3 New Reports Suggest IMF Policies Undermine Efforts on HIV/AIDS, Health and Education

[Guest guest]

From: Rick Rowden

[mailto:Rick.Rowden@...]

3 New Reports Suggest IMF Policies

Undermine Efforts on HIV/AIDS, Health and Education

(Apologies for

cross-postings…)

The International Monetary Fund’s mission is to keep inflation

under control and insist that low-income countries maintain “macroeconomic

stability” at all costs. Access to World Bank aid and other bilateral

foreign assistance is contingent upon a “thumbs-up” approval signal

from the IMF on a country’s macroeconomic policies. But is the

IMF’s traditional mission still compatible with the imperatives of poor

countries today? Are its economic policies attached as conditions on its loan

programs so cautious and restrictive that they are blocking the needed

scaling-up of public spending that will be required to accept more aid and

achieve the Millennium Development Goals (MDGs)? Are the IMF’s policies

blocking efforts to scale-up spending to the levels needed for effectively

fighting HIV/AIDS and other preventable and treatable diseases? Three

recent reports by the IMF’s Independent Evaluation Office, the Center for

Global Development and ActionAid International’s Education Team examine

these issues and weigh in on the debate, all suggesting that the

IMF’s policies are restricting the ability of low-income countries

to scale-up public spending to hire the numbers of doctors, nurses and teachers

projected to be necessary to meet their development goals:

1. The IEO Report:

A new report by the IMF’s Independent Evaluation Office (IEO) on

“The IMF and Aid to Sub-Saharan Africa,” examined IMF loan programs

to 29 Sub-Saharan African countries between 1999-2005. On page 9 was a finding

that has alarmed aid advocates: significant percentages of foreign aid to these

countries during these years were not programmed to be spent because of 2

particular IMF policies on currency reserve levels and inflation rates. The

report noted that about 37 percent of all annual aid increases to these

countries in these years was diverted into building internationally currency

reserve levels (see Figure 2.2, p.9). The report also found that, among

countries perceived to already have sufficient currency reserves, only about $3

of every $10 in annual aid increases was programmed to be spent, and up to $7

out of every $10 was redirected and diverted by IMF into either paying down

domestic debt, building up international currency reserves, or both (see Figure

2.3 on p. 9, with a further elaboration of this data on Pages 42-44). In both

cases, having so much of the new aid increases not being spent was certainly

not the intention of the donors, or citizens in donor countries.

According to the IEO report, the “main driver” here in

decisions to curtail spending of the aid was the IMF’s insistence on very

low levels for inflation. Countries who had failed to comply with the IMF’s

instance on getting inflation down to 5-7 percent a year were only allowed to

spend 15 percent of their annual aid increases, or just $1.50 of every $10 in

annual aid increases by donors. Speaking at a seminar in London on April

2, 2007, the lead author of the report, Joanne Salop, said the IEO report team

recommended that since the 5-7 percent threshold was, in fact, the operative

policy of the Fund, it should be publicly stated and clarified—but the

IMF Executive Board and management rejected the recommendation.

As part of the larger context for the IMF’s tight monetary

policies, one of the major overarching findings of the IEO report was that the

IMF Executive Board and senior management were never really enthusiastic about

the emphasis placed by donors on “poverty reduction” or the new

efforts to scale-up aid and spending for the MDGs. Without strong leadership

directing any real policy changes in this regard, the IEO report found, the

staff simply reverted to prioritizing macroeconomic stability over other goals.

The important implication of this finding for aid advocates is that there is a

contradiction happening within the leading donor governments between enabling a

“scaling up environment” on the one hand while enforcing rigid macroeconomic

stability and spending restraint on the other hand.

For the IEO report: http://www.ieo-imf.org/eval/complete/pdf/03122007/report.pdf

For responses by alarmed aid advocates, see ActionAid’s

newsletter: http://www.actionaidusa.org/pdf/PoliciesandPriorities-IFIs-Spring2007issue-1008.pdf

2. The CGD Report:

A new study by Washington DC-based Center for Global Development titled,

“Does the IMF Constrain Health Spending in Poor Countries? Evidence and

an Agenda for Action,” was produced by the CGD Working Group on IMF

Programs and Health Spending and chaired by Mr. Goldsbrough. The working

group included 15 experts drawn from policy-making positions in developing

countries, academia, civil society, and multilateral organizations. The study

explored criticisms of the IMF’s macroeconomic policies and the impact

they actually have on health spending in low-income countries, supported by

in-depth case studies from Mozambique,

Rwanda, and Zambia. On

fiscal policy (deficit-reduction targets), the report found: “The

evidence suggests that IMF-supported fiscal programs have often been too

conservative or risk-averse. In particular, the IMF has not done enough to

explore more expansionary, but still feasible, options for higher public

spending.” On monetary policy (inflation-reduction targets), the report

noted: “Empirical evidence does not justify pushing inflation to these

levels in low-income countries.” Among its many recommendations, the CGD

report called on the IMF to “help countries explore a broader range of

feasible options,” and with “less emphasis on negotiating

short-term program conditionality.”

For the CGD study: http://www.cgdev.org/doc/IMF/IMF_Report.pdf

3. The ActionAid Education Team

Report: A new report by ActionAid’s multi-country

International Education Team builds on previous research and new in-depth

country case studies from Malawi, Mozambique and Sierra Leone:

“Confronting the Contradictions: The IMF, wage bill caps and the case for

teachers.” ActionAid found that a major factor behind the chronic and

severe shortage of teachers is that IMF policies have required many poor

countries to freeze or curtail teacher recruitment. The IMF may have varying

degrees of influence in directly setting the level of funds available for wages

of public sector employees, or the “wage bill ceilings.” However,

by insisting on overly-restrictive macroeconomic policies that unnecessarily

constrain overall government spending in national budgets, and thus constrain

sector budgets and public employees’ wages, the IMF is in part

responsible for the persisting teacher shortage. In all three countries

examined, the wage bill ceiling is too low to allow the governments to hire the

teachers they need to achieve the pupil-teacher ratio (PTR) of 40:1 recommended

by the Education for All - Fast-Track Initiative (EFA-FTI). There is

considerable evidence that the current ceilings compromise the quality of

education in each of these countries. However, because the specific

inflation-reduction and deficit reduction targets in the IMF loan programs are

already constraining the size of the overall national budgets at unnecessarily

low levels, even if the formal wage bill ceilings are removed, money available

for the public sector wages is still effectively constrained. The wage bill

ceiling is only a symptom of a deeper problem: it’s the inflation and

deficit targets that must be changed.

Led by Akanksha A. Marphatia, the ActionAid International Education Team

report highlighted that there is a growing policy contradiction at work in the

foreign aid system and it is undermining education goals around the world: At

the same time as the richest donor countries are trying to scale-up spending

and foreign aid for education with one hand, they are also blocking the ability

of many poor countries to spend that aid because of IMF loan programs

they’re approving with the other hand. This presents a

contradictory set of policies that are working at cross-purposes. The ActionAid

report called on education advocates and donors to deal with resolving the

contradiction. The IMF issued a public response to the report on its website,

and ActionAid’s Education Team responded.

For the new ActionAid report: http://www.actionaidusa.org/imf_africa.php

For the IMF response: http://www.imf.org/external/np/vc/2007/051707.htm

For ActionAid’s point-by-point rebuttal to the IMF: http://www.actionaid.org/main.aspx?PageID=652

Implications of the 3 New Reports

The IEO report showed that a significant amount of foreign aid was not

being programmed to be spent by the IMF because of two of its policies on

reserve levels and inflation rates. The CGD study found that there is no

empirical evidence to justify one of those policies, that on low inflation.

Taken together, the two reports suggest that a major amount of foreign aid is

not being spent because of a policy that is not adequately based on empirical

evidence. This is, of course, unacceptable to aid advocates.

While the CGD report documented that there is no empirical evidence to

justify driving inflation from moderate levels (10-20 percent) down into the

signal digits, the ActionAid report noted there are concerns about the negative

consequences of policies that may be unnecessarily restrictive: “Many

studies claim that squeezing economies through low single-digit inflation rates

in order to reduce demand and government spending has actually resulted in

slower growth for the poorest countries.” (pp.12-13).

Concerns about the negative impact on growth caused by

overly-restrictive policies in IMF loan programs were raised in a report by the

US Government Accountability Office (GAO). The report noted that while there is

a “substantial grey area” between those policies that may be

considered too austere and those that cause macroeconomic instability, it

warned, “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.” These concerns were

also noted in the findings of a major 2005 World Bank study on “Lessons

from the 1990s,” led by o Zagha, which noted that, “the

search for macroeconomic stability, narrowly defined, may in some cases have

actually been inimical to growth,” and that doing so came “at the

expense of growth enhancing policies such as adequate provision of public

goods, as well as social investments that might have both increased the growth

payoff and made stability more durable.” If IMF policies are unnecessarily

restricting optimally higher GDP growth rates just in order to get inflation so

low, and the levels of public spending, investment and employment of doctors,

nurses and teachers are being unnecessarily constrained as a result, then

health and education advocates must weigh in on this issue and demand a

resolution to this problem.

All 3 reports found that the IMF was not considering alternative

policies or scenarios, and all of the reports, in their own ways, called for

the IMF to broaden the scope for consideration of alternative macroeconomic

policies and scenarios, including more expansionary policy options. The IEO

report recommended: “The Executive Board should reaffirm and/or clarify

IMF policies on the underlying performance thresholds for the spending and

absorption of additional aid, the mobilization of aid, alternative

scenarios…and pro-poor and pro-growth budget frameworks.” (p.33).

The CGD report recommended: “The IMF should help countries explore a

broader range of feasible options for the fiscal deficit and public spending.

This requires less emphasis on negotiating short-term program conditionality

and a greater focus on helping countries strengthen their understanding of the

consequences of different options…The IMF should be more transparent and

pro active in discussing the rationale for its policy advice and the

assumptions underlying its programs.” And the ActionAid report

recommended: “The IMF should stop attaching specific policy conditions to

their lending and surveillance programmes, including on inflation levels,

fiscal deficits and wage bills. Any advice they give must provide a range of

policy options to enable governments and other stakeholders – including

parliaments and civil society – to make informed choices about macroeconomic

policies, wage bills and the level of social spending.”

Reasonable Options for More Doctors, Nurses and

Teachers Not Being Considered

Many more doctors, nurses and teachers could be hired this year, and

into successive years, but they will not be, unless the current policies

change. Here’s why: the IMF’s narrow mission is like an

accountant--it is always looking for budgets to maintain short-term fiscal

solvency on a permanent ongoing basis, thereby omitting any possibilities for

countries to ever embark on large up-front public investments in health or

education that would require running budget deficits over a number of years.

Often the multiplier benefits of major investments in public health and

education can take 15 to 20 years to manifest in the form of higher GDP growth

and productivity rates. Each macroeconomic policy option has its own short-term

and long-terms costs and benefits, but because the IMF is always demanding

short-term fiscal solvency at any given time, many reasonable alternative

macroeconomic policy options for hiring more doctors, nurses and teachers or

making long-term investments in the health or education systems are not even

being allowed for consideration or debate.

Regarding the “grey area” of alternative policy options

between those that may be considered too austere and those that cause

macroeconomic instability, the IMF Executive Board has been operating from one

narrow end of this range of possibilities by insisting on extremely restrictive

policies. In so doing, it has been prohibiting other reasonable options and

increased-spending scenarios from being explored or considered. Public health

and education, HIV/AIDS and other MDGs advocates are going to have to address

this problem with their governments and legislators so that finance ministries

and the IMF can be brought into compliance with the scaling-up agenda, and a

broader range of more ambitious spending and investment policies are permitted

for consideration by policy makers and public stakeholders.

A July 4, 2005 New York Times editorial appropriately summarized the

current contradiction in donor policies: “There is a desperate need for

greater policy coherence in a period when many national governments, including

Washington, are sensibly exhorting African governments to spend more on primary

health care and education while international financial institutions largely

controlled by those same Western governments have been pressing African

countries to shrink their government payrolls, including teachers and health

care workers.”

Cases in Point: US Executive Director

at IMF on Loans to Sierra Leone

and Malawi---Ideology

over Evidence

In a classic display of what Amartya Sen called “anti-deficit

radicalism,” the IMF loan programs for both Sierra Leone and Malawi

programmed deficit-reduction targets that will seek to nearly balance their

budgets over the next few years, despite the fact they both countries have

massive unemployment and underemployment problems and immense development

needs. Both IMF programs also contain inflation-reduction targets that are

seeking to drive inflation from the mid-teens down into the middle

single-digits over the next couple of years. Achieving both of these policy

targets involves public spending constraints that are unnecessarily

restrictive. Doctors, nurses and teachers that might otherwise be employed will

not be.

At meetings with civil society advocates, economists, parliamentarians

and finance ministry officials in Freetown and Lilongwe in the fall of 2006, ActionAid was asked to seek

clarification from the US

about why such unnecessarily restrictive fiscal and monetary policies were

approved in their respective IMF loan programs. At a January 2007 meeting with

ActionAid, the US ED to the IMF, Ms. Meg Lundsager, explained that they

“didn’t trust” the governments in either country to engage in

any productive or efficient deficit spending, so they went along with approving

IMF deficit-reduction targets that basically blocked those countries from being

able to do so. The cost of such a position in terms of foregone jobs for more

doctors, nurses and teachers, and/or foregone capital investments in the health

and education systems, is tremendous. The US ED also suggested that any deficit

spending would “crowd out” available credit for the private sector,

this despite mounting evidence for the reverse, as noted by IMF’s Sanjeev

Gupta, et al, that, depending on the nature of the public investments, public

spending can actually have a “crowding-in” effect that creates new

opportunities for private investment (“Macroeconomic challenges of

scaling up aid to Africa: a checklist for practitioners,” IMF, 2006.

p.26).

On driving inflation down to the middle single-digits, when asked for the

basis for doing this, and after reviewing hard copies of all of the empirical

evidence that shows there is no justification for pushing inflation to these

levels in low-income countries, the US ED said she “didn’t

care” that there was not substantial evidence for driving inflation so

low, and that the US simply “believed” that inflation should be

this low, and that’s why they approved the IMF loans for Sierra Leone and

Malawi with such unnecessarily restrictive inflation-reduction targets.

For health and education advocates who are trying desperately to

maximize budgets, wages and get every last doctor, nurse and teacher hired,

such faith-based economic policy-making is totally unacceptable. An array

of reasonable alternative policy options for increasing public spending is

being unnecessarily omitted from consideration. US aid advocates should engage

the US Congress and US Treasury Secretary Henry son about US actions being

taken at the IMF, and call for the IMF to broaden the scope for consideration

of alternative macroeconomic policies and scenarios, including more

expansionary policy options. Others should engage with their finance ministries

and legislators call on their governments to take similar actions at the IMF.

For more background information on these issues, or for information

about ActionAid’s Multi-Country Economic Literacy and Advocacy Project

that is bringing together health and education advocates with economists to

learn about alternative macroeconomic policies in Sierra

Leone, Kenya,

Malawi and the United States,

contact:

Ms. Rose Wanjiru in Nairobi,

Kenya at: Rose.Wanjiru@...

Mr. Zombo in Freetown,

Sierra Leone

at: Zombo@...

Mr. Rick Rowden in Washington DC,

USA at: Rick.Rowden@...

Ms. Julita Nsanjama in Lilongwe, Malawi

at: Julita.Nsanjama@...

Rick Rowden

Senior Policy Analyst

ActionAid International USA

1420 K Street NW, Suite 900

Washington DC 20005 USA

Tel: (202) 835-1240

Fax: (202) 835-1244

www.actionaidusa.org