Social services


IMF economic policies under fire

Hiding the conditionality problem

15 February 2010

While the political agenda at the IMF is shifting back to mandate and governance reform, there are growing calls that the Fund needs to fundamentally rethink the monetary and fiscal policies it demands of borrowers if the institution is to retain legitimacy and renew its mandate.

An end January report from Action for Global Health UK and the Stop AIDS Campaign examines nine country programmes, chosen based on the countries’ high HIV/AIDS prevalence, to assess the whether the IMF’s policy requirements create enough space for countries to scale up health interventions. While praising the IMF programme in Uganda for actually stopping the finance ministry from making deeper cuts, the study finds that “despite rhetoric of change, and claims of increased flexibility, IMF policies in programme countries still lead to overly tight macro-economic practices with severe impact on government’s ability to invest in public health.” A raft of recent reports have criticised the IMF’s overly austere economic policies, finding that the IMF was being less flexible than needed in its crisis response programmes (see Update 68, 67).

It is not just NGOs that have been critical; the flagship annual report of the UN economic agencies, the World Economic Situation and Prospects 2010, has also faulted IMF policies. Released in December, it found that “despite pronounced intentions, many recent IMF country programmes contain pro-cyclical conditions that can unnecessarily exacerbate an economic downturn in a number of developing countries. Indeed, amid sharply falling global demand, the Fund has been advocating belt-tightening for many developing programme countries. At the same time, it has been praising advanced economies for their unprecedented efforts in borrowing and spending their way out of recession. The IMF should expand the use of its resources to help support counter-cyclical measures in those developing countries that have sustainable public finances in the medium-term but are impeded in this effort by adverse market conditions.”

IMF policies in programme countries still lead to overly tight macro-economic practices

Further, UNESCO’s  Education For All Global Monitoring Report 2010, which tracks commitments to aid for education, cautions that the IMF’s programmes might create deflationary pressure, reducing the fiscal space needed to scale up education spending. It questions whether the Fund’s commitment to flexibility will be sustained in 2010 and recommends that “in drawing up loan conditions, IMF staff should be required to report explicitly on consistency with the financing requirements for achieving the core Education for All goals by 2015.”

Continued tightening for most

These debates may seem abstract, but some policy makers are being forced to slash public services in order to meet Fund prescriptions. The IMF’s claimed flexibility is up for debate, especially as most programmes in developing and transition countries require public spending in 2010 to drop below pre-crisis levels at the same time as the Fund is warning rich countries not cut off fiscal stimulus too early because it could jeopardise recoveries.

Serbia’s 150,000 public sector workers stepped up pressure on the government in January, seeking higher pay in a year when wages must stay frozen if the country’s €3 billion ($4.1 billion) loan from the IMF is to remain on track. The IMF representative to Serbia, Bogdan Lissovolik responded that the Fund agreement with Serbia envisages pensions and salaries in the public sector remaining frozen in 2010. Additionally, he cautioned against the increase in the public deficit associated with wage rises, and suggested that more effort should be put into public sector staff cuts and privatisation.

The IMF approved a stand-by arrangement of $1.25 billion for Jamaica after the government met IMF demands on privatising Air Jamaica, which the Fund says weighs heavily on the government’s finances. Jamaica’s prime minister stated in November that there is no alternative to an IMF rescue package, and called for Jamaicans to be prepared for a rough recovery. The programme will require public spending cuts and financial system reforms.

Latvia’s parliament voted in early December to shrink its 2010 budget by 500 million lats (€700 million) with spending cuts, including a 40 per cent public wage cut, and tax increases in order to secure the next tranche of its €7.5 billion rescue package that is being financed mainly by the IMF, EU, and World Bank (see Update 68, 67, 66). The plan was later derailed by a constitutional court decision that ruled that public sector pension cuts were unconstitutional, adding an extra 180 million lats back into the budget. The IMF reportedly agreed to allow the pension payments without offsetting public spending cuts in 2010.

The IMF and EU said they were likely to unfreeze a €20 billion bailout loan to Romania after the parliament pledged to curb its budget deficit. The joint IMF, EU and World Bank bailout was suspended in October after the Romanian parliament dismissed the government, partly over tough spending plans demanded by the lenders (see Update 68). In addition to cutting 100,000 public sector jobs, in early February the new government committed to reform its pension system including raising the retirement age and scrapping some pension categories.

Exploring alternatives for some

Sierra Leone was one of the few African countries to defy even the looser IMF policy advice on deficits and inflation by embarking on a fiscal stimulus that focussed on labour-intensive infrastructure. Professor John Weeks, an economic advisor the Sierra Leonean finance minister Samura Kamara, helped draft a policy package for the country that combined these higher deficit policies with monetary easing in the form of printing money, and called for “donors and the IMF to grant it ‘policy space'”.

Likewise, Uzbekistan is now being praised by analysts for its resistance to dominant policy prescriptions. The pre-crisis IMF economic report on the country faulted the Uzbeks for their heavy financial sector intervention, trade restrictions and exchange rate management. But now the country is being hailed as a heterodox success story in a paper from the Centre for Development Policy and Research at the University of London. Even members of the IMF board had to revise their opinion when they visited the country in October 2009. The IMF executive directors announced that “Uzbekistan has remained mostly resilient to the global economic crisis as a result of the authorities’ prudent policies that enabled them to accumulate considerable resources to support growth in this period and withstand the impact of the crisis and due to its cautious approach to participation in global financial markets.”

Debating the tenets of economic policy

A new book released in December, The deadly ideas of neoliberalism: How the IMF has undermined public health and the fight against AIDS, challenged the Fund’s approach to economic policy. It argues that “IMF fiscal and monetary policies are tantamount to ‘health repression’ and are undermining global health goals, and that public financing to support health systems needs to be ‘liberated’ from such constraints through the freedom for developing countries to use more expansionary fiscal and monetary policy options.”

In an exchange of views on the IMF’s website, the book’s author Rick Rowden criticises the IMF for continually failing to grasp health campaigners’ main critique: that the IMF’s “underlying ideological disposition … prioritises short-term financial sector variables in macroeconomic policy to the subordination or neglect of real sector variables, such as long-term developmental goals, industrialisation, higher employment or increased public investment.”

The IMF staff’s response emphasises that the Fund has shown flexibility on fiscal and monetary targets during the course of the financial crisis and that the “objective of IMF-supported programmes is to promote high and sustained growth, which will improve the well-being of the poor and create fiscal space for increasing priority spending, including on health.”

Much of the criticism comes down to a lack of consensus over what is ‘macroeconomic stability’. Critics such as Rowden believe that the IMF’s preference for single-digit inflation and low-single-digit fiscal deficit targets is not supported by the peer-reviewed economics literature. A US Congressional committee wanted an answer on the issue and commissioned the independent US Government Accountability Office (GAO) to examine it. They published their report in November 2009, but it immediately drew criticism.

The report concluded that “empirical evidence generally suggests inflation is detrimental to economic growth after it exceeds a critical threshold, which is broadly consistent with the inflation targets included in the IMF-supported programmes reviewed.” However this judgement is based on comparing IMF targets to only six studies. Despite listing 16 papers in the bibliography, the GAO only analysed nine studies published since 1999 in the text of the report. To judge the IMF targets as consistent, they simply dropped three of the nine studies “since two of the three estimates outside the 5 to 12 per cent range are likely due to methodological issues and the remaining estimate (17 per cent) is from a June 2009 study that addresses a number of the methodological issues in the existing literature but has not been peer reviewed.” Buried in this footnote is the admission that “this exercise is not meant to imply that literature is conclusive.”
The UN is also critical of the theoretical underpinning of much of the IMF advice: that inflation is bad for the poor. In its World Social Situation 2010 report, which was released in January, the UN Department for Economic and Social Affairs argues that the one-sided fight against inflation ignores the impact of employment creation, the net debtor position of most of the poor, and the negative consequences of tight monetary policy and reduced social spending during recessions. “Focusing on inflation and fiscal deficits alone reflects too narrow a view of stabilisation. Therefore, stabilisation needs to be defined more broadly to include stability of the real economy, with smoothened business cycles and reduced fluctuations of output, investment, employment and incomes. Achieving such stability of the real economy may require larger fiscal deficits and higher rates of inflation than prescribed by the conventional macroeconomic policy mix, especially in the face of economic shocks or natural calamities.”