IMF programmes and income inequality

In the ‘World Inequality Report 2026’ released last month, it was pointed out ‘Inequality has long been a defining feature of the global economy, but by 2025, it has reached levels that demand urgent attention. … The findings are clear: inequality remains extreme and persistent; it manifests across multiple dimensions that intersect and reinforce one another; and it reshapes democracies, fragmenting coalitions and eroding political consensus. Yet the data also demonstrate that inequality can be reduced. Policies such as redistributive transfers, progressive taxation, investment in human capital, and stronger labour rights have made a difference in some contexts. Proposals such as minimum wealth taxes on multi-millionaires illustrate the scale of resources that could be mobilized to finance education, health, and climate adaptation. Reducing inequality is not only about fairness but also essential for the resilience of economies, the stability of democracies, and the viability of our planet.’

Pakistan has been in around two dozen International Monetary Fund (IMF) programmes, and the above analysis, along with previous research studies showing income inequality enhancing impact of IMF programmes, it is important for both the IMF and the country’s authorities– Ministry of Finance, and State Bank of Pakistan (SBP)– to move away from neoliberal, and austerity-based IMF programme conditionalities, to those that allow greater role of the public sector in running the affairs of the economy, and support appropriate level of social spending, like on health, and education for instance, unlike the current practice of IMF conditionalities to (unjustifiably) favour over-board practice of austerity policies

The Report specifically focussed on a number of countries, which included Pakistan, whereby it pointed out an alarming situation with regard to inequality. It indicated in this regard as ‘In Pakistan, inequality remains high and shows limited progress over the past decade. The top 10 percent of earners capture 42 percent of total income, whereas the bottom 50 percent receive only 19 percent. Wealth inequality is even more concentrated, with the richest 10 percent holding 59 percent of total wealth and the top 1 percent accounting for 24 percent. … Overall, income and wealth are highly concentrated in Pakistan, with persistent gender disparities and only minor shifts in inequality trends.’

In the book ‘A thousand cuts: social protection in the age of austerity’ it is pointed out that not only do IMF programme conditionalities have a positive correlation with income inequality, conditionalities also have a positive correlation with income inequality. Here, the book, analyzing a time period of 1980-2017, almost four decades, or 38 years to be precise, and for 194 countries, which includes Pakistan, indicated ‘‘…we plot the association between average annual income Gini and the total number of conditions between 1980 and 2017. …We observe a weak positive correlation between the two variables, correlating at 0.18.’

With regard to analysing causal relationship, the book takes certain control variables, and applies a multivariate regression analysis. The control variables include, for instance, gross domestic product (GDP, or simply national income), trade openness, foreign direct investment (FDI), and levels of democracy, among others. About levels of democracy, the book indicated the reason for taking it as a control variable as ‘…since democratic governments are more inclined to help the lower and middle classes with progressive taxes, minimum wage laws, price subsidies, and public works provision, thereby having more equitable income distributions…’

Analysis pointed out that IMF conditions as a whole had a significant positive correlation with income inequality. As pointed out in the book, this is broadly in line with a similar message that a number of previous studies reached in line with labour income, and inequality, whereby the book highlighted ‘Within this small-but-fast growing body of literature on the global determinants of income inequalities, debates surrounding the impact of IMF programmes have persisted over time. Most scholarship on the impact of IMF programmes on inequality… suggests adverse effects that can persist over the medium-run.’

Specific results about the causation pointed out ‘We find an effect for the total number of conditionalities on the Gini coefficient of disposable income… On average, each additional binding IMF condition increases the income Gini by 0.013 percentage points, all other variables held equal. Setting the number of binding conditions at the mean, at 21.511 per year, would therefore result in an increase of 0.28 percentage points.’ Hence, approximately 22 conditionalities per year would increase income inequality by 0.3 percentage points, whereby given Pakistan, as per the same book had the highest number of conditionalities among all IMF programme countries during 1980-2019– a similar time period as taken for the regression analysis covering time period at 1980-2017– at 1,303, it is quite likely that it meaningfully contributed to increase in income inequality in the country.

Here, further analysis in the book, taking ‘IMF fiscal adjustment indicator’ and seeing its impact on income deciles of IMF programme countries, pointed out that while fiscal austerity conditionalities reduced the incomes of the first seven income deciles, that is the lower-, and middle-income groups, they had a significantly positive impact on income decile 10, which is representative of the richest segment of the society.

The book pointed out in this regard ‘Based on the point estimate, a country on an IMF program requiring an annual fiscal adjustment of 10 percentage points can expect the share of income of decile one– the sum of incomes of the poorest 10 percent of the population as a proportion of total income– to decrease by 1.34 percentage points on average, and we can say with 90 percent confidence that this decile is between 0.50 and 2.18 percentage points. At income decile share six– the sum of incomes between the bottom 50 percent and 60 percent of the population as a proportion of total income– the same fiscal adjustment of 10 percentage points would reduce the share of income by, on average, 2.33 percentage points. While the fiscal adjustment effects for income decile shares eight and nine are also broadly comparable, they do not reach the 90 percent threshold of statistical significance. For income decile 10– the sum of incomes of the richest 10 percent of the population as a proportion of total income– the effect of IMF fiscal adjustment turns positive and is much larger relative to other deciles. An IMF programme requiring an annual fiscal adjustment of 10 percentage points would increase the share of income in this decile by 17.05 percentage points, and we are 90 percent certain that it is between 8.07 and 26.02 percentage points.’

Pakistan has been in around two dozen International Monetary Fund (IMF) programmes, and the above analysis, along with previous research studies showing income inequality enhancing impact of IMF programmes, it is important for both the IMF and the country’s authorities– Ministry of Finance, and State Bank of Pakistan (SBP)– to move away from neoliberal, and austerity-based IMF programme conditionalities, to those that allow greater role of the public sector in running the affairs of the economy, and support appropriate level of social spending, like on health, and education for instance, unlike the current practice of IMF conditionalities to (unjustifiably) favour over-board practice of austerity policies.