The 'Despotic Leviathan' and Its Financial Architecture: How IMF Conditionalities Deepen Inequality

Santosh Mehrotra () and Shady Hassan ()
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Santosh Mehrotra: University of Bath

No 18350, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper examines how IMF policies contribute to the inequality in MENA, and to a Middle-Income Trap (MIT). Developing a theory expanding Acemoglu and Robinson’s “Narrow Corridor” framework, it shows how IMF conditions align domestic elite incentives with creditor interests through a principal-agent lens. Using 2020-2025 data, its analysis reveals IMF monetary policies create rent-seeking structures that institutionalize inequality and suppress growth. The paper identifies an “engineered r>g dynamic” as a quantifiable signature of this extraction, empirically verified in Egypt. It establishes a causal link between financial/monetary policy (interest rates, debt compounding) and the “Despotic Leviathan” state formation.

Keywords: political economy; domestic debt; inequality; IMF conditionality; state capture; Middle-Income Trap; Egypt (search for similar items in EconPapers)
JEL-codes: F33 O11 O43 P16 (search for similar items in EconPapers)
Date: 2025-12
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