Poverty, Social Spending, And IMF Programs: Myth vs. Reality

An oft-repeated claim is that the IMF is responsible for increasing human misery in the developing countries in particular by forcing countries to cut spending on programs like health and education. But riots and repetition do not make such claims true. At best, such accusations are out of date; at worst, they are ideological grandstanding.

The record, indeed, is clear: in 66 countries with IMF programs, between 1985 and 1998, per capita spending on health and education rose by over 2% per year after inflation. These numbers reflect the fact that IMF advice to countries facing budgetary pressures emphasizes the importance of sustaining expenditures on health and education. The Fund urges that savings be found in unproductive spending — meaning excessive military spending, subsidies for the well-to-do, and inefficient administrative practices. Indeed, military spending (in the 41 countries where the IMF has data) fell by almost 1% of GDP between 1993 and 1997.

Low-income countries have posted larger gains in health and education spending than other countries under IMF programs. This difference will become even more pronounced as increasing amounts of debt relief are delivered under the Initiative for Heavily-Indebted Poor Countries (HIPCs), because a principal condition for this assistance is that the money saved is channeled into poverty reduction.

In the past year, 10 of the 41 eligible countries have been granted debt relief under this initiative; we expect another 10 to start receiving debt relief by the end of this year. Early participants like Bolivia and Uganda are seeing their debt service payments fall by as much as 1% of GDP, providing scope for a substantial increase in health and education spending. In Tanzania, next year’s budget provides for a 44% increase in poverty-related spending.

Twenty years ago, it may have been true that IMF fiscal policy advice focused on the bottom line of a government’s accounts. Over time, as it became increasingly clear that the burden of fiscal adjustment fell on those with the weakest voice, usually the poor, the IMF recognized that a focus on short-run fiscal results was inadequate. Since the late 1980’s, the Fund has regarded investment in human development as a way to promote sustained economic growth. Today, the IMF emphasizes protecting (or increasing) social expenditures for the poor, while making sure spending is well-targeted, and on improving governance mechanisms so that the voice of the poor is heard.

Of course, poverty reduction involves more than throwing money at the problem. The quality and composition of social spending is just as important as the amount that is spent.

Social spending should be targeted at the needy. In health and education, the poor often do not have good access to services. In many of the HIPCs, we find heavy spending on urban hospitals and higher education relative to basic health care and primary education. In these countries, only 14% of health and education spending benefits the poorest 20% of the population, while 30% of the spending goes to the richest 20%.

The need to target spending applies equally to social benefits. Indonesia had large subsidies for cooking oil and other widely-consumed products, largely benefiting the middle class. The IMF-supported program, despite heavy criticism, eliminated most of them. Instead, the money saved was plowed back into better-targeted subsidies, such as a grade of rice mostly eaten by the poor. To improve targeting to yield the largest possible reduction in poverty with the resources available, the IMF now expects all poor countries borrowing from the Fund to prepare comprehensive poverty reduction strategies.

Second, funds must be efficiently channeled to social expenditures. Losses through corruption or excessive spending on program administration need to be minimized. Here, improved transparency of government operations is vital. Nigeria’s IMF-supported program, for example, embraces the Poverty Reduction Initiative, which aims to use funds productively and to ensure that the public funds for poverty reduction are accounted for every quarter.

Finally, it must be recognized that for whatever reason even the best-intentioned policies do not necessarily translate into results. In countries with IMF programs, we know there have been positive outcomes. School enrollment rates rose by 1% per year, and more quickly for girls than for boys, narrowing the gender gap. Infant mortality fell by 22% per year, and even faster for children under five. Immunization rates rose by almost 5% per year.

Nevertheless, the IMF is not complacent, and seeks to ensure that policies deliver results. It is a truism that a country’s future is its people, and promoting better health and education outcomes may be one of the soundest economic decisions a country can make. Still, giving priority to education and health care should not be at the expense of other public programs such as sanitation and rural road-building that might be just as important for reducing poverty. We must not fail to see the forest for the trees.

Much remains to be done to improve the lot of the poorest of the poor. Indeed, there is much that we still don’t know about how to reduce poverty. In many countries, even reliable data about the current state of affairs is hard to come by. But the IMF is making every effort to help countries achieve the global objective of halving poverty by 2015, and, as the numbers show, this is not just talk.