Social services


IMF’s focus on austerity proved “wrong, wrong, wrong”, say critics

21 November 2011

While Christine Lagarde and staff at the Fund begin to acknowledge that too much austerity is risking jobs and growth and civil society groups call for an end to IFIs policy conditions, IMF programmes continue to promote fiscal retrenchment.

The IMF special report for the October G20 finance ministers’ meetings, Global Economic Prospects and Policy Challenges, suggested that austerity measures may have gone too far (see Update 77, 76, 75). The report stresses that advanced economies “have scope to slow their current pace of consolidation, if offset by a commitment of additional tightening later,” and concludes that “the path to recovery has narrowed, but the path is still open, if action is taken now.” US-based economist Paul Krugman argues the IMF’s report “is essentially a declaration that the focus on universal austerity was wrong, wrong, wrong”, and might be a sign that economists at the Fund “are rightly frightened by the economic outlook.”

This comes just one month after Christine Lagarde said that “consolidating too quickly can hurt the recovery and worsen job prospects.” Owen Tudor, from the UK Trade Union Congress, argued that Lagarde is still placing too much stress on deficit reduction, “possibly simply to avoid too much distance from the governments who pay her wages … or she is being too coded with calls for ‘medium term’ strategies when she really means ‘spend now, but set out how you will pay later’.”

the current wave of fiscal consolidation threatenschildren and poor households

Kemal Derviş, former Turkish finance minister, said that “One should beware … of a naive version of the ‘stimulate now, retrench later’ argument.” Derviş believes that “stimulate now and announce future retrenchment can be the answer … but the retrenchment must not create anxiety about the future that would nullify the stimulus.”

Austerity threatens children

Continuing previous debates on the impact of IMF programmes on social spending (see Update 74, 72), an August IMF staff discussion note presented an econometric analysis of the impact of IMF programmes on health and education spending in low-income countries (LICs). The study, which uses data between 1985 and 2009 for 140 countries, finds that LICs’ education and health spending as a proportion of GDP has “risen during IMF-supported programmes at a faster pace than in developing countries as a whole.” It showed no impact of IMF programmes on such spending in middle-income countries.

However, the technical grounds of the study were criticised by Brook Baker, policy analyst at US-based NGO Health GAP, who pointed out that “if the absolute value of GDP (Gross Domestic Product) and/or government spending went down or remained stagnant as a result of structural adjustment and fiscal austerity, then stable or slightly increasing percentages might not represent the positive changes on real spending that might have resulted from more robust and expansionary fiscal and monetary policy.” Baker also underlined the fact that the study “finds modest evidence of positive association (between IMF programmes and social spending), but only in LICs”, and argued that “the IMF’s macroeconomic fundamentalism and its impact on health has to be judged not just against a cohort of even weaker performing LICs, but against what was possible if the IMF had been less dogmatic and more accommodating of more expansionary economic policies that increased investments in health, education, job creation, and more egalitarian and sustainable economic development.”

Meanwhile, a September report by UNICEF warns that “the current wave of fiscal consolidation that is taking hold of developing countries … threaten[s] children and poor households’ survival, nutritional growth and other rights.” The report, which examines the latest IMF government spending projections for 128 developing countries, points out that although most countries introduced fiscal stimulus packages during 2008 and 2009, since then “the scope of austerity has widened quickly, with 70 developing countries reducing total expenditures by nearly 3 per cent of GDP, on average, during 2010, and 91 developing countries expected to reduce annual expenditures in 2012.”

In order to identify the different adjustment options considered by governments, the study also reviews policy discussions and other information contained in IMF country reports between January 2010 and September 2011. It finds that an increasing number of countries are considering adjustment measures like “wage bill cuts/caps, subsidy reversals and rationalising social protection schemes in order to achieve cost-savings; many governments are also considering introducing or increasing consumption taxes on basic products that vulnerable populations consume.”

Conditionality: NGOs vs IMF

NGOs and the IMF remain at loggerheads over a study on conditionality being conducted by the Organisation for Economic Co-operation and Development (OECD), a rich countries’ think tank. The OECD task team on conditionality (TToC) is reviewing the experience of conditionality reform after the 2005 Paris declaration on aid effectiveness. It will submit reports ahead of the late November 2011 Busan High Level Forum on Aid Effectiveness. Early in 2011, a draft overview report for the TToC by development consultancy Mokoro, found that “the available evidence suggests that restrictive macro-economic policies have meant that African economies have elected to save a significant share of increased aid flows instead of absorbing them in increased public expenditure or private sector growth.” Leaked emails show that at the insistence of the IMF, the TToC’s final version of the report was drastically altered with a watered-down recommendation that the process of setting macro-economic targets should be opened up to broader discussion.

In late September, Better Aid, an umbrella organisation of over 1,000 civil society organisations working on development effectiveness, sent a letter to the task team expressing their “concern about the decision of the chairs of the TToC not to submit any message on conditionality for inclusion in the draft Busan outcome document” and called for “an end of donor and IFI implicit and indirect policy conditions.”

Pakistan’s rejection of an IMF loan in late October shed light on the problems behind IMF conditionality. As pointed out in a November article by Nancy Birdsall, Milan Vaishnav and Danny Cutherell, all at the Centre for Global Development, published in Foreign Policy magazine, “attempts by the civilian government to lower subsidies or raise taxes have been met over the past year with street protests and threats of further upheaval, and unsurprisingly, resistance on the part of the legislature.” The authors conclude that “the IMF saga makes clear that that leverage just doesn’t exist. Using economic aid to push weak civilian governments into political steps they cannot take (unless they are willing to give up power altogether) doesn’t work.” This confirms previous studies of IFI conditionality (see Update 64, 60).

G20 urges IMF to set up new lending window

At their summit, G20 countries asked the IMF to set up a new short-term lending window, called the Precautionary and Liquidity Line (PLL), which Lagarde said would “provide increased and more flexible short-term liquidity to countries with strong policies and fundamentals facing systemic shocks.” The only apparent difference with the Flexible Credit Line (FCL), which the IMF established in 2009 (see Update 65), is that the loans would be over a six-month period. The FCL was originally designed with a term of either six months or one year, but this was changed in August 2010 to be a term of either one or two years (see Update 72). Media reported that the PLL would have a borrowing limit of five times quota, half of the implicit limit of ten times quota that the FCL had. Given its design characteristics, the PLL seems targeted at non-eurozone countries that might be negatively affected by a renewed recession in Europe.