A report released in September by NGOs ActionAid, Global AIDS Alliance, Student Global AIDS Campaign and RESULTS Educational Fund puts into sharp focus long-standing criticism of the IMF’s prescriptive fiscal targets for some of the world’s poorest countries. The Fund argues that it contains “allegations, errors and misconceptions”.
Blocking Progress: How the Fight Against HIV/AIDS is Being Undermined by the World Bank and International Monetary Fund highlights how IMF loan conditions demanding low inflation and tight budget ceilings constrain public spending towards HIV/AIDS. The IMF’s bias towards low inflation is questioned. The paper argues that there is no consensus among economists on what level of inflation undermines economic growth.
While underscoring the importance of macro-economic stability, the report cautions against the Fund’s preoccupation with keeping inflation low through reduced public sector spending. The authors’ question who should make the judgement over trade-offs and assert the primacy of local policy alternatives and spending priorities.
They quote a US General Accounting Office report which cautioned: “policies that are overly concerned with macroeconomic stability may turn out to be too austere, lowering economic growth from its optimal level and impeding progress on poverty reduction”.
The report cautions that anticipated increases in HIV/AIDs funding are likely to meet resistance from the IMF owing to rigid budgetary ceilings. This is magnified by the Fund’s ‘signalling’ role: other donors will not lend without prior Fund approval. The authors say the Bank is complicit with austere Fund budgetary policies.
The report makes the point that although the IMF claims that higher government spending will lead to higher inflation, much of the research used to justify this claim is based on the experiences of industrialised countries. There is no empirical evidence that this is actually the case in poor countries. The study cites evidence from a 1995 study on the link between inflation and economic growth. It found that levels of inflation of up to 20% did not necessarily harm economic growth in the long term. They also give the examples of Latin America, Japan and South Korea in the 50′s, 60′s and 70′s respectively, where high growth accompanied double digit inflation.
Former IMF adviser and Columbia University economist, Jeffrey Sachs, wrote an open letter to the Ugandan government in 2002 arguing that finance ministry concerns over appreciation of the Ugandan shilling were unsubstantiated. Sachs pointed out, “the risks of currency overvaluation from donor-financed health spending are way overblown. I don’t know of a single country where increased donor-financed health spending to respond to epidemics such as HIV/AIDS has been a trigger for macroeconomic instability. On the contrary, there is real and shocking macroeconomic instability caused by the failure to respond to such epidemics”. The Fund denies that Uganda nearly rejected funding for HIV/AIDS in spite of media reports to the contrary.
Speaking from both sides of their mouths?
To the question of whether programmes supported by the IMF and World Bank prevent countries from accepting external grants, the Fund argues that “higher levels of external grants and their more effective use are important elements of the Monterrey Consensus to fight poverty and reach the Millennium Development Goals (MDGs) in low-income countries”. Adding “the IMF seeks to help member countries increase their capacity to absorb and manage higher grant flows”. They suggest that the buck stops with countries on how best to manage aid but with the all important caveat “consistent with long-term economic stability, sustainable growth and poverty reduction”.
To enhance absorptive capacity, the Fund proposes strengthening planning and monitoring capacity in line ministries, improving public expenditure and financial management systems, and addressing governance deficiencies and infrastructure bottlenecks. The NGO report makes the argument that Fund conditions which restrict public sector spending constrain absorptive capacity. Peter Heller, deputy director of the fiscal affairs department of the IMF denied there was any legitimate criticism of the IMF in its dealings with poor countries facing HIV/AIDS: “certainly no IMF ceiling has prevented the employment of nurses in Kenya or Uganda or elsewhere, as has been alleged by some”.
Arguing that the Fund’s core mandate is to help countries achieve and maintain macroeconomic stability, he confirmed that “we can’t support a policy programme that implies a high rate of inflation”. However, he was quick to add this did not imply lack of flexibility. Arguing that there are limits, he restated that once inflation starts rising above “a certain level, it becomes injurious to the prospects for real economic growth”.
The NGO report recommends that G7 governments:
Should have clear positions on flexibility on inflation targets that would allow higher levels of public spending;
Should provide technical advice that allows developing countries greater ability to consider macro-economic scenarios and make trade-offs;
Must not take positions at the IMF board that would undermine efforts to address HIV /AIDS and other health crises.