- Ritha Khemani, Sanjeev Gupta, Calvin McDonald, Louis Dicks-Mireaux, and Marijn Verhoeven
- Published Date:
- January 2000
Directors considered that the IMF’s primary role is to promote macroeconomic stability and structural reforms necessary for achieving sustainable and rapid growth. They underscored the crucial importance of economic growth for poverty alleviation, but also recognized that the IMF must be sensitive to the social implications of its policy advice. In particular. Directors noted that IMF-supported programs have sought to help members address the potential adverse impact on vulnerable groups of their adjustment and reform efforts as well as of exogenous shocks, and that such efforts in turn can make a vital contribution toward sustaining economic reforms and protecting living standards. They also observed that sound macroeconomic policies, coupled with effective social and infrastructure spending, foster faster long-term growth. In light of these considerations. Directors observed that social safely nets and appropriately targeted productive public spending, particularly in the social area, can provide critical support for the success of members’ adjustment and reform programs.
Broader requirements for improving living standards were also discussed, including promoting faster growth and employment creation and better integrating poorer countries into the international economic system. In addition, Directors suggested that the international community should work to improve these countries’ access to industrial country markets, as well as to halt the excessive flow of weapons to developing countries. Directors stressed the importance of good governance, transparency, and accountability for ensuring the effective use of public resources.
Directors discussed the role of the IMF with regard to social policies. Recognizing the need for mutually reinforcing macroeconomic and social policies, they underscored the importance of more closely integrating, with the help of the World Bank, social issues and poverty concerns into IMF supported programs. Directors agreed that greater attention to social issues was necessary in the context of low-income countries, including HIPCs, where structural reforms are particularly critical. With regard to other countries, a variety of views was expressed on the degree and modalities of IMF involvement in social issues. Some speakers attached importance to these issues in countries other than low-income countries, pointing to the recent experience in the Asian crisis countries and elsewhere. However, a number of Directors, while concurring that IMF-supported programs should encompass members’ social policies and poverty reduction efforts, cautioned nevertheless that the IMF should not allow its primary mandate to be diluted. They viewed the World Bank as taking the leading role in developing adequate social safety nets and effective social policies, and the IMF as contributing to poverty reduction mainly through its support of economic policies that provide a conducive environment for sustained growth.
All Directors emphasized that, as regards social issues, the World Bank and other relevant international organizations have the primary mandate and expertise. In this connection, they noted, for example, that the relationship between public social spending, growth, and poverty is complex, and that it is therefore critical to ensure that spending is used productively. Several Directors cautioned that the IMF did not have the panoply of expertise needed to assess the quality of social spending and related issues. Directors, therefore, underscored that the social components of countries’ IMF-supported programs should draw, to the fullest extent possible, on the work of the World Bank and other relevant institutions. Some Directors were of the view that when timely inputs from these institutions on essential social components of IMF-supported programs were not available, IMF staff would necessarily have to provide policy advice to the extent feasible. Many other Directors were skeptical about such IMF involvement, particularly if it were to require additional staff expertise. All Directors suggested that, to facilitate such cooperation, these institutions should be encouraged to provide more timely input. Overall, Directors agreed that more intensive cooperation between the IMF and the Bank is essential, proceeding along the lines of these institutions’ respective responsibilities and comparative advantages, and thus avoiding duplication of efforts. They welcomed therefore the recent enhanced IMF-Bank cooperation, pointing to the Enhanced Structural Adjustment Facility/International Development Association (ESAF/IDA) pilot program and the preparation of the reports for this discussion.
Turning to specific issues in the area of social policies. Directors noted the scope for further improving the quality and implementation of social safety nets, through comprehensive ex ante analyses and monitoring, relying on the expertise of the World Bank and other organizations. Several Directors recommended that the staff should assess, in the course of surveillance, the adequacy of social policy instruments, the performance of social safety nets, and the potential social ramifications of macroeconomic and financial policies. Many others, however, cautioned that this should not detract from the appropriate focus of Article IV surveillance. We will have to come back to this matter on the occasion of the biennial review of surveillance.
Spending on education and health care has increased in real per capita terms and in relation to GDP in most countries with IMF-supported programs during the past decade. While this has been accompanied by an improvement in a broad range of social indicators, Directors noted the diversity in outcomes caused by the differences in the effectiveness of social spending. Although some cautioned that too much emphasis on the absolute amount of social spending could send the wrong message, Directors more generally stressed the importance of efficient and well-targeted spending for ensuring that gains in social indicators are commensurate with spending increases. Further improvements in these areas could be achieved, inter alia, by strengthening a country’s budget formulation and implementation capacity.
The establishment of national quantitative targets for poverty reduction–consistent with the International Development Goals for 2015 to which countries have subscribed–could also prove beneficial, especially if the higher targeted spending is used productively. Directors suggested that, in setting targets, spending needs in priority areas for poverty reduction other than health, education, and social safety nets–such as basic sanitation, rural roads, and access to clean water–should also be taken into account; such priority spending may contribute as much or more to poverty reduction. Some Directors thought that core labor standards had a valuable contribution to make to the achievement of these targets, while other Directors were concerned that this issue is outside the IMF’s main areas of responsibility. We will come back to this issue after further consultations with the World Bank and the ILO.
Directors considered that in countries where social spending is so low as to be a critical area of weakness, structural benchmarks could continue to be used selectively to protect social spending and to promote key institutional reforms. While many Directors thought that such benchmarks should only be used in ESAF-supported programs, some other Directors saw the value in applying performance indicators (performance criteria and structural benchmarks) to a broader range of IMF-supported programs. In establishing such structural benchmarks, IMF staff will rely on inputs from the World Bank and others to ensure, inter alia, the targeting and quality of spending.
Directors noted with concern the widespread poor quality of data on social spending, social indicators, and social protection arrangements, which inhibited the design and implementation of effective social programs. They saw an urgent need for country authorities to identify weaknesses in data and data collection, and to make data improvements in collaboration with the World Bank, other international agencies, and civil society.
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For program descriptions sec the Glossary at the end of this volume. After this paper was drafted, the Enhanced Structural Adjustment Facility (ESAF) was renamed the Poverty Reduction and Growth Facility (PRGF).
A more detailed discussion of the proposed Poverty Reduction Strategy Paper is provided in the World Bank-IMF staff paper. “HIPC Initiative–Strengthening the Link Between Debt Relief and Poverty Reduction,” which is available on the Internet: http://www.imf.org/external/np/pdr/prsp/status.htm. See also the Glossary at the end of this volume.
Article I (ii) of the Articles of Agreement of the International Monetary Fund.
See also the World Bank paper, “Building Poverty Reduction Strategies in Developing Countries” and the joint World Bank-IMF paper, “HIPC Initiative–Strengthening the Link Between Debt Relief and Poverty Reduction.” Both are available on the Internet: www.iinf.org/external/np/pdr/prsp/status.htm.
The scope of social policies, and the channels through which macroeconomic policies can have a social impact, cover a broad area. The selective focus of this paper on social safety nets and public spending on education and health care allows in-depth consideration of a limited number of important social policies that are closely linked to the design of economic programs. For this reason, the focus is on the expenditure side of the budget, which has offered better opportunities than the tax side for poverty reduction (see Harberger, 1998). Likewise, the paper does not discuss the social impact of the IMF’s macroeconomic policy advice, per se, except to the extent it bears directly on the design of social policies; nor does it attempt a broader review of IMF policy recommendations in the social sphere in bilateral and multilateral surveillance.
As regards fiscal deficits, see Fischer (1991); Levine and Zervos (1993); Easterly and Rebelo (1993); Bredenkamp and Schadler (1999); and Goldsbrough and others (1996); as regards inflation, see Barro (1995); Bruno and Easterly (1995); Sarel (1996); and Ghosh and Phillips (1998). Macroeconomic stability–lower (and stable) inflation–has also been shown to be conducive to higher long-run growth (World Bank, 1996).
Demery and Squire’s (1996) review of six African countries has shown that macroeconomic adjustment has generally benefited the poor.
Sahn, Dorosh, and Younger (1997), in a comprehensive study based on computable general equilibrium models of 10 sub-Saharan countries, concluded that under structural adjustment programs supported by the IMF and the World Bank, most of the poor experienced small net gains. They also showed that structural reforms hurt those reaping rents from distortionary policies, who tend to be nonpoor.
Among the frequent contacts in civil society groups are Oxfam, Friends of the Earth. World Vision, the Swiss Council of Development Organizations, Witness for Peace, Christian Aid, Results International, and Caritas Internationalis. The IMF has organized numerous seminars for academics, labor unions, environmental groups, religious organizations, and development NGOs. In 1996, the Managing Director addressed a World Congress of the International Confederation of Free Trade Unions (ICFTU) and in 1997 the World Conference of Labor. In addition, the IMF has greatly increased the dissemination of information through press releases, public information notes, and the publication of some staff reports and other studies.
The two conferences on income distribution and economic policy organized by the IMF in recent years have also emphasized the need for cost-effective social safety nets during reform periods. See Tanzi and Chu (1998) and Tanzi, Chu, and Gupta (1999).
This approach is consistent with that set forth in the 1993 Development Committee paper prepared jointly by the staffs of the IMF and the World Bank. Executive Directors in the 1993 discussion on safety nets “agreed that the IMF’s policy advice through technical assistance on social safety nets should be continued to the extent that staff resources were available.
The Poverty Assessments prepared by the World Bank have been particularly useful. In some cases, the World Bank and national authorities use different poverty lines (e.g., Belarus). In the design of social safety nets, the usual practice has been to use country-specific poverty lines, rather than international poverty lines defined in terms of U.S. dollars in purchasing power parity terms for daily consumption of an individual.
Less than two-thirds of countries with IMF-supported programs have conducted at least one household or demographic survey, of which the last one in more than half of the countries was conducted before 1996.
The wages paid to participants are the most critical determinant of overall program cost and the effectiveness of job creation through public works schemes. Experience from a range of countries shows that programs are more effective when the wage is maintained at a level below the prevailing market wage for unskilled labor. See Subbarao and others (1997).
Azerbaijan, Bolivia, Georgia, Guyana, the Kyrgyz Republic, the Lao People’s Democratic Republic, the former Yugoslav Republic of Macedonia, Malawi, Mongolia, Pakistan, Senegal, and Vietnam.
With the support of the World Bank, a few countries have recently established a mechanism to monitor social outcomes on an ongoing basis (e.g., the Social Monitoring and Early Response Unit in Indonesia).
There are wide disparities in the cost-effectiveness of government spending on education and health care across countries in Africa, and, in general, these countries were found to be less efficient than those in the Western Hemisphere and Asia. See Gupta, Verhoeven, and Honjo (1997).
For example, for the latest year for which data are available, Zambia has a higher immunization coverage than Kenya, but also a higher infant mortality rate. In contrast, for a group of 48 program countries for which recent data are available, there is a negative and statistically significant correlation between immunization coverage and infant mortality rate.
Notwithstanding the problems with comparability, IMF staff have compiled cross-country data on public education and health care spending. This data set covers 65 countries that are implementing or have implemented IMF-supported reform programs, of which 31 are low-income countries with ESAF-supported programs. The GDP deflator was used to convert nominal expenditures into real terms. In principle, deflating by public sector wages would provide a more accurate reading of real trends in education and health care spending. But such wage data are rarely available for low-income countries. In 10 countries in Africa for which data on public sector wages are available, real per capita spending on education and health care increased, on average, by 2 percent a year under IMF-supported programs–a result consistent with spending trends derived from the GDP deflator.
The countries where spending on education as a share of GDP declined are the Republic of Congo, Côte d’Ivoire, Guinea-Bissau, Madagascar, Mali, Mozambique, and Nigeria. In health care, the Comoros. Guinea-Bissau, Nigeria, and Zambia experienced a decline in spending as a percentage of GDP. The countries where real per capita spending on education declined are the Comoros, Côte d’Ivoire, the Republic of Congo, Kenya, Madagascar, Mali, Nigeria, and Sierra Leone. In part, this reflected cuts in salary from a high level (e.g., Côte d’Ivoire). In health care, the countries where real per capita spending on health care declined are the Comoros, Côte d’Ivoire, Kenya, Madagascar, Nigeria, and Zambia.
As yet, there is no consensus in international forums on the precise social indicators to be used for assessing development and social performance. As noted in Box 2.2, there are at present four sets of indicators in use.
For a discussion of the reasons for the slow pace of reforms in education and health care spending in transition countries, sec Gupta (1998).
This has been an issue during the decentralization of government in Ethiopia; see Ter-Minassian (1997, Chapter 20).
For example, if budget allocations in the health sector are made on the basis of the number of beds in a hospital, hospital administrators and doctors may increase the number of beds and keep them occupied, squeezing allocations for medicine. See also Tanzi (1998) and Mauro (1998).
The rural population in Albania and Ghana, however, receives as much as 70 percent of the benefits from public spending on primary education. Furthermore, the incidence of education spending has improved over time in favor of the rural population in Malawi. See also Davoodi and Sachjapinan (forthcoming).
The countries were selected to cover a range of social policy strategies and progress in implementing policies, with a view to identifying ways of strengthening the social content of IMF-supported programs. The ESAF arrangements reviewed cover the last five years, during which operational staff guidelines on public social spending were issued. The countries include five heavily indebted poor countries that have reached their decision point under the HIPC Initiative: Bolivia (with the three-year ESAF arrangements starting in 1994 and 1998); Burkina Faso (1998): Cote d’lvoire (1998); Mozambique (1996); and Uganda (1997). Other countries included in the review are Armenia (1996); Georgia (1996): Kyrgyz Republic (1994 and 1998); Ghana (1995 and 1999); Lao People’s Democratic Republic (1993); and Malawi (1995).
In some cases, strategic plans specifically for the education and/or health care sectors were also formulated.
In the Kyrgyz Republic (1998) and Burkina Faso (1996), some of the reforms were directly targeted at social spending.
Policy measures that members intend to follow as a condition for the use of IMF financial resources.
The link between disbursements of financial assistance and adherence to benchmarks is less strict than for performance criteria and prior actions.
Collaboration between the World Bank and IMF has been periodically reviewed and staff guidance notes on collaboration in certain policy areas have been issued.
IMF senior staff have participated in the high-level tripartite ILO meetings in Bangkok in 1997. 1998, and 1999, and, in May 1998, the IMF organized a seminar with the ILO to improve the staff’s understanding of core labor standards and the ILO’s role in setting and monitoring these standards.
The World Bank report underscored three points: (i) only somewhat more than half of the Country Assistance Strategies prepared in FY 1998 were judged fully satisfactory in their integration of poverty issues into the framing of a forward-looking strategy; (ii) progress in completing poverty assessments has at times been slow, reflecting a greater use of participatory and consultative methods, staff resource constraints, and the degree of domestic political commitment; and (iii) much less progress has been made in evaluating the impact of specific interventions (only 13 percent of Country Assistance Strategies include monitorable poverty benchmarks that were time-bound and output- or outcome-oriented).
A more detailed description of the proposed process and the PRSP is provided in the Bank-IMF paper, “H1PC Initiative-Strengthening the Link Between Debt Relief and Poverty Reduction,” which is available on the Internet at http://www.imf.org/external/np/pdr/prsp/status.htm.
In the context of IMF-supported programs, a point of reference against which program implementation is monitored. Benchmarks are not necessarily quantitative and frequently relate to structural variables and policies.Comprehensive Development Framework (CDF).
A holistic approach to development formulated by the World Bank and implemented on a pilot basis since early 1999. The CDF highlights the interdependence of all elements of development–social, structural, human, governance, environmental, economic, and financial–and stresses ownership by the country and partnership with government, civil society, assistance agencies, and the private sector.Conditionality.
Economic policies that members intend to follow as a condition for the use of IMF resources. These are often expressed as performance criteria (e.g., monetary and budgetary targets) or benchmarks, and are intended to ensure that the use of IMF credit is temporary and consistent with the objectives of adjustment programs designed to correct a member’s macroeconomic and structural imbalances, and promote stronger growth and external payments viability.Country Assistance Strategy (CAS).
The central vehicle for World Bank Executive Board review of its assistance strategy for the International Development Association (IDA) and its borrowers. The CAS document describes the strategy based on an assessment of priorities in the country and indicates the level and composition of assistance to be provided based on the strategy and the country’s portfolio performance.Enhanced Structural Adjustment Facility (ESAF).
This facility, established by the Executive Board in 1987 and extended and enlarged in February 1994, was the principal means by which the IMF provided financial support, in the form of highly concessional loans, to low-income member countries facing protracted balance of payments problems and loans and grants under the H1PC Initiative. In late 1999, the ESAF was succeeded by the Poverty Reduction and Growth Facility (PRGF).ESAF/IDA Pilot Project.
Program for enhanced World Bank-IMF collaboration in low-income (ESAF/IDA) countries, including a specific focus on social sector issues in six countries–Cameroon, Ethiopia, Nicaragua, Tajikistan, Vietnam, and Zimbabwe.Heavily Indebted Poor Countries (HIPC) Initiative.
Initiative designed to provide exceptional assistance to heavily indebted poor countries following sound economic policies to help them reduce their external debt burden to sustainable levels. In the second half of 1999, the Initiative was strengthened to provide deeper and faster debt relief through the Enhanced HIPC Initiative.Memorandum of Economic Policies (MEP).
Document prepared by a member country describing the policies that it intends to implement in the context of its request for financial support from the IMF.Performance Criteria.
Macroeconomic indicators such as monetary and budgetary targets that must be met for the member to qualify for phased purchases under Stand-By Arrangements in the upper credit tranches. Extended Fund Facility (EFF). and Enhanced Structural Adjustment Facility Arrangements (ESAF).Policy Framework Paper (PFP).
Document prepared by a member country in collaboration with the staffs of the IMF and the World Bank and updated annually, which describes the authorities’ economic objectives and macroeconomic and structural policies for a three-year adjustment program supported by resources under the Enhanced Structural Adjustment Facility (ESAF), as well as associated external financing needs and major sources of financing.Poverty Reduction and Growth Facility (PRGF).
The IMF’s successor facility to the Enhanced Structural Adjustment Facility (ESAF). In the PRGF, poverty reduction is a key element of a renewed growth-oriented economic strategy. The cornerstone of the new approach is a nationally owned, comprehensive. Poverty Reduction Strategy Paper (PRSP).Poverty Reduction Strategy Paper (PRSP).
The central document in the new Poverty Reduction and Growth Facility (PRGF), it will identify priorities for public action to achieve the greatest impact on poverty reduction. It will also address the critical and often complex issues related to enhancing good governance and supporting transparency in policymaking. The PRSP will be country driven, being prepared by the authorities with assistance from the World Bank and the IMF. and reflect the outcome of an open, participatory process involving civil society, relevant international institutions, and donors.Public Expenditure Review (PER).
The major vehicle for the World Bank to analyze public sector issues, and public expenditure issues in particular, as part of its economic and sector work with its member countries. PERs help countries establish effective and transparent mechanisms to allocate and use available public resources in a manner that promotes economic growth and helps in reducing poverty.Stand-By Arrangements.
Stand-By Arrangements give member countries the right to draw up to a specified amount of IMF resources during a prescribed period (usually 12-18 months, although they can extend up to three years). The release of drawings is conditional upon meeting performance criteria and the completion of periodic reviews.