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Social Dimensions of the IMF’s Policy Dialogue
IMF Pamphlet Series No. 47
March 1999
The IMF's growing emphasis on social policy issues has emerged from an explicit recognition that more importance must be attached to equity and the full development of human resources if reform programs are to be viable in the long run.
The IMF's mandate is to promote international monetary cooperation, the balanced growth of international trade, and a stable system of exchange rates. Fulfilling this mandate is the IMF's primary contribution to sustainable economic and human development. In pursuing it, however, the IMF likewise recognizes that macroeconomic viability must include policies to address social concerns--such as rising unemployment, malnutrition, and social marginalization--that arise in the context of macroeconomic stabilization and structural adjustment reforms. This realization reflects two broad trends that have manifested themselves since the late 1970s: the emergence of more open and participatory forms of policy-making involving the IMF with various elements of civil society (academics, religious leaders, business groups, labor unions, and NGOs); and a growing recognition that popular support for traditional adjustment programs is an essential precondition for their ultimate success.
Social Safety Nets
In the short term, the transition from an economy ridden with imbalances and rigidities to a high-quality growth path may hurt some of society's most vulnerable groups. Removal of generalized price subsidies on basic necessities or devaluation, for example, can cause real incomes of the poor to decline. Likewise, social instability can be triggered by reductions in budget subsidies to public enterprises and their restructuring, a lowering of protection following trade liberalization, and a downsizing of the government resulting in job losses.
To address such contingencies, IMF policy advice and technical assistance increasingly focus on incorporating cost-effective and financially viable social safety nets into reform programs--keeping in mind the country's needs, along with its institutional and administrative capacity. Possible measures include targeted subsidies and cash compensation (in lieu of generalized subsidies) to protect the poor from rising prices on basic food items; improved distribution of medicines and other essentials; temporary price controls for essential commodities; severance pay and retraining for unemployed civil servants; public works employment; and adoption of permanent social security arrangements.
Of course, social safety nets require financing. IMF-supported programs typically emphasize the importance of reducing, if not eliminating, unproductive public expenditures to generate money for such purposes. Reduced military spending constitutes an important endeavor to provide resources for both social safety nets and other social spending. In fact, between 1990-97, military outlays as a share of GDP in countries with IMF-supported programs remained below the worldwide average, particularly in countries with programs of more than a two-year duration. For 52 countries for which consistent data on military and social expenditures are available, between 1990-96 military spending declined by an average of 3.1 percent of total expenditure, while social outlays grew by 1.2 percent on average. In the 38 countries with IMF-supported programs included in this sample, military expenditures declined by about the same magnitude, but social outlays grew on average by about 1.5 percentage points of total expenditures.
Social Sector Spending
Fiscal adjustment is critical in the design of IMF-supported adjustment programs and in IMF policy advice on social issues. The composition of government expenditures reflects social priorities and such expenditures are being targeted more specifically to meet the needs of the poor. In the process, the IMF maintains a dialogue with the World Bank, United Nations agencies, and the International Labor Organization to identify key areas where public expenditure must be maintained or even increased if necessary--and where nonproductive spending (including military spending) can be reduced--so that investments in human capital, such as basic health care and primary education are not displaced. Through policy discussions and technical assistance, the IMF contributes to improving transparency in governments' decision making and their capacity to monitor social developments. As part of this effort, the IMF also focuses on social sector spending of member countries--in particular on health and education--in its surveillance and program activities. This focus reflects a recognition of the crucial link between the level and efficiency of health and education spending and economic growth.
Some Social Sector Measures
in IMF-Supported Adjustment Programs
Social efforts undertaken by member country authorities as part of IMF-supported
adjustment programs include the following:
Algeria. Strengthening the social safety net; reviewing the public works program regularly; conducting a survey to gain insight into the extent of poverty; and alleviating the severe housing shortage.
Armenia. Reorienting social expenditures toward the most vulnerable segments of the population; improving coverage of the social safety net; and reforming education and health.
Bolivia. Expanding the coverage and quality of basic education and health;
establishing a minimum pension for all Bolivians based on shares of capitalized public
enterprises.
Côte d'Ivoire. Implementing a comprehensive, multi-sectoral social strategy in favor of vulnerable groups and introducing a system for routine monitoring of poverty indicators.
Korea. Extending the coverage and increasing the minimum benefit level and duration under the unemployment insurance scheme; increasing social welfare assistance.
Mozambique. Reviewing the existing safety nets—a Poverty Assessment and Action Plan focuses on the expansion of primary and secondary education.
Thailand. Collaborating with the World Bank and the Asian Development Bank to provide support for temporary labor-intensive civil works programs, the establishment of a Social Investment Fund, extension of social assistance programs to protect the unemployed and a strengthening of education and health spending.
Yemen. Designing a social safety net program to generate employment for unskilled labor while upgrading infrastructure and social service facilities and maintaining expenditures for health and education.
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Recently, the IMF engaged in a review of social spending in a representative sample of 31 low-income countries that received support through the IMF's Enhanced Structural Adjustment Facility (ESAF) which provides concessionary finance to low-income developing countries. The results for the period 1986-97 indicate that these countries have made progress in raising public social expenditures and improving social indicators. This overall progress, however, masks considerable variation in experience across countries.
On average, for the entire group of countries, per capita real spending on education and health increased at an annual rate of 4.1 percent and 4.6 percent respectively, although much smaller gains were recorded in Africa. Over the course of the program, most social indicators in the sample countries also improved. On average, illiteracy rates declined by 2.6 percent a year, primary school enrollment increased by 1 percent a year, infant mortality declined by 1.3 percent a year, and life expectancy increased by 0.5 percent a year, while access to health care and safe water improved by 11 percent a year and 6 percent a year, respectively.
Can More be Done?
Despite significant progress, social policy implementation has been constrained in many countries by poor data and administrative capacity, weak political commitment, vested interests, and limited foreign assistance. What is needed is not only further improvement--including by the IMF in collaboration with others--of the design and implementation of social policies but also a strengthened capacity on their part to monitor, on a timely basis, the situation of the poor. Ultimately, regard for the human costs involved during adjustment is essential if adjustment efforts are to be successful.
Excerpted from the Official IMF Website. Please visit www.imf.org for more information.
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