chapter  4
22 Pages

The effect of IMF programs on public wages and salaries

ByIRFAN NOORUDDIN AND JAMES RAYMOND VREELAND

In developing countries, governments often face strategic incentives to devote public expenditures to public wages and salaries, and such expenditures can play a vital role in fostering economic progress and reducing income inequality. The means available to the government of a developing country to do this, however, may depend on the role it plays in global governance. In this chapter, we explore how the role a developing country plays in global governance impacts upon government policies that affect the domestic distribution of income, particularly when the country faces a financial crisis. We consider the effect of International Monetary Fund (IMF) programs of economic reform on public wages and salaries. We show that their effect is contingent on the role a country plays in international institutions-particularly whether the country is a member of the United Nations Security Council (UNSC). In general, the dire economic circumstances that governments face

when turning to the IMF typically lead them to cut public wages and salaries. This is not surprising. Governments turning to the IMF suffer from problems of excess demand. They may have large government budget deficits, high public debt, low levels of foreign reserves and an overvalued exchange rate. As a result, they are forced by their economic circumstances, along with conditions prescribed by the IMF in return for loans, to slash public spending, particularly the wages and salaries of civil servants. Developing countries often use the civil service to provide both public and private goods to constituencies to maximize their chances of surviving in office. Cutting expenditures on the wages and salaries of civil servants thus puts governments in jeopardy. But economic crises leave them little room other than to make the tough choice of cutting public spending. This may not be the case, however, for countries that are serving as

temporary members of the UNSC. The UNSC is perhaps the most powerful arm of the United Nations, imbued with the responsibility of

maintaining world peace and the power to take military action. Its governance structure gives it legitimacy because the most powerful members have veto power over resolutions and also because these resolutions need support from the weaker temporary members who are elected for two-year terms. Representation is thus incorporated into the governance of the UNSC, and developing countries who serve have a privileged voice on the international stage. Therefore, if a country is serving on the UNSC, it has international political leverage to negotiate favorable treatment from the IMF. This is because the major shareholders of the Fund-notably the United States-can influence the terms of an IMF loan, and they are willing to do this favor because they care about how the country votes on the UNSC. Most developing countries face pressure to protect civil servants during economic downturns but typically lack the resources to do so. Yet developing democracies serving on the UNSC are exceptional-they have the same domestic incentives to protect civil servants as their non-UNSC counterparts and the international leverage to obtain the means to do so. IMF participation actually increases their budget allocation for public wages and salaries. Our argument brings together three ideas from the broader literature in

international and comparative political economy, and we review each in turn, proceeding with the following sections. First, we discuss how governments use the civil service as a means to protect the middle class and why this is important for the survival of the government. We then turn to the role the IMF plays during an economic crisis. Thereafter, we explore connections across international institutions by considering how the governance of the UNSC is affected by the governance of the IMF. Armed with the implications of these three ideas, we put forth our principal hypothesis: the impact of IMF participation on public wages and salaries depends on UNSC participation. We then test this hypothesis before discussing our results in light of domestic political institutions, speculating as to why we might observe differential effects in democracies and dictatorships. The final section presents our concluding comments.

Public expenditure on the wages and salaries of civil servants is one way in which governments, whether democracies or dictatorships, pay off vital constituencies. Autocrats, who depend on a small coalition of loyal supporters to survive in office (Bueno de Mesquita et al., 2003)1

use their resources to provide “private goods” to this small group, but they also maintain a powerful internal security apparatus, as repression and fear are common methods of keeping the larger population in

check (Boix, 2003). Thus, they devote resources to the wages and salaries of their loyal clique, of the military, and of other security forces. Autocrats also employ favored constituents in large public sector bureaucracies that are typically immune to public accountability. Democratic leaders, hoping to win re-election, target as large a portion

of the electorate as possible and use their resources to provide “public goods,” such as economic policies that will benefit the economy in the aggregate (Bueno de Mesquita et al., 2003; Nooruddin and Simmons, 2006). They also target swing voters, particularly the small but growing middle class (see Chhibber and Nooruddin, 2004). Building on Rudra (2008), Nooruddin and Rudra (2009) argue that in the face of the economic vagaries of globalization, developing democracies have used the civil service as a way to protect the electorally vital middle class. Openness increases uncertainty about future job security in the private sector (even as it might increase employment opportunities) leading citizens to reward politicians who can offer stable employment in the form of civil service positions (see also Nooruddin and Simmons, 2009). Thus, public wages and salaries are doubly beneficial to the government. They allow the government to provide more public services by increasing expenditures on public works projects such as infrastructure development, which should benefit the electorate as a whole, and they enable the government to protect a crucial political constituency, the middle class. So, while dictatorial governments use public expenditures to benefit small and specific loyal followers as well as the military and security forces, and democracies use public expenditures to provide public goods and protect the growing but vital middle class, both regimes provide wages and salaries to key constituencies to maximize the chances of surviving in office. This calculus changes when a government enters into a financial crisis,

facing a shortfall in foreign exchange. Such a situation may result from large government budget deficits, high public debt, trade deficits, and an overvalued exchange rate. In short, the country suffers from excess demand, leaving the government little room but to impose unpalatable reductions in public expenditures. Most developing countries would prefer to protect the wages and salaries of civil servants during economic downturns, but they simply lack the resources to do so. To generate the resources required to weather the crisis, developing countries often turn to the IMF.