Political instability and the interventions of IMF and the World Bank in non-democratic regimes

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Political instability and the interventions of IMF and the World Bank in non-democratic regimes

Abstract

We consider a potential effect of foreign aid on political instability in a dictatorial regime. Firstly, we make use of a theoretical model of a contested dictatorship receiving aid flows. We find that aid may increase political stability through its effect on the resources used by the insurgents and on those used by the elite. Aid may also undermine government’s accountability by reducing its dependence on tax revenues (described by the decline of the tax rate). Secondly, we provide empirical evidence of an effect of aid on political instability using OLS fixed effects and GMM system. Aid flows might lead to a decrease of political instability in contested dictatorships and more particularly in anocracies. The results are robust to several econometric methods and to other measures of political instability. Furthermore, the empirical tests support our theoretical prediction that IMF intervention could have a counterproductive effect by increasing regime stability if the ruling elite is highly corrupt.

Introduction

Foreign aid might be compared to “sovereign rents” as oil, but cautiously (Collier [2006]). As a non tax revenue, it might have a negative effect on government accountability (Knack [2009]). Morrison [2012] emphasizes the similarities between oil resource curse and foreign aid. He also points out that “natural resources and aid give dictators revenue to maintain power” . Our analysis might provide an additional understanding of the mechanisms through which aid has an impact on political stability in dictatorial regimes.

Aid flows might lead to several problems already identified in the literature : collective action and moral hazard problems, the strengthening of a “soft budget constraint” and of the “tragedy of commons” and the lack of incentives to reform and to be accountable in terms of taxpayers (if aid decreases the tax rate).

Political instability is a core concern in most of developing countries, especially in Africa. The negative impact of political instability on economic growth is usually established (Alesina et al. [1996] ; Devereux and Wen [1998] ; Pinto and Timmons [2005] ; Aisen and Veiga [2011]) but some authors have questioned the extent of this causality. Jong-A-Pin [2009] finds such an effect concerning the instability of the political regime but fails to estimate any impact of the other aspects of political instability (mass civil protest and regime instability). Campos and Nugent [2002] look at the long-run causal relationship and demonstrate that Sub-Saharan African countries influence the significance of the results. They finally question the potential harm of political instability on economic conditions. Butkiewicz and Yanikkaya [2005] also point out that the causality between economic growth and political instability is not obvious and that the measure of political instability can explain some differences in results.

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