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IMF Survey Vol.30, September 2001
Article

Social dimensions of financing: IMF recognizes the importance of social policies

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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By pursuing its mandate to promote international monetary cooperation, the balanced growth of international trade, and a stable system of exchange rates, the IMF contributes to sustainable economic and human development. It recognizes that successful macroeconomic programs must include policies that directly address poverty and social concerns and that, to support these objectives, IMF-supported programs must integrate social sector spending that focuses on improving the education and health status of the poor.

The IMF’s attention to social policy issues reflects the recognition that popular support—or “country ownership”—for economic adjustment programs is necessary if the programs are to succeed, and good health and education contribute to, and benefit from, growth and poverty reduction.

How the IMF addresses social concerns

In pursuing this aspect of its work, the IMF collaborates extensively with other institutions for advice, including regional development banks, the United Nations Development Program, the International Labor Organization, the World Health Organization, and especially the World Bank. Drawing on their expertise, the IMF provides advice to countries on how social and sectoral programs aimed at poverty reduction can be accommodated and financed within a growth-enhancing macroeconomic framework. It does so by identifying not only unproductive spending that should be reduced to make more money available for basic health care and primary education, but also key categories of public expenditure that must be maintained or increased. Through policy discussions and technical assistance, the IMF also plays a role in improving the transparency of governments’ decision making and their ability to monitor poverty-reducing spending and social developments.

Poverty reduction strategy papers (PRSPs) are prepared by member country authorities through a participatory process including input from civil society and the support of the IMF, the World Bank, and other development partners. These papers describe the country’s macroeconomic, structural, and social policies to promote growth and reduce poverty. They are part of a dialogue that enables the IMF to ensure that social and sectoral programs aimed at poverty reduction are consistent with the macroeconomic policies it supports. Measures supported by the IMF’s Poverty Reduction and Growth Facility (PRGF), geared to low-income member countries (see box on IMF facilities, pages 12-13), derive from the overall strategy laid out in the PRSP. As of the end of June 2001, the Executive Boards of the IMF and the World Bank had considered 5 full PRSPs and 37 interim PRSPs (action plans and timetables prepared by national authorities for producing a fully developed PRSP), most from African countries.

Results

A recent review of social spending in a representative sample of 32 low-income countries that received IMF support during 1985-99 showed that these countries had both increased public social expenditures and improved social indicators. Experience varied across countries, but for the entire group, on average, per capita real spending on education increased at an annual rate of 3.4 percent and on health, 3.3 percent. Smaller gains in education spending were recorded in Africa. Social indicators gained as well: on average, and on an annual basis, overall primary school enrollment improved by 0.9 percent; female primary and secondary enrollment increased by 1.2 percent and 1.3 percent, respectively; infant mortality declined by 1.8 percent; mortality for children under the age of 5 dropped by 2.2 percent; and contraceptive prevalence rose by 5.3 percent.

These improvements in social indicators have been accompanied by an increase in social spending and a decline in defense outlays. Between 1990 and 1999, military spending declined by 1.2 percentage points of GDP in low-income countries with IMF-supported programs, while spending on health care and education in those countries increased by 0.8 percentage point of GDP.

Social impact analysis

The IMF is committed to integrating social impact analysis in PRGF-supported programs. Social impact analysis assesses how policy interventions will affect the well-being of different social groups, especially the vulnerable and the poor. Those countries that are able to do so will conduct the analysis during the preparation of PRSPs. For those countries where national capacity is weak, the IMF will draw on the work done by the World Bank and other development partners in the PRSP process.

When the social impact analysis indicates that a particular measure (for example, currency devaluation) may adversely affect groups of the poor, such effects would be addressed through the choice or timing of policies as well as through social safety nets. The safety nets built into IMF-supported programs have included subsidies or cash compensation for particular vulnerable groups; improved distribution of essential commodities, such as medicines; temporary price controls on some essential commodities; severance pay and retraining for public sector employees who have lost their jobs; and employment through public works programs. About three-fourths of the low-income countries that had IMF-supported programs during 1994-98 included social safety nets in their programs.

What else can the IMF do?

The IMF has improved the collection of data on government social expenditures, as well as the monitoring of social indicators, especially in the heavily indebted poor countries. Work on the PRSP process is still evolving and is expected to forge a stronger link between social spending and social indicators and focus attention more closely on how to help the poor. Additionally, the IMF and the World Bank are jointly assisting heavily indebted poor countries in building the capacity to track poverty-related spending.

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