Who adjusts? Exchange rate regimes and finance versus labor under IMF programs

Abstract

Who adjusts under International Monetary Fund (IMF) programs and why? In this paper, I demonstrate that labor groups adjust when there is a fixed exchange rate regime and international financial groups are strong enough to defend the peg. In that case, the Fund substitutes currency devaluation with lowering labor costs via labor market reform. Lower wages are used to increase competitiveness and support exports. In other words, the Fund makes labor ‘cheaper’ through its labor market reform when money cannot be made ‘cheaper’ due to strong international financial interests. To test this theory, I use a mixed-method approach. I complement the case comparison of Latvia and Hungary in 2008–two very similar cases except for their exchange rate regime and the influence of international finance on their economy–with a large-N study using a global sample of IMF borrowers over the years 1989 and 2014. The paper shows that international organizations such as the IMF might amplify the voice of the strong (financial interests) while making the ‘weak’ (labor groups) weaker via their conditionality.