ See Heckman 1979 for the classic statement of the selec-
tion bias problem+
54+ See Heckman 1978 and 1979; and Achen 1986+ For discussions and other examples of selection
bias corrections in studies of the IMF, see Vreeland 2003; Ul Haque and Khan 1998; Garuda 2000;
IMF 2003; and Jensen 2004+
55+ This discussion draws heavily on Greene 2003, chap+ 22+ For notational convenience, we ignore
the time subscript t+
of IMF participation+56 Then, using this model, we generate the hazard rates needed
to correct for selection+57
Our model of IMF participation employs the same explanatory factors identi-
fied by the IMF+58 First, a principal determinant of participation in IMF programs
is recidivism+59 Countries that have participated in IMF programs previously are
more likely to do so in the future+ One interpretation of this is that because the
country’s leaders have already incurred the sovereignty cost of approaching the
IMF previously, returning to the IMF for more aid is less costly domestically+
Another, less benign, interpretation is that IMF programs do not work all that well
and require countries to return repeatedly+ We therefore control for the presence of
an IMF program in the previous year+
Other right-hand variables code economic characteristics of the country, which
are appropriate since countries only turn to the IMF when their economies are in
turmoil+ We include the following indicators of such trouble: ~1! the per capita
income ~GDP per capita!, ~2! the growth rate of the economy, ~3! the size of
the current account deficit as a share of gdp, which serves as a proxy of
external crisis, ~4! the size of the government balance as a share of gdp,
and ~5! the country’s level of democracy+ Table 1 presents the results of the IMF
participation model+
Our IMF participation model performs well, correctly predicting 89+79 percent
of all observations in the sample+60 As expected, previous IMF participation is the
best predictor of current IMF participation+ Other factors with a statistically sig-
nificant effect are the country’s growth rate, level of per capita income, and size
of current account balance+ Also, countries that are growing faster, have higher
per capita incomes, and higher current account surpluses are less likely to need
help from the IMF+ Finally, the size of the government balance and the country’s
regime type do not have any effect on IMF participation+
56+ IMF 2003, app+ 4+

57+ To increase confidence in the robustness of our results, we also used two different techniques
for estimating the hazard rates+ First, we considered a dynamic probit model of IMF participation; see
Beck et al+ 2002+ Second, we used a dynamic bivariate probit with partial observability; see Vreeland
2003, chap+ 4; and Conway 2003+ The particular advantage of the second method is that it allows
researchers to treat the IMF ’s decision to engage in an agreement as distinct from the government’s
decision+ Since our results do not change when we use these alternative models to generate the hazard
rates, we stick with the IMF ’s technique to enhance comparability of our results+ The alternative results
are available from the authors+
58+ IMF 2003, 81+ Other factors sometimes included in models of IMF participation are total pop-
ulation as a proxy of market size, size of external debt, and number of domestic veto players+
59+ See Bird 2003; IMF 2003; and Vreeland 2003+
60+ Bird cautions against putting too much stock in such “goodness-of-fit” statistics since, for most
sample periods, predicting “no agreement” should be accurate 80 percent of the time; see Bird 2003,
51+ We report ours as an indicator of the satisfactory nature of the model, relative to others of its kind+
For benchmark purposes, Garuda’s model correctly predicted 62 percent of his sample—see Garuda
2000, 1037; while Jensen’s model correctly predicted 83 percent of the observations in his sample—
see Jensen 2004, 22+ Bird’s summary of various published models of IMF participation suggest that,
on average, 85 percent of observations are correctly predicted; Bird 2003, 51+
TABLE 1. Model of IMF participation
Variable Coefficient Standard error T-statistic P ⬎ 6t 6
imft⫺1 0+718 0+021 34+96 0+000

gdp growth rate ⫺0+006 0+001 ⫺4+35 0+000
current account balance ⫺0+002 0+001 ⫺2+21 0+029
government budget balance 0+0003 0+002 0+23 0+817
democracy 0+003 0+018 0+17 0+867
per capita gdp ~log! ⫺0+039 0+006 ⫺6+77 0+000
Observations 2213
Countries 130
Percentage correctly predicted 89+79%
Having built a satisfactory model of IMF program participation, we can now

turn to our primary interest, which is to see if democracy conditions the effect of
IMF programs on government spending, controlling for the factors that lead coun-
tries into IMF programs in the first place+ As noted above, we use the models of
IMF participation to generate hazard rates ~ lZ i ! for IMF participants and nonpar-
ticipants, and then use this predicted imf variable in place of the observed IMF
variable used above+ There are some noteworthy findings of this model, which are
presented in Table 2 below+
One of the more striking results of the models is that IMF participation seems
to have a positive effect on public service spending, contrary to the critics’ claims+
The variable imf has a positive coefficient in three of the four models while the
Dimf coefficient is positive in all four models+ These results are in stark contrast
to the critics of the IMF and seem instead to support the results submitted by the
IEO+ But we cannot make too much of these results because more often than not
the coefficients do not reach conventional levels of statistical significance+ The
imf coefficient is not statistically significant in any of the four models and while
the variable Dimf is closer to conventional levels, it reaches them only in Mod-
els 1 and 4+ Since these variables are not significant, it would seem that IMF pro-
grams have little impact on the poor through their effect on government spending
patterns+
Such a conclusion would be hasty given the inclusion of an interaction term+
Technically, the estimated coefficients discussed above provide the impact of an
IMF program for countries that score 0 on the Polity scale+ To gain a full appre-
ciation of the IMF ’s impact, therefore, we must evaluate the evidence for a con-
ditional effect of IMF programs on public service spending+ The coefficients on
the interaction terms ~dem{imf and Ddem{imf! are significant at conventional lev-
els across the board with the exception of Model 1+ Importantly, and counterintu-
itively given the existing literature, these effects are negative, suggesting that in
democracies, IMF programs exert a downward pressure on education and health
TABLE 2. Selection-corrected effects of IMF programs on social

spending
Shares of total expenditures
Education Health
Change in shares
of total expenditures Model 1 Model 2 Model 3 Model 4
~DY!t⫺1 ⫺0+18 ⫺0+07 ⫺0+03 ⫺0+04

~0+05! +00 ~0+05! +21 ~0+07! +66 ~0+06! +48
Yt⫺1 ⫺0+12 ⫺0+43 ⫺0+06 ⫺0+42
~0+02! +00 ~0+05! +00 ~0+03! +02 ~0+14! +00
imft⫺1 ⫺0+09 0+01 0+87 0+53
~0+09! +78 ~0+57! +99 ~0+62! +17 ~1+82! +77
~Dimf!t 0+70 0+64 1+33 1+81
~0+70! +11 ~0+48! +19 ~0+92! +15 ~1+09! +10
gdppct⫺1 0+14 ⫺0+47 ⫺0+06 ⫺1+87
~0+11! +18 ~1+26! +71 ~0+22! +79 ~3+72! +62
~Dgdppc!t ⫺10+45 ⫺33+16 ⫺14+13 61+63
~10+78! +34 ~16+69! +05 ~21+35! +51 ~23+45! +01
yeart⫺1 0+07 0+04 0+07 0+31
~0+02! +00 ~0+05! +49 ~0+05! +16 ~0+15! +04
democt⫺1 0+05 0+10 0+07 0+31
~0+02! +03 ~0+06! +08 ~0+04! +06 ~0+16! +04
~Ddemoc!t 0+06 0+08 0+19 ⫺0+08
~0+06! +37 ~0+07! +28 ~0+10! +07 ~0+15! +60
pop14t⫺1 ⫺0+01 ⫺0+30 0+02 0+32
~0+02! +52 ~0+18! +09 ~0+04! +58 ~0+24! +19
pop65t⫺1 ⫺0+11 ⫺0+34 0+04 ⫺0+61
~0+05! +03 ~0+27! +21 ~0+07! +55 ~0+46! +19
gdpgrowt⫺1 0+19 0+40 0+16 ⫺0+44
~0+11! +09 ~0+17! +02 ~0+20! +44 ~0+23! +06
~Dgdpgrow!t 0+15 0+35 0+19 ⫺0+48
~0+11! +19 ~0+16! +03 ~0+21! +38 ~0+22! +03
~growneg!t⫺1 0+53 0+97 ⫺0+62 0+26
~0+55! +34 ~0+68! +16 ~0+78! +43 ~0+84! +75
~Dgrowneg!t 0+10 0+25 ⫺0+69 0+20
~0+43! +81 ~0+48! +61 ~0+66! +30 ~0+69! +77
~growvol!t⫺1 ⫺0+01 0+19 ⫺0+18 ⫺0+01
~0+04! +79 ~0+28! +51 ~0+06! +01 ~0+20! +94
~dem{imf!t⫺1 ⫺0+20 ⫺0+16 ⫺0+13 ⫺0+08
~0+23! +34 ~0+05! +01 ~0+08! +09 ~0+04! +02
~Ddem{imf!t ⫺0+14 ⫺0+13 ⫺0+29 ⫺0+35
~0+06! +02 ~0+06! +04 ~0+11! +01 ~0+12! +01
Constant ⫺140+39 — ⫺131+70 —
~33+96! +00 — ~92+37! +16 —
Observations 882 882 467 467
Countries 98 98 92 92
Adjusted R 2 +14 +31 +13 +48
RMSE 2+32 2+21 2+49 2+16
Country fixed effects No Yes No Yes
Notes: Robust standard errors are in parentheses; p-levels are two-sided and superscripted+
spending+ A more precise way to interpret these results is to do so with reference

to the partial derivative ~using the subscripts from equation 1!:
dD~Spending!
⫽ bimf ⫹ bid DEMi, t⫺1 ~5!
d~IMF!
Using the results from Model 2 ~since it incorporates fixed effects, which is a
more conservative specification!, the partial derivative taken with respect to imf is
@0+001 ⫺ ~0+16{dem!#+ We can see, then, that the effect of IMF programs on educa-
tion spending is negative and, more strikingly, that this downward pressure actually
increases with increasing levels of democracy+ Model 4 shows that IMF programs
have a similar increasingly negative effect in democracies for health spending+
To provide greater intuition for these results, Figures 1 and 2 simulate these
results, using the average sample values for each year for the control variables
and manipulating the imf and dem variables+ Thus, we first predict a baseline for
each regime type, and then “shock” the system with an IMF program that last
three periods+ The deviation of the “with IMF ” line from the “no IMF ” line pro-
vides an estimate of the impact of the IMF program+ For presentation purposes,
the “democracy” and “nondemocracy” predicted values are placed on different axes+
Looking first at Figure 1, we see that absent IMF programs, democracies spend
more on education as a percent of total spending than their nondemocratic coun-
terparts do, but this difference shrinks during IMF program periods—evidence
FIGURE 1. Effect of IMF program on education spending

FIGURE 2. Effect of IMF program on health spending
that impact of IMF programs differs according to the regime type+ Democratic
countries with IMF programs tend to cut education spending about 2 percent of
total spending, while the share of spending rises in nondemocracies about the same
amount+ A similar finding with health is shown in Figure 2, which reveals that
health spending as a share of total government spending falls when democracies
experience IMF austerity programs but rises in nondemocracies, even as democ-
racies spend more than nondemocracies absent IMF programs+
These results show that IMF programs do indeed hurt spending on the poor, but
they do so more in democratic countries+ What are we to make of these results? There
are three ways these results can be interpreted+ The first is what we might call an
“accounting” interpretation+ Since our dependent variable is spending as a share of
total government spending, the negative coefficient can arise because of move-
ments in either the numerator or the denominator+ In particular, the negative sign
can result due to ~1! an increase in total spending while education and health spend-
ing remain constant or increase at a slower rate, making it appear as if govern-
ments are spending less, or ~2! a decline in spending on education and health services
while total spending is constant or perhaps declining at a slower rate than the
decrease in services spending+ Since we know from previous research that IMF pro-
grams do indeed result in governments reducing their total spending, we can quickly
discard the first option and conclude that something else is driving these results+61
61+ See IMF 2003; and Cho 2004+

A second possibility is an “economic efficiency” interpretation+ This would sug-

gest that because democracies spend more on these services in the absence of IMF
programs, it makes the most sense for these to be the targets of cuts during aus-
terity+ That is, if austerity requires that governments reach some targeted level of
budget cuts, the most economically efficient way to do this is to trim those cat-
egories where spending was particularly “loose” in the absence of austerity+ We
can see from our results that democracies do indeed spend more on these pro-
grams in the absence of IMF programs, and so one reasonable interpretation of
the negative coefficients on the interaction terms is that democratic governments
cut spending according to economic reasons rather than political ones+ This expla-
nation would also explain why nondemocracies appear to “increase” their social
spending under IMF programs+ Given that nondemocracies spend less on these
categories in “good” times, a more plausible interpretation of this finding is that
they cut other categories of spending to bring their deficits down, which results in
the share of social spending increasing even as the absolute amount spent does
not change+
The final interpretation, and one that arises out of our discussion earlier, is a
wholly political logic+ It would suggest that democratic leaders cut programs accord-
ing to the power of the interests associated with those spending items+ Since dem-
ocratic governments are put in power according to frequent political tests, and
since the probability and efficacy of political participation is not equally distrib-
uted throughout the population, office-seeking democratic leaders appeal to those
better-organized and hence more politically relevant interests+ In times of fiscal
austerity, this means protecting those spending items from substantial budget cuts+
Given that the economic and political interpretations discussed above are obser-
vationally equivalent, we attempt to distinguish between them by extending our
analysis to another category of government spending, namely military spending+62
Military spending typically constitutes a significant share of developing country
budgets and therefore, according to the purely economic rationale, might be prone
to substantial cuts+ However, the military, given our argument, should be particu-
larly well placed to resist cuts because it is well organized and politically power-
ful+ Table 3 reports the results from estimations using this alternative spending
measure+63
Turning to these results, we see that the pattern of the estimated coefficients is
precisely the opposite of those in the education and health spending models+ The
estimated coefficients on the uninteracted democracy variable, which provide the
effect of democracy in the absence of IMF programs, are all negative, and three of
the four coefficients are statistically significant+ Thus, as expected, in the absence
of IMF programs, democracies allocate a smaller share of their budgets to the
62+ Specifically, we estimate these models using military spending as a percent of total GDP+
63+ Models reported in Table 3 include the selection-correction described above+ To preserve space,
we report only the coefficients from the key variables+ Complete results are available from the authors+
TABLE 3. Selection-corrected effects of IMF

programs on alternative measures of government
spending
Military share of GDP

Change in military
share of GDP Model 5 Model 6
imft⫺1 ⫺0+23 ⫺0+36

~0+10! +03 ~0+16! +03
~Dimf!t ⫺0+10 ⫺0+18
~0+12!+42 ~0+13! +19
democt⫺1 ⫺0+002 ⫺0+05
~0+01! +77 ~0+02! +02
~Ddemoc!t⫺1 ⫺0+03 ⫺0+04
~0+02! +07 ~0+02! +04
~dem{imf!t⫺1 0+002 0+004
~0+01! +86 ~0+02! +07
~Ddem{imf!t 0+03 0+04
~0+01! +02 ~0+02! +03
Observations 885 885
Countries 109 109
Adjusted R 2 +22 +48
RMSE +56 +49
Country fixed effects No Yes
Notes: Robust standard errors are in parentheses; p-levels are two-sided and
superscripted+ Coefficients for remaining variables are suppressed to pre-
serve space+
military+ What happens when the IMF demands cuts to the budget? The inter-
action term coefficients tell an interesting story+ All four coefficients are positive,
and three of the four are statistically significant+ Thus, in the presence of an IMF
program, democracies increase the share of spending allocated to the military+ We
take this to mean that the military’s organization allows it to overcome the prob-
lem of collective action and resist cuts as compared to an explanation that would
focus on economic efficiency+
Our statistical analysis thus provides strong and consistent support for the claim
that the effect of IMF programs is indeed shaped by the domestic political institu-
tions of recipient countries; but these effects do not go in ways conventional
accounts might lead us to expect+ Rather, while we do find that democracies allo-
cate more of their budgets to social categories such as education and health when
there is no IMF program in place, this relationship is reversed in the presence of
an IMF program+ Contrary to the unconditional positive effect reported by the
IMF, we find that IMF programs reduce the share of spending on education and
health in democracies+ We also find evidence suggesting that this is not due to
economic rationality but rather to a political calculus based on heterogeneity in
the efficacy of political organization+ Of course, the economic and political stories
are not stark opposites, and decisions of how to frame the economic rationale are
undoubtedly influenced by political factors+ Our data are too coarse to distinguish
truly between the two explanations, but they should provide an impetus to efforts
to do so via more detailed case studies of particular instances of IMF program
implementation+
Robustness Checks
In this section, we check first if our results hold with different measures of the
dependent variables+ Second, we ask if recent guidelines for social expenditures
have worked+64
Alternative Social Spending Indicators

First, we test robustness by using alternative measures of education and health
spending, considering each in per capita terms rather than as shares of total spend-
ing+ Doing so provides leverage on the question of whether the results discussed
above are simply an artifact of the fact that changes in shares could result from
changes to total spending even while absolute spending on education and health
remain unchanged+ Table 4 reports the results from estimations using these mea-
sures of spending+65
The results reported in Table 4 are supportive of the claims made above, though
they are stronger for the health measure than for the per capita education measure+
In the two models on per capita education, few of the key coefficients are statis-
tically significant, but these are illustrative+ Consider Model 7+ Here, the uninter-
acted coefficient on democracy is positive and statistically significant+ In the
absence of IMF programs, a one-unit increase in a country’s democracy score is
predicted to increase its spending on education per capita by $53+ However, the
interaction term is negative and statistically significant ~ b ⫽ ⫺112+12!+ Thus, the
presence of an IMF program results in a decrease in the per capita spending on
education, though, as indicated above, these results are clearly not conclusive+
The per capita health models, by contrast, are far more damning+ Three of the
four interaction term coefficients in Models 9 and 10 are negative and statistically
significant, which means that, in the presence of IMF programs, increases in a
country’s democracy score result in reductions in the per capita amount spent on
64+ We also checked if our results held in separate regional subsamples of our data+ Specifically, we
estimated our models using only the Latin American or sub-Saharan African samples because these
two regions have the most experience with IMF programs+ Our results do hold in these subsamples
and are available from the authors+
65+ Models reported in Table 4 include the selection-correction described above+ We report only the
key coefficients to preserve space+
TABLE 4. Selection-corrected effects of IMF programs on per capita spending
Per capita figures
Education Health
Change in per capita
level of spending Model 7 Model 8 Model 9 Model 10
imft⫺1 ⫺167+08 79+45 12+10 ⫺2+14

~249+67! +5 ~430+13! +85 ~7+80! +12 ~18+44! +91
~Dimf!t ⫺26+19 165+25 11+24 9+59
~346+58! +94 ~377+93! +66 ~7+49! +14 ~13+84! +49
democt⫺1 53+18 ⫺58+29 0+79 ⫺1+34
~24+08! +03 ~56+71! +31 ~0+57! +16 ~2+27! +56
~Ddemoc!t 20+16 ⫺33+01 1+08 ⫺0+42
~34+27! +56 ~50+37! +51 ~1+36! +43 ~2+01! +83
~dem{imf!t⫺1 ⫺112+12 ⫺34+26 ⫺2+04 ⫺2+01
~36+21! +00 ~58+64! +56 ~1+01! +05 ~2+68! +46
~Ddem{imf!t ⫺28+53 15+27 ⫺2+07 ⫺2+82
~45+15! +52 ~60+67! +80 ~0+97! +04 ~1+65! +09
Observations 988 988 541 541
Countries 107 107 98 98
Adjusted R 2 +08 +20 +11 +47
RMSE 4805+8 4753+6 105+23 90+42
Country fixed effects No Yes No Yes
Notes: Robust standard errors are in parentheses; p-levels are two-sided and superscripted+ Coefficients for remaining
variables suppressed to preserve space+
health+ The negative effect of IMF programs on social spending described in the
previous section are thus not merely accounting artifacts, but rather evidence of
political considerations in the implementation of budgetary cuts+
A Kindler, Gentler IMF?
Our final robustness check considers if recent policy changes at the IMF have had
their desired effect+ Starting in the late 1980s and early 1990s, the IMF has
responded to its critics by placing greater emphasis on protecting social expendi-
tures+ In 1996, Bird reported:
The Fund is also moving away from concentration on simple budgetary aggre-
gates, such as total spending or the budget balance, in favor of paying more
attention to the “quality” of fiscal adjustment+ Since the economic impact of
its fiscal provisions are much affected by which expenditures are trimmed
and what is done with taxes, the Fund is becoming more insistent on know-
ing how a government proposes to implement promised reductions in the bud-
FIGURE 3. Effect of IMF program on education spending before and after 1995
get deficit, increasingly urging governments to install social safety nets and
asking awkward questions about military spending+66
However, Bird questioned whether such pronouncements have made any differ-
ence in practice, noting that the “hard core” of IMF programs had not changed
much+67 In 1997, the IMF institutionalized such considerations in its Guidelines
on Social Expenditures, which call for IMF staff to monitor health and education
spending, as well as monitor trends in social indicators such as infant mortality
and school enrollment+68 Have such initiatives had their desired effect?
To find out, we create a dummy variable for the 1995–2000 period, and interact
it with the core variables in our analysis ~imf, democracy, and their interaction!+69
This allows us to estimate separately the effect of these variables before and after
1995+ Figure 3 summarizes these results for the education model+70
Figure 3 graphs the predicted effect of an IMF program on the share of spend-
ing allocated to education for three values of the regime type variable+ At either
66+ Bird 1996, 492+

67+ Ibid+, 493+
68+ IMF 2003, 8–9+
69+ We chose 1995 as the cutoff point because Bird’s analysis indicates that the reforms were already
underway by 1996+
70+ Full results are available on request+
extreme is the predicted effect of an IMF program for nondemocracies ~⫺10! and
democracies ~10!, while in the middle we show the predicted effect for the mean
level of democracy in our sample ~⫺2!+ Figure 3 also separates the estimated effect
of the IMF pre- and post-1995+ From our perspective, three conclusions are sug-
gested by this analysis+ First, the conditional impact of the IMF is clearly evident
here+ For nondemocracies, the IMF ’s effect is to increase education’s share of total
spending, but this positive effect decreases as the country’s level of democracy
increases, such that it is negative for pure democracies+ Second, the data suggest
that IMF efforts to pay more attention to distributional consequences of budgetary
cuts have had some effect in nondemocratic countries+ Post-1995, the positive
impact of the IMF on education spending in nondemocracies is larger than it was
before 1995+ Finally, this evidence suggests a way to reconcile the IEO’s findings
with ours+ Given that the average recipient of an IMF program in these data is a
nondemocracy, and given that the positive effect of the IMF in nondemocracies is
larger than its negative effect in democracies, it is not surprising that pooling democ-
racies and nondemocracies results in a finding of a positive IMF effect+ However,
as our analysis has demonstrated, such a finding masks important political dynam-
ics that are important to understand if we are to assess the “true” impact of the
IMF on the public programs that benefit the poor+
Conclusion
Over the past twenty-five years, the role played by the IMF in developing coun-
tries has expanded rapidly, and its achievements at stabilization and reform have
been clouded by harsh criticism of its alleged negative effects on the poor+ This
article examines the critique that IMF austerity programs cause reductions in social
expenditures such as education and health that are particularly important to the
lower classes+ Our analysis finds strong and robust evidence for this criticism, in
contrast to a recent IMF report claiming to find the opposite+ But our results are
more nuanced than this basic finding+ Structural reforms, such as curbing govern-
ment spending, almost always have short-term distributional implications+ What
is important about our findings is that in democracies the weight of this burden
seems to be placed squarely on the shoulders of those least able to access private
sources of supply of services such as education and health+ Contrary to the logic
of the democratic deficit, we would argue that this is not necessarily due to the
IMF imposing its will on “helpless” governments+ Rather, we argue that govern-
ments maintain some leverage over the content and implementation of IMF pro-
grams, and hence the decrease in spending can be attributed to an unabashedly
political calculus+ Because public services are associated with relatively less-
organized interests, cutting these programs may be preferable in democracies where
political tests are frequent and the barriers to entry into the political arena are
relatively low+
This research has both theoretical and policy implications+ Theoretically, two
implications for future research are especially noteworthy+ First, studies of the IMF’s
impact on various aspects of the domestic economies of program recipients have
correctly focused on the various methodological challenges posed by such policy
evaluation exercises+ However, this focus has been to the detriment of more impor-
tant political questions+ While many scholars point to the importance of political
considerations in the implementation of IMF conditionality, we have yet to under-
stand fully how such political factors might alter the effects of the IMF+ We hope
our research spurs others to develop more nuanced arguments about the effects of
IMF programs+ Particularly helpful would be detailed case studies seeking to
uncover the nature of domestic bargaining that takes place under the shadow of
IMF austerity+ How do groups mobilize to resist cuts? Which groups get heard
and which are ignored? How do the specific institutional mechanisms of account-
ability linking citizens and policymakers affect who wins and loses?
Second, more attention to the dynamics of the “democratic deficit” is war-
ranted+ Conditionality reduces the flexibility of domestic leaders, but that, after
all, is its point+ More relevant questions are: Does entering an IMF program under-
mine democratic accountability and, if so, how? Do domestic leaders “scapegoat”
the IMF to enact policies that might be politically infeasible otherwise? Or are
they truly helpless to resist IMF-preferred policies? What determines a country’s
bargaining leverage vis-à-vis the IMF? The IMF ’s recent move to transparency in
making available country letters of intent should enable future research to answer
such questions+
Third, we hope our research is useful also to scholars seeking to understand the
links between regime type and government spending+ Evidence of the procyclical-
ity of social spending suggests that the relationship between democracy and social
spending is more complicated than previously modeled+ If, for instance, democra-
cies have higher revenues or generate more debt and therefore increase expendi-
tures, they might well use these additional funds to finance higher levels of social
spending+ In this case, the higher levels of social spending in democracies has less
to do with greater political competition, larger winning coalitions, or electoral
accountability, and more to do with the differential sizes of government budgets+
Alternatively, one might well argue that the reason democracies have larger bud-
gets is because they face pressures to spend more on social spending+ Unpacking
the endogenous relationships between democracy, social spending, and budget con-
straints thus holds tremendous promise+
Finally, the policy importance of studies such as these cannot be understated, as
they can shape public perceptions of the IMF, bolster the voices of those seeking
to reform the IMF, and affect how the IMF responds to its critics+ Consider, as an
example, the reaction of Jean-Claude Milleron, former French Executive Director
of the IMF, to the IEO’s 2003 evaluation of IMF fiscal adjustment programs:
The IEO made a remarkable and useful contribution when it found that coun-
tries with an IMF program have higher social spending, on average, than
they would have had without a program+ Thus, the naïve view that the IMF
always proposes a “one size fits all” approach for countries in distress is a
myth, broadly disseminated by poorly informed academics and nongovern-
mental organizations+ Cross-sectional econometric studies are often the proper
response to ideology+ Such studies would have been very useful, in particu-
lar when the IMF was under fire from its colleagues in the World Bank+ In
the same spirit, I also remember difficult hearings in the French parliament
in which I would have been much more comfortable if I had had such use-
ful and interesting studies to rely on+71
At the very least, our findings should suggest that such optimism is out of place
and that the IMF must return to the drawing board to reassess the true impact of
its programs+
Data Appendix
Countries in Estimation Sample
~Countries in italics are only in the education spending sample; countries in bold are only
in the health spending sample+!: Albania, Argentina, Australia, Austria, Azerbaijan, Ban-
gladesh, Belarus, Belgium, Bhutan, Bolivia, Botswana, Brazil, Bulgaria, Burkina Faso,
Burundi, Cameroon, Canada, Chile, Colombia, Costa Rica, Congo ~Rep+!, Congo ~Dem+
Rep+!, Cote d’Ivoire, Croatia, Cyprus, Denmark, Dominican Republic, Ecuador, Egypt, Esto-
nia, Ethiopia, Finland, Fiji, France, Germany, Ghana, Greece, Guatemala, Guinea, Guy-
ana, Haiti, Hungary, India, Indonesia, Iran ~Islamic Rep+!, Iceland, Ireland, Israel, Italy,
Jamaica, Japan, Jordan, Kenya, Korea ~Rep+!, Kuwait, Kyrgyz Republic, Latvia, Lesotho,
Lithuania, Luxembourg, Madagascar, Malawi, Malaysia, Mali, Mauritius, Mexico, Mol-
dova, Mongolia, Morocco, Namibia, Nepal, Netherlands, New Zealand, Nicaragua, Nor-
way, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Portugal,
Romania, Sierra Leone, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sri
Lanka, Sweden, Switzerland, Syrian Arab Republic, Thailand, Togo, Trinidad and Tobago,
Tunisia, Turkey, United Kingdom, United States, Uruguay, Venezuela, Vietnam, Yemen (Rep.),
Zambia, and Zimbabwe+
Description of Variables 72
education: Per capita public spending on education+

education * : Public spending on education ~% of total spending!+
health: Per capita public spending on health+
health * : Public spending on health ~% of total spending!+
defense: Military expenditures ~% of GDP!+
gdp: Gross domestic product ~constant 1995 US $!+
71+ Milleron 2004, 49+

72+ All data are from World Bank 2004 unless otherwise noted+ We convert the education and health
data into shares of total expenditures using the gdp and expenditures data described below+
TABLE A1. Summary statistics
Standard
Variable N Mean deviation
education * 1,527 16+469 5+976

health * 809 23+265 12+139
military * 1,601 13+113 12+249
military ~% of GDP ! 1,773 4+063 5+847
per capita education spending 2,171 323+763 511+763
per capita health spending 1,299 451+075 790+512
gdp per capita ~log! 4,963 7+48 1+538
population under 14 3,536 35+988 10+006
population over 65 3,536 6+145 4+068
gdp growth rate ~annual %! 5,072 3+668 6+488
negative growth rate 5,072 0+184 0+387
growth rate volatility 8,438 5+561 3+907
democracy ~Polity! 5,514 ⫺0+363 7+694
imf 7,475 0+242 0+428
current account balance ~% GDP ! 3,445 ⫺4+268 10+363
overall budget balance ~% GDP ! 3201 ⫺3+263 5+791
Notes: * as share of total spending+
expenditures: Central government expenditure, total ~% of GDP!+

gdp per capita: GDP per capita ~constant 1995 US $!+
gdp growth: GDP growth ~annual %!+
gdpneg: Negative GDP growth+ Dichotomous variable coded as “1” if GDP growth
was negative; “0” otherwise+ Source: Authors’ calculations+
gdpvol: Volatility of GDP growth+ Sample period standard deviation of growth rates+
Source: Authors’ calculations+
pop14: Population under the age of 14+
pop65: Population over the age of 65+
democracy: Polity combined scale of regime type ~⫺10 to 10!+ Source: Marshall,
Jaggers, and Gurr 2004+
imf:+ Dichotomous variable for participation in IMF program+ Source: Vreeland 2003+
current account balance: Current account balance ~% of GDP!+
government balance: Overall central government budget balance ~% of GDP!+
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The Politics of Hard Choices: IMF Programs and Government Spending

Irfan Nooruddin and Joel W. Simmons

International Organization / Volume 60 / Issue 04 / October 2006, pp 1001 - 1033

Link to this article: http://journals.cambridge.org/abstract_S0020818306060334

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Abstract A central component of International Monetary Fund ~IMF! programs

International Organization 60, Fall 2006, pp+ 1001–1033

effects are conditional on regime type, and the direction of conditionality, if it

Policy Conditionality and Its Effects on the Poor

4+ Biersteker 1990, 477+

budget-financed child-feeding programme @as# part of an overall attempt to reduce

13+ Cornia 1987, 67+

The Conditional Impact of IMF Conditionality

22+ IMF 2003, 8, emphasis added+

25+ Kahler 1993, 376+

Democracy and Conditionality

29+ Ibid+ 2003, 55–56+

31+ Lake and Baum 2001+

34+ Schattschneider 1960, 32; see also Olson 1982+

One particular concern is that spending on primary education and health

In opposition to the institutional arguments proposed above, this logic sug-

44+ Lustig 2000, 13+

A Cross-National, Time-Series Analysis

where ED is education’s share of spending, HC is health’s share of spending, C is

1+ Democracy increases social spending ~ bdem . 0!+

Since we know IMF participation is not randomly assigned to country-years,

Sij ⫽ x ij' b ⫹ dIMFi ⫹ «i ~2!

IMFi* ⫽ vi' g ⫹ m i ~3!

We only observe participation in IMF programs as a dichotomous variable such

E~Sij 6IMFi ⫽ 1, x i , vi ! ⫽ xij' b ⫹ d ⫹ E~«i 6IMFi ⫽ 1, x i , vi !

⫽ xij' b ⫹ d ⫹ rs« l~⫺vi' g! ~4!

bl ⫽ rs« in equation ~4! by least squares regression on x and the selectivity

56+ IMF 2003, app+ 4+

TABLE 1. Model of IMF participation

Variable Coefficient Standard error T-statistic P ⬎ 6t 6

imft⫺1 0+718 0+021 34+96 0+000

Having built a satisfactory model of IMF program participation, we can now

TABLE 2. Selection-corrected effects of IMF programs on social

Shares of total expenditures

~DY!t⫺1 ⫺0+18 ⫺0+07 ⫺0+03 ⫺0+04

spending+ A more precise way to interpret these results is to do so with reference

FIGURE 1. Effect of IMF program on education spending

FIGURE 2. Effect of IMF program on health spending

61+ See IMF 2003; and Cho 2004+

A second possibility is an “economic efficiency” interpretation+ This would sug-

TABLE 3. Selection-corrected effects of IMF

Military share of GDP

imft⫺1 ⫺0+23 ⫺0+36

Alternative Social Spending Indicators

TABLE 4. Selection-corrected effects of IMF programs on per capita spending

Per capita figures

imft⫺1 ⫺167+08 79+45 12+10 ⫺2+14

A Kindler, Gentler IMF?

66+ Bird 1996, 492+