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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.
Key Words : Political Instability, International organizations, Foreign aid, Corruption