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Mehta Rao Sonali
Mehta Rao Sonali
Mehta Rao Sonali
A Sectoral Analysis
The conditions incorporated into the International Monetary Fund (IMF)s lending programs remain a
controversial subject of study because of their strong implications for post-colonial economic
development and stability. Most global studies have taken a generalist approach, primarily to determine
whether or not the IMF has a positive impact on overall economic growth, but economists have failed to
reach a strong consensus. This study will instead look at how IMF programs affect the distribution of
labor and capital to different sectors of a nations economy. The findings indicate that IMF programs
consistently restructure economies, leading to a service sector growth and decline in agricultural output.
They also decrease the size of the industrial workforce relative to the other sectors of the economy and
increase manufacturing exports as a percentage of total merchandise exports.
Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
The graph below shows changes in output by sector in the Dominican Republic from
1966 to 2000. As illustrated by the graph, all three sectors stay about the same size for a long
period of time. Suddenly, shortly after the Dominican Republic enters its first IMF agreement,
we see a significant spike in the size of the service sector, while both agricultural and industrial
production suddenly decline. Is the case of the Dominican Republic an isolated example, or do
In answering this question, this paper offers a concrete assessment of the systematic
structural consequences of IMF programs. While the overall impact of IMF programs on overall
economic growth remains controversial and difficult to assess because it is such a broad topic,
this more focused approach allows us to see definitive significant results regarding the impact of
IMF programs on the three sectors of the economyAgriculture, Industry, and Services.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
The findings indicate that agricultural output declines significantly and the service sector
expands. While the volume of industrial output does not change significantly as a result of IMF
of the industrial sector) increase. It is also important to note that while these changes in
employment and exports occur in industry, there is no significant comparable effect in the
These results have the potential to provide valuable insight into the analysis of the
increasingly global, free-market economy, is heavily influenced by the relative strength and
growth rates of each sector of its economy. The allocation of resources across sectors is likely to
play a large role in determining key exports, income distribution, and the volume of capital
income and status across social groups, particularly in countries where certain social or ethnic
groups engage in particular economic activities. This could potentially exacerbate ethno
linguistic tensions. Changes in relative sector size can also drive long-term demographic
changes, such as migration into or out of urban areas depending on the changes in the types of
jobs available.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Literature Review
The International Monetary Fund (IMF) was established on July 22, 1944 at the Bretton
Woods Conference, with the mandate to monitor and help maintain pegged but adjustable
exchange rates in the industrialized world. It originally began as a fund made up of contributions
from member countries to enable countries facing balance of payments deficits to purchase
foreign exchange. However, it quickly became apparent that market driven exchange rates were
preferred to rates regulated by the IMF, so in the 1970s the IMF moved into its new, more
controversial role of lending to and monitoring the economic activities of the developing world.
In order to better understand the literature, it is important to first get a general idea of the
conditions that are typically attached to IMF loans. Although the IMF structural adjustment
programs vary on a country-to-country basis, there are certain recommendations that are seen in
market liberalization, and deregulation of the private sector are three overarching developmental
goals that the IMF has promoted through its programs in the past. Devaluation, intended to lower
domestic consumption and increase the volume of exports, is another common requirement of
IMF programs. There has been much debate regarding the usefulness of these objectives and
In the past, the results and impact of IMF programs have been measured using both large
and small-scale studies that focus exclusively on the effects on overall economic growth, income
distribution, and balance of payments. This sectoral approach will provide a more comprehensive
resources to different segments of society, providing a new perspective on the results of past
studies.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
The original mandate of the IMF was to enhance global economic stability by addressing
Balance of Payments deficits, so the most obvious result to study is the effect of IMF programs
on overall BOP and the current account component of the BOP. There have been many studies
with different approaches that have looked at this problem, and most have come to the
conclusion that IMF programs are helpful in addressing BOP deficits and have a positive impact
on the current account component of the BOP. For example, University of California professor
of Latino Studies at University of California, Manuel Pastor, former IMF economist, Thorvaldur
Gylfason, and former director of the IMF Institute, Mohsin Khan, have all found a statistically
significant positive effect of IMF programs on BOP, particularly the current account of the BOP.
Since the IMF began to shift roles in the 70s, economists and political scientists have
shifted their focus accordingly to study the impact of IMF programs on more complex topics
such as overall economic growth and development. However, according to the literature, there is
less agreement on this topic than BOP, in part because there are many different opinions on how
to define successful development. Some argue that the end goal should be to improve the quality
of life of the countrys inhabitants, while others focus on employment and achieving minimal
living standards. Others define successful development as a shift away from government
regulation to reliance on market principles and export promotion. The ambiguity of the term
development in this context has undoubtedly contributed to much of the ambiguity in results.
Thus, there are multiple studies showing that IMF programs promote economic growth but they
have begun to be undermined by recent studies with different models, many of which find a
In the 80s and early 90s, many studies covered this topic, approaching it with different
methodologies. Results were very mixed, many of them statistically insignificant. Khan used a
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
more sophisticated approach to address nonrandom selection in his 1990 study, which found a
significant negative effect on growth in the short run, which tapered off as time passed. A later
study by Patrick Conway, economist at University of North Carolina, found that the initial
negative effect became a positive effect after three years. Many economists and political
scientists used this study to argue that countries must endure the negative effects of IMF
Later on, however, another series of studies found a statistically significant negative
effect on growth. Adam Przeworski and Vreeland conducted a study in 2000 that showed a
negative effect on annual output growth of about 1.5 percent for 79 countries between 1971 and
1990. Studies in 2003 by economists Michael Hutchinson and Ivan Noy and 2005 by economists
Robert Barro and Jong-Wha Lee also found that IMF programs have a statistically significant
The third general area of interest is the effect of IMF programs on income distribution.
The three major studies in this area, conducted by Manuel Pastor, Gopal Garuda, and James
Vreeland, have all found that IMF programs exacerbate income inequality. Vreeland explains the
theoretical reasons for this finding in his book. He points out that devaluation, a common
recommendation of IMF programs, makes it more profitable to produce exports, but makes
imports more expensive for consumers. Depending on the occupations and behavior of the poor,
this could potentially hurt or help them. For example, poor rural farmers who produce products
for export would benefit from devaluation, while poor urban consumers would be hurt by this
change. These studies are also supported by the findings of World Bank economist, William
Easterly, who found that IMF and World Bank programs mute the effects of economic growth
formation of IMF policies. Additional literature seeks to understand the selection process that
determines which countries go under IMF programs and why certain countries receive favorable
treatment. There are also a number of studies that examine patterns in compliance. This literature
is less relevant to my topic from a comparative standpoint, as they deal more with power and
process and less with assessment of end results. However, the studies that examine the power
structures behind IMF decisions are important to consider when drawing conclusions and
considering implications of the results because the interests of the top IMF policy-makers are
overview of the IMF, its history, the politics surrounding its actions, and its global impact in his
book, The International Monetary Fund: Politics of Conditional Lending. Among many aspects
of IMF procedure, Vreeland is critical of the inherent structural advantage that the U.S. has
because of its veto-power over the Managing Director, who makes decisions based on a general
consensus in the absence of strict voting procedures. This prevents smaller, less powerful
countries from forming a voting block in order to make their voices heard. One particularly
interesting study by Strom Thacker, a political scientist at Boston University, looked at voting
patterns at the United Nations as a determinant of IMF programs and found that countries that
voted with the U.S. were more likely to receive an IMF program than countries that did not.
Another study by Randall Stone finds that countries receiving favorable amounts of U.S. foreign
In his paper, IMF conditionality: theory and evidence, Alex Dreher provides a
background and critical analysis of IMF conditionality. He explores the underlying motives and
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
justifications for enforcing conditionality and assesses their success in achieving their stated
goals. He then moves on to attempt to measure overall compliance and to look at the incentives
for governments to comply. He finds that if country authorities are committed to reform,
Alex Dreher and Nathan Jensen in their paper, Independent Actor or Agent? An
Empirical Analysis of the Impact of U.S. Interests on IMF Conditions, put together findings
from multiple studies revealing that the U.S. uses its position of influence in the IMF not only to
push through structural adjustment policies around the world that are in its own economic
interests, but also to use loans and conditionality to create incentives for other countries to
cooperate with U.S. foreign policy goals. Others have asserted that the interests of commercial
U.S. banks also impact the behavior of the IMF disproportionately. Thomas Oatley and Jason
Yackee present evidence that the amount of U.S. bank exposure in a developing country is a
determinant of the size of the IMF loans received and Broz and Hawes find that the bank
In the past, the primary focus of these studies has been on overall economic effects.
While there has been a general lack of consensus over the years regarding aggregate
expansionary effects of IMF programs, I will show that the IMF has clear, discernable economic
The results generated by this sectoral approach will in turn provide a deeper, more
information because a countrys path to development will be different depending on the relative
determining key exports and on capital flows into and out of the country.
Hypotheses
The IMFs structural adjustment programs often contain requirements that are likely to
have very different consequences across sectors. The IMF has been known to push deregulation
by the federal government in favor of rapid privatization as one of its conditions. While
privatization may make the service sector more efficient, there are many cases that show that
rapid privatization of agriculture has met with major problems. In his article, The Malawi
Model, Joshua Kurlantzick asserts that privatization of agriculture has resulted in food
shortages across the developing world, as private traders do not have the power and resources to
respond to food emergencies and governments have seen their food reserve stocks dwindle,
leaving little staple foods left for emergencies. As a point of contrast, he uses the example of
Malawi, a small country in southern Africa that was able to avert food shortages by ignoring the
donor countries and putting into place a government-controlled agricultural subsidy program.
Capital market liberalization is also likely to immediately benefit industry and services
(particularly financial services) by opening the door to foreign investment in these areas, but is
not likely to increase investment in agricultural development. The IMF also puts pressure on
governments to change spending patterns, which is likely to have strong sectoral implications.
For example, in accordance with the free-market ideology of its top economists, the IMF
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Hypothesis: Countries that enter an IMF program will experience a consistent restructuring of
the economy in which one (or two) particular sector(s) grows in size and resources while the
other sector(s) shrink. For example, IMF programs might decrease the size of the industrial and
agricultural sectors and increase the share of services produced by all economies that enter
programs. It is also possible that it promotes agricultural growth and service sector growth at the
expense of services. There are a number of possible combinations. I compare this against the
null, which states that IMF programs do not cause any statistically significant, consistent
restructuring of economies.
Data Description
I have determined that output (relative to overall output), employment (relative to overall
employment), and exports (relative to overall exports) are the best available indicators of a
particular sectors relative strength in the economy. Using these indicators we will be able to
Independent variables
1. UnderIMF: binary variable where 0 indicates that a given country is not under any IMF
programs during a given year and 1 indicates that a country is under one or more IMF
programs, but may or may not have started the program during that year
2. StartIMF: binary variable where 0 indicates that a country has not started a new IMF
program during a given year or the previous year, but may or may not already be under
an IMF program, and 1 indicates that a country has just started an IMF program during
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Dependent variables
In order to measure the effects of IMF programs on the agricultural, industrial, and service
Sectors, I have chosen to use variables measuring value added, exports, and employment levels
within each sector. These three measures will be most effective way to examine relative sector
strength because they give us an idea of relative production output, economic value, and size (in
relative to overall output; Value added in agriculture corresponds to ISIC divisions 1-5
and includes forestry, hunting, and fishing, as well as cultivation of crops and livestock
production. Value added is the net output of a sector after adding up all outputs and
(ISIC), revision 3.
relative to overall output; Value added in industry corresponds to ISIC divisions 10-45
and includes manufacturing (ISIC divisions 15-37). It comprises value added in mining,
gas. Value added is the net output of a sector after adding up all outputs and subtracting
fabricated assets or depletion and degradation of natural resources. The origin of value
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Spring 2010
added is determined by the International Standard Industrial Classification (ISIC),
revision 3.
the service sector relative to overall output; Value added in services correspond to ISIC
divisions 50-99 and they include value added in wholesale and retail trade (including
hotels and restaurants), transport, and government, financial, professional, and personal
services such as education, health care, and real estate services. Also included are
imputed bank service charges, import duties, and any statistical discrepancies noted by
national compilers as well as discrepancies arising from rescaling. Value added is the net
output of a sector after adding up all outputs and subtracting intermediate inputs. It is
and degradation of natural resources. The industrial origin of value added is determined
Used to measure the volume of agricultural exports relative to all merchandise exports;
Agricultural raw materials comprise SITC section 2 (crude materials except fuels)
excluding divisions 22, 27 (crude fertilizers and minerals excluding coal, petroleum, and
service sector
Control variables
autocracy and a score of 1 indicates that it is a robust democracy and the scores in
counts all residents regardless of legal status or citizenship--except for refugees not
permanently settled in the country of asylum, who are generally considered part of the
population of their country of origin. The values shown are midyear estimates.
3. GDP Per Capita (LGDPPC): Gross domestic product is the sum of gross value added
by all resident producers in the economy plus any product taxes and minus any subsidies
not included in the value of the products. It is calculated without making deductions for
The GDP value is then divided by total population in order to obtain GDP Per Capita.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Method
Using all of the above data, my unit of analysis is country year; so all data will be
sorted by country year. I have run multivariate regressions according to the formulas listed below
in order to determine the correlation between entering an IMF program and output, employment,
and exports in all three sectors. I am controlling for Equations 2 and 3 in each model allow us to
observe separately to what extent being under an IMF program versus starting an IMF program
Model 1:
The first equation will allow us to see the extent to which being under an IMF program and/or
starting an IMF program in a given year is a predictor of agricultural output in the next year
(indicated by Agrigdpt+1), while controlling for the previous years agricultural output (indicated
by Agrigdpt-1) GDP Per Capita, population size, form of government, and overall time trends.
The second equation will illustrate the extent to which being under an IMF program (regardless
of start date) in a given year is a predictor of agricultural output in the next year, while
controlling for the same variables. The third equation will show us the extent to which starting an
IMF program in a given year is a predictor of agricultural ouput in the next two years, again
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Model 2:
The first equation will allow us to see the extent to which being under an IMF program or
starting an IMF program in a given year is a predictor of industrial output in the next year
(indicated by Indgdpt+1), while controlling for the previous years industrial output (indicated by
Indgdpt-1), GDP Per Capita, population size, form of government, and overall time trends. The
second equation will illustrate the extent to which being under an IMF program (regardless of
start date) in a given year is a predictor of industrial output in the next year, while controlling for
the same variables. The third equation will show us the extent to which starting an IMF program
in a given year is a predictor of industrial output in the next two years, again controlling for the
same variables.
Model 3:
The first equation will allow us to see the extent to which being under an IMF program or
starting an IMF program in a given year is a predictor of service sector output in the next year
(indicated by Servgdpt+1), while controlling for the previous years service sector output
(indicated by Servgdpt-1), GDP Per Capita, population size, form of government, and overall time
trends. The second equation will illustrate the extent to which being under an IMF program
(regardless of start date) in a given year is a predictor of service sector output in the next year,
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
while controlling for the same variables. The third equation will show us the extent to which
starting an IMF program in a given year is a predictor of service sector output in the next two
Model 4:
The first equation will allow us to see the extent to which being under an IMF program or
starting an IMF program in a given year is a predictor of the relative size of the agricultural
workforce in the next year (indicated by Agriempt+1), while controlling for the previous years
agricultural workforce size (indicated by Agriempt-1), GDP Per Capita, population size, form of
government, and overall time trends. The second equation will illustrate the extent to which
being under an IMF program (regardless of start date) in a given year is a predictor of
Agricultural employment in the next year, while controlling for the same variables. The third
equation will show us the extent to which starting an IMF program in a given year is a predictor
of Agricultural employment in the next two years, again controlling for the same variables.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Model 5:
The first equation will allow us to see the extent to which being under an IMF program or
starting an IMF program in a given year is a predictor of the relative size of the industrial
workforce in the next year (indicated by Indempt+1), while controlling for the previous years
industrial workforce size (indicated by Indempt-1), GDP Per Capita, population size, form of
government, and overall time trends. The second equation will illustrate the extent to which
being under an IMF program (regardless of start date) in a given year is a predictor of industrial
employment in the next year, while controlling for the same variables. The third equation will
show us the extent to which starting an IMF program in a given year is a predictor of Industrial
employment in the next two years, again controlling for the same variables.
Model 6:
The first equation will allow us to see the extent to which being under an IMF program or
starting an IMF program in a given year is a predictor of the relative size of the service sector
workforce in the next year (indicated by Servempt+1), while controlling for the previous years
service sector workforce size (indicated by Servempt-1), GDP Per Capita, population size, form
of government, and overall time trends. The second equation will illustrate the extent to which
being under an IMF program (regardless of start date) in a given year is a predictor of service
sector employment in the next year, while controlling for the same variables. The third equation
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
will show us the extent to which starting an IMF program in a given year is a predictor of
Service sector employment in the next year, again controlling for the same variables.
Model 7:
The first equation will allow us to see the extent to which being under an IMF program or
starting an IMF program in a given year is a predictor of the relative volume of agricultural raw
material exports in the next year (indicated by Agriexpt+1), while controlling for the previous
years agricultural raw material exports (indicated by Agriexpt-1), GDP Per Capita, population
size, form of government, and overall time trends. The second equation will illustrate the extent
to which being under an IMF program (regardless of start date) in a given year is a predictor of
Agricultural raw material exports in the next year, while controlling for the same variables. The
third equation will show us the extent to which starting an IMF program in a given year is a
predictor of Agricultural raw material exports in the next year, again controlling for the same
variables.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Model 8:
The first equation will allow us to see the extent to which being under an IMF program or
starting an IMF program in a given year is a predictor of the volume of manufactured goods
exported in the next year (indicated by Manexpt+1), while controlling for the previous years
manufactures exports (indicated by Manexpt-1), GDP Per Capita, population size, form of
government, and overall time trends. The second equation will illustrate the extent to which
being under an IMF program (regardless of start date) in a given year is a predictor of
manufactures exports in the next year, while controlling for the same variables. The third
equation will show us the extent to which starting an IMF program in a given year is a predictor
of manufactures exports in the next two years, again controlling for the same variables.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Results
Model 1: The regression results from Model 1, which looks at value added as a percentage of
Table 1
Value Added (% GDP) by Sector
StartandUnderIMF(Equation1) UnderIMF(Equation2) StartIMF(Equation3)
Variable Agrigdpt+1 Indgdpt+1 Servgdpt+1 Agrigdpt+1 Indgdpt+1 Servgdpt+1 Agrigdpt+1 Indgdpt+1 Servgdpt+1
Agrigdpt1 .883** .883** .884**
(.006) (.006) (.006)
Indgdpt1 .919** .919** .919**
(.006) (.006) (.006)
.890**
Servgdpt1 (.007) .890** .891**
(.007) (.007)
UnderIMF .105 .174 .259 .209* .174 .353**
(.136) (.160) (.161) (.121) (.143) (.144)
StartIMF .325* .000 .293 .393** .111 .461**
(.193) (.228) (.229) (.172) (.204) (.204)
Polity .093 1.259** 1.488** .096 1.259** 1.489** .080 1.280** 1.513**
(.171) (.213) (.210) (.171) (.213) (.210) (.170) (.213) (.210)
LnPopt1 .045 .027 .055 .046 .027 .056 .045 .026 .055
(.035) (.041) (.041) (.035) (.041) (.041) (.035) (.041) (.041
GDPPCt1 .899** .208** .478** .903** .208** .481** .886** .225** .450**
(.068) (.060) (.055) (.068) .060 (.054) (.066) (.057) (.052)
Year .015** .006 .017** .015** .006 .017** .016** .007 .019**
(.005) (.006) (.006) (.005) (.006) (.006) (.005) (.006) (.006)
Constant 39.394** 13.799 33.172** 38.583** 13.780 32.472** 40.437** 15.810 35.962**
(10.458) (11.997) (12.089) (10.450) (11.976) (12.078) (10.371) (11.852) (11.967)
Number
ofObser
vations 3931 3925 3918 3931 3925 3918 3931 3925 3918
2
R .954 .893 .899 .954 .893 .899 .954 .893 .899
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Model 2: The regression results from Model 2, which looks at employment by sector, as a
Table 2
Employment by Sector
StartandUnderIMF(Equation1) UnderIMF(Equation2) StartIMF(Equation3)
Variable Agriempt+1 Indempt+1 Servempt+1 Agriempt+1 Indempt+1 Servempt+1 Agriempt+1 Indempt+1 Servempt+1
Agrigdpt1 .832** .833** .832**
(.014) (.014) (.014)
Indgdpt1 .861** .861** .861**
(.013) (.013) (.013)
Servgdpt1 .867** .867** .868**
(.012) (.012) (.012)
UnderIMF .033 .082 .154 .248 .171 .108
(.394) (.232) (.323) (.363) (.214) (.296)
StartIMF .763 .914** .159 .781 .867** .073
(.558) (.327) (.453) (.512) (.301) (.415)
Polity .691 .057 1.044** .741 .115 1.05** .680 .075 1.076**
(.609) (.358) (.494) (.608) (.358) (.493) (.602) (.354) (.488)
LnPopt1 .203** .024 .247** .206** .018 .247** .200** .023 .246**
(.100) (.058) (.082) (.101) (.058) (.082) (.100) (.057) (.082)
GDPPCt1 1.469** .134 1.000** 1.454** .131 .997** 1.476** .119 .965**
(.205) (.092) (.162) (.205) (.093) (.162) (.186) (.082) (.144)
.006 .027** .018 .005 .025* .018 .006 .027** .018
Year (.022) (.013) (.019) (.022) (.013) (.019) (.022) (.013) (.018)
Constant .841 56.023** 34.878 2.769 52.737** 35.172 1.641 55.503** 35.251
(44.606) (26.234) (37.074) (44.599) (26.287) (37.051) (44.413) (26.116) (36.947)
Numberof
Obser
vations 1193 1193 1193 1193 1193 1193 1195 1195 1195
2
R
.917 .842 .930 .917 .841 .930 .917 .842 .930
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Model 3: The regression results from Model 3, which looks at exports by sector, as a percentage
Table 3
Exports by Sector
StartandUnderIMF(Equation1) UnderIMF(Equation2) StartIMF(Equation3)
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Analysis
The key finding of this study is that IMF programs consistently promote service sector
growth and hurt agricultural growth in terms of output. The figures to support this finding can be
found in Table 1, which shows that within two years of starting an IMF program, a countrys
percentage points and when a country is under an IMF program, regardless of start date, the
predicted decline in agricultural output, though less statistically significant, is approximately two
percentage points. This table also predicts service sector relative growth of four percentage
points in the next year if a country is under an IMF program, and by five percentage points if a
country has just signed onto an IMF program within the last two years.
The regressions from Model 2 and Model 3 also show some statistically significant
results regarding employment and exports. Table 2 shows that employment in the industrial
when a country joins an IMF program. This result is only statistically significant when within
two years of a country starting an IMF program, which shows that this large drop in the
industrial workforce is an immediate effect of starting an IMF program. Table 3 shows that
percentage points, and within two years of starting an IMF program the number is even larger,
showing an over fourteen percentage point increase in manufacturing exports immediately after a
There are also several trends in the results among the control variables. The lag
variables generated to control for previous years output (For example, Agrigdpt-1), are highly
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Sonali Mehta-Rao
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Spring 2010
significant in predicting future results across the board, and therefore the best overall predictors
of sectoral growth or decline in the study. In Model 1, GDPPCt-1 is a highly significant predictor
of changes in value added as a percentage of GDP across all sectors. Another interesting
observation is that polity is a highly statistically significant predictor of changes in value added
by the industrial and service sectors, but not for agriculture. General time trends (Year) are
significant in predicting changes in value added by the agriculture and service sectors, but not for
industry.
The results from Model 2 show that both GDPPCt-1 and LnPopt-1 are both significant in
predicting changes in employment levels for the agricultural and service sectors, but not for
employment, and general time trends (Year) are statistically significant in predicting changes in
industrial employment. Looking at the results from Model 3, GDPPCt-1 and LnPopt-1 are highly
statistically significant predictors of both growth and decline in both agricultural raw exports and
manufacturing exports.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Graphs:
The following graphs illustrate my key finding, that IMF programs decrease the share of
the economy made up of agricultural output and increase the size of the service sectors share.
The results are most visible in Ghana and the Dominican Republic, where we can very clearly
see significant agricultural decline and service sector growth when the country goes under an
IMF program. The Pakistan graph shows a steady but gradual increase in service sector size and
decrease in agriculture, which is more evenly spread out over time, possibly because Pakistan
has consistently been under IMF programs for the majority of the time from 1966 to 2000.
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Spring 2010
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Future Research
These findings open up a lot of doors for more in-depth future research on IMF impacts. A
study designed to explore more long-term effects of IMF programs is would be useful in
determining whether or not IMF programs have consistently affected the structural development
of economies in the long run or if their impact is only short-term. The results of such a study
would be helpful in clarifying the implications of the economic restructuring for the developing
world in particular. It would also provide useful in assessing the demographic implications of
economic restructuring, such as movement into or away from urban areas, which would only be
seen in the long run because it takes time for large groups of people to make these drastic
lifestyle changes.
Another interesting idea for future research would be to look at whether or not the
restructuring effects are the same for countries under democratic and autocratic regimes. This
will simply add another dimension to this study, allowing us to see whether or not regime-type is
In order to determine the impact of this economic restructuring on the people of the
countries, it would be interesting to look at the correlation between poverty levels and the size of
each sector. This will allow us to see if agricultural decline, for example, is a significant
Since there is already so much literature that has found that U.S. interests are important in
driving IMF policy, it would be interesting to examine the connection between U.S. interests and
the restructuring that occurs under IMF programs. This would be more difficult to conduct
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Implications
Based on the economic restructuring that is shown in this study and the existing
these results. First, I will look at the differences in results across the three models and the
possible causes and implications of these variations. For example, my findings show that
agricultural value added decreases under IMF programs, but there is no significant change in the
relative size of the agricultural workforce. This can be explained by the fact that, because their
skill set and way of life tends to be very different from industrial and service sector employees, it
is not easy for agricultural workers to quickly transition into careers in the industrial and service
sectors, even if the money in the economy is shifting into those sectors. Thus, based on the
immobility of agricultural workers in terms of changing jobs, we can draw the conclusion that a
decrease in the agricultures share of GDP leaves those employed in agriculture with less
income, as the same number of people must split a smaller slice of the pie.
manufactures exports, while agriculture raw materials exports do not change significantly.
Devaluation, commonly prescribed by the IMF, has been shown to increase overall exports, but
this study finds that when a country is under an IMF program, this devaluation-induced increase
in exports is not spread evenly between the sectors, but overwhelmingly benefits only exporters
of manufactured goods. It is unclear why this is so, but one possible theory is that the Wests
tendency to heavily subsidize its agricultural sector destroys the ability of smaller, developing
These findings are also particularly interesting in light of the free-trade debate, in which
those who promote free trade argue that the law of comparative advantage will allow everyone to
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
benefit in the long run. The IMF has consistently promoted free trade over the years, pressuring
countries through loan programs to reduce trade barriers and government subsidies for local
products. However, my results show that IMF programs have resulted in consistent promotion of
growth in the service sector and reduction of agricultural growth. These results are not consistent
with the free-market ideology that different countries should specialize in the sector in which
they have a comparative advantage. Countries that went under IMF programs may have had a
comparative advantage in agriculture if they had continued to grow that sector, but my results
show that IMF programs reduce the size of the agricultural sectors across the board.
ethnicities or social classes are employed within each sector, but I cannot draw any specific
conclusions at this time because this study is not designed to analyze social impact in depth.
However, I hypothesize that the structural reform, particularly if it is not reversed quickly, could
lead to tensions between classes or ethnic groups as one group benefits and another becomes
disadvantaged.
Conclusion
The results of this study clarify the economic impact of IMF programs, particularly in
consequences that have not become apparent in past studies that have taken a more generalist
approach to assessing impacts. However, this approach is limited because overall economic
growth is rarely distributed evenly. While scholars have been caught up in debating whether or
not IMF programs promote overall growth, or alleviate poverty in general, they have neglected to
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
look more closely at the distribution of changes in economic growthwhich segments of society
end up benefiting and who ends up getting hurt. I have proven that the service sector consistently
benefits and the agricultural sector consistently declines when a country joins an IMF program.
The specific implications for growth and for socioeconomic development cannot be accurately
predicted from these findings alone, but a number of new hypotheses may be formed based on
my results, providing a wide range of opportunities for future study that will deepen our
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010
Works Cited
Dreher, Alex, and Nathan Jensen. Independent Actor or Agent? An Empirical Analysis of the
Impact of U.S. Interests on IMF Conditions. Working paper. Vol. 118. Swiss Institute for
Dreher, Alex. IMF conditionality: theory and evidence. Working paper. Public Choice, 2009.
E., Stiglitz, Joseph. Globalization and its Discontents. New York: W. W. Norton, 2002. Print.
Kurlantzick, Joshua. "The Malawi Model." Democracy: A Journal of Ideas 13 (2009): 60-68.
Print.
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Sonali Mehta-Rao
Senior Honors Thesis
Spring 2010