1 Social Dimensions of the IMF’s Policy Dialogue

Ke-young Chu, and Sanjeev Gupta
Published Date:
April 1998
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IMF Involvement in Social Issues

The IMF’s involvement in social issues has to be seen in the context of its mandate. The mandate, as laid down in its Articles of Agreement, is clear: (1) to promote international monetary cooperation; (2) to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income; (3) to promote exchange stability and to maintain orderly exchange arrangements among members; (4) to assist in the establishment of a multilateral payments system; and (5) to give confidence to members by providing temporary financial resources to help them correct balance of payments disequilibria. Given this essentially macroeconomic mandate, the IMF’s contribution to social development is mainly indirect, and its role in social policy advice is necessarily limited. Nevertheless, the IMF’s involvement in social issues has evolved over time, drawing not only from its own experience but also from that of member countries and of other agencies.

During the 1950s and 1960s, when the IMF provided financial assistance mainly to industrial countries, its policy advice focused primarily on macroeconomic policies. With the shift to lending to developing countries since the 1970s and to economies in transition since the late 1980s, much greater attention has been given to the complementarity of macroeconomic policies and structural reforms and to the formulation of policies in a medium-term context.1 With this broadened focus, the interrelationships between economic and social issues have also increasingly been recognized. Experience has shown the need for protecting vulnerable groups during the adjustment period by constructing well-targeted social safety nets and by safeguarding access of these groups to basic public services, such as primary health and education. These measures would also serve to enhance the political sustainability of economic reforms.

The broader context for the IMF’s policy advice has called for much closer collaboration than in the past among international agencies, with a delineation of responsibilities according to each agency’s mandate and expertise. Much of the analysis and policy and technical advice on social issues is undertaken by international agencies other than the IMF, such as the World Bank, regional development banks, the Food and Agriculture Organization (FAO), the International Labour Organization (ILO), the United Nations Development Programme (UNDP), and the United Nations Children’s Fund (UNICEF), as well as by bilateral donors and nongovernmental organizations. The issues are complex, and analysis and action are often hindered by weak data and administrative structures. Given these difficulties, it has been important that the various parties build not only on their own experience but also on that of members and other agencies.

The increasing involvement of the IMF in social matters has been discussed by its Executive Board on several occasions. In 1988, for example, the Board stressed the need to assist member countries in evaluating the implications of IMF-supported adjustment programs for income distribution and poverty, to strengthen the staff’s understanding of the channels through which adjustment policies affect the poor, and to draw more extensively on the expertise of the World Bank and UN institutions. At the same time, it reaffirmed its decision not to establish conditions on the use of IMF resources related to income distribution. The joint World Bank-IMF Development Committee, which also has discussed social issues, has encouraged both the World Bank and the IMF to further intensify their efforts, working closely together, in helping design and implement well-targeted measures to mitigate the costs of adjustment.

Sustained Economic and Social Development: The IMF’s Perspective

While economic policies of individual countries can have diverse objectives, as experience has shown, three key points have particular relevance for social development.

Economic growth is required for sustainable social development. In the last few years, a broader concept of high-quality growth has emerged, namely, economic growth that brings lasting employment gains and poverty reduction, provides greater equality of income through greater equality of opportunity, including for women, respects human freedom, and protects the environment.

Controlling inflation can prevent or mitigate real-income losses, against which the poor are least protected because their income is often fixed in nominal terms and they tend to hold much of their assets in the form of currency.

By promoting the agriculture sector, which employs most of the poor, many developing countries can achieve a lasting reduction in poverty.

The main pillars of economic policy that would lead to progress in these three areas include sound macroeconomic and structural policies, with a strong social policy component, and good governance and participatory development.

Macroeconomic policy: sound macroeconomic policies—fiscal, monetary and credit, and exchange rate policies—are needed to secure financial stability and external viability with low inflation. In the absence of these conditions, it is difficult for a country to encourage productive investment or to promote the efficient use of scarce resources, both of which are essential for durable growth.

Structural policy: structural reforms are often vital in promoting a market-based environment with an outward orientation. These include liberal and open systems of prices, exchange, trade, and investment; a fiscal system that emphasizes efficient resource allocation and minimizes adverse effects on incentives; agricultural marketing arrangements that promote competition; a financial system that is free of direct credit allocation and effectively channels financial savings to productive investment; and policies that take into account their impact on the environment.

Social policy: social and supplementary structural policies are also needed to strengthen the social dimensions of economic development. These include labor market policies aimed at ensuring high employment through competitive and flexible wages and at removing other rigidities while adhering to ILO principles; public expenditure programs aimed at protecting and, when possible, increasing cost-effective programs for human development and reducing poverty (such as generally accessible health, education, and social security programs); a tax system that ensures a fair distribution of the tax burden; and well-targeted social safety nets to mitigate negative effects of economic reform on vulnerable groups.

Good governance and participatory development: effective governance involves such diverse elements as publicly accountable institutions for formulating and executing the budget, efficient tax administration and public expenditure management, prudent banking supervision, a transparent foreign trade and exchange regime, and a fair and transparent legal and regulatory framework. Transparency and checks and balances, at both the political and administrative levels, can help limit the influence of special vested interests.

There is a broad consensus among governments and in the international community on the importance of most of these elements. But translating them into concrete policies and priorities involves difficult choices concerning income distribution, as well as present and future consumption and investment. Consensus building often involves disseminating information, explaining policies to the general public, and, where appropriate, decentralizing the decision-making and implementation process. It is critical that key players—especially people at the grassroots level—have a stake in economic policymaking, and that the social policies are compatible with administrative capacity.

Note: Reprinted, in part, from Social Dimensions of the IMF’s Policy Dialogue, IMF Pamphlet Series, No. 47 (Washington: IMF, 1995), pp. 3–8, which was prepared by the staff of the Expenditure Policy Division of the Fiscal Affairs Department and the Policy Development Review Department of the IMF.

The IMF created new facilities that emphasized structural reforms set in a medium-term context: the Extended Fund Facility (EFF) in 1974, and two concessional lending facilities—the Structural Adjustment Facility (SAF) in 1986, and the Enhanced Structural Adjustment Facility (ESAF) in 1987—for the benefit of low-income countries. The latter facility was extended and enlarged in 1993.

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