How the IMF Restricts HealthEducation Sector Spending

1
How the IMF Restricts Health/Education Sector
Spending

• Prof. Brook K. Baker
• Northeastern U. School of Law, Program on Human
  Rights and the Global Economy
• Health GAP (Global Access Project)
• Health Alliance International Macroeconomic
  Literacy Training, June 19-20, 2008

2
Introduction

• IMF structural adjustment policies devastated the
  delivery of health, education and other social
  services in developing countries during the
  1980s and 90s.
• Although the IMF continues to claim that it has
  changed priorities and that it now focuses on
  poverty reduction, it key macroeconomic policies
  remain unchanged.
• IMF macroeconomic stability and fiscal restraint
  policies still prevent needed expenditures on
  health and education funded either from domestic
  or donor resources.

3
Introduction Contd

• New evidence documents that IMF policies restrict
  spending of new aid funds in sub-Saharan Africa.
• Independent and NGO critiques urge more
  expansive, pro-growth and pro-health/education
  policies .

4
Key IMF Assumption Macroeconomic Fundamentalism

• Macroeconomic stability and neo-liberal
  structural adjustments are first order priorities
  in developing countries.
• Inflation should be kept in check in the single
  digits, preferably below 5.
• Fiscal deficits should be kept very low
  ordinarily below 3.
• Foreign currency reserves should be kept high
  at least 2 ½ months of export earnings as a
  safeguard against commodity price shocks,
  currency fluctuations, and other shocks.

5
Key IMF Assumption Debt Should be Paid First,
No Default!

• Debt repayment always comes first.
• Debt should be kept at a sustainable level so
  that debtors do not default on public debt.
• Aid and domestic revenues should be spent on debt
  reduction, if possible, which over time will
  create more fiscal space for public sector
  spending.

6
Key IMF Assumption Wasteful Public Spending Must
Be Eliminated

• Government spending is largely unproductive,
  though there is growing recognition of benefits
  of government spending on infrastructure.
• Even productive government spending should be
  kept low so that it doesnt crowd out more
  pro-growth/productive private sector investment.

7
Key IMF Assumption Health Ed Spending is
Relatively Unimportant

• Health education spending are not productive.
• Spending in health and education has only
  increased by .5 and .9 respectively 2000-05.

8
Key IMF Assumption Health Ed Must Fit
Existing Fiscal Envelop

• The IMF has historically imposed conditionality
  on the public sector wage bill both in the form
  of wage caps and employment caps.
• Health education spending must be disciplined
  within the existing fiscal-policy envelop.

9
Key IMF Assumption Imports are Better than
Non-Trade Goods

• Government and social spending on imported goods
  (absorption) is generally non-inflationary.
• Government and social spending on non-traded
  goods and services is inflationary and can lead
  to Dutch Disease rampant inflation, currency
  appreciation, and loss of competitiveness.
• Competitiveness is dependent on labor market
  liberalization, low wages, and low taxes.
• There is little or no spare supply-side capacity
  to produce more non-trade goods.

10
Key IMF Assumption Free Trade, Comparative
Advantage Exports

• In order to enact comparative advantage, free
  trade requires elimination of tariff barriers.
• Building an export-centric economy is important
  to maximize efficiency and to exploit comparative
  advantages.
• Exports are important because they are a source
  of foreign currency (debts and imports must be
  paid with foreign currency).
• Free trade allows increased consumer access to
  lower-cost imports.

11
Key IMF Assumption Foreign Aid is
Unreliable/Unsustainable

• Foreign aid is best spent on achieving
  macroeconomic stability before it is spent on
  social programs, e.g., health and education.
• Foreign aid is highly volatile and unpredictable
  and thus it should be deeply discounted in
  macroeconomic/fiscal planning.
• Countries should build aid volatility reserves.
  
• Countries should avoid foreign aid dependency and
  instead look to gradual expansion of domestic
  revenue before increasing fiscal expenditures.

12
Key IMF Assumption Build Fiscal Space but Dont
Tax Business

• Eliminate tariffs (easy to collect, can be
  progressive).
• Shift to regressive value-added taxes.
• Reduce business taxes to attract FDI and to
  promote competitiveness.

13
Key Findings IEO Report (2007)

• Aid flows are still very modest, though there has
  been an increase since the late 1990s.
• 29 sub-Saharan African countries experienced some
  increases in foreign aid 1999-2005.
• Most of those receiving more aid were
  post-conflict or good-performing.
• A substantial portion of the increased aid was in
  the form of debt relief. Figure 2.1A.
• From 1980 to 2005 there were dramatic reductions
  in fiscal deficits and in inflation rates.

14
Structural Adjustment was a disaster for Africa

• From 1980-2005,
• growth was negative, Figure 2.1E,
• incomes declined, Figure 2.1G, and
• poverty remained constant, Figure 2.1H.
• However, the recent trend is improving slightly
  for both growth and per capita income.
• On average public expenditures rose by about 2.5
  of GDP over from 1999-2005.

15
Key IOE Findings Hydraulic Fungibility

• On average, 37 of all additional aid was
  indirectly diverted to increase foreign currency
  reserves another 37 was diverted to reduce
  domestic debt only 27 was actually spent.
  Figure A2.9.

16
Poorer, Weaker Countries Spent Even Less

• Good performers (low inflation, high reserves)
  spend 49, weak performers only 17.

17
Reserve Ratios and Inflation Rates were Key
Determinants of Fungibility

• Countries with less than 2 ½ months of reserves
  put 95 of increased aid into reserves countries
  with high reserves absorbed 100.
• Countries with more than 5 inflation put 85 of
  increased aid into debt reduction. Countries
  with inflation below 5 put 21 into debt
  reduction.

18
Key IEO Findings IMF Discounts Future Aid Flows

• IMF PRGFs have historically limited domestic
  financing of aid shortfalls and required full
  saving of windfalls.
• IMF PRGFs significantly discount future aid
  flows.

19
Key IEO Findings Discounting and Lack of
Advocacy Reduce Spending

• These inherently conservative policies result in
  greatly reduced spending of aid.
• IMF staff have not proactively created policy
  justifications for increased foreign aid.

20
Staff Continues to Justify Wage Bill Ceilings

• Recourse to wage bill ceilings reflected... a
  concern to ensure that sufficient resources
  should be directed to priority nonwage or capital
  outlays. ... Recent Fund guidance to mission
  chiefs in SSA countries has been to discourage
  the use of wage ceilings, given their blunt
  nature.
• Authorities have sometimes found wage ceilings
  useful instruments to help address wage
  pressures, overstaffed civil services, strong
  unions, or sectoral lobbies.

21
Key Center for Global Development Findings (2007)

• The modest increases in health expenditures have
  only succeeded in restoring previous budget
  shares.
• Actual expenditures have only increased from 10
  to 15, far less than the 40 recommended by the
  Commission on Macroeconomics and Health (2001).

22
Key CGD Findings

• IMF has not done enough to explore more
  expansionary, but still feasible options.
• Empirical evidence does not support pushing
  inflation to the 5 level in low-income
  countries.
• IMF should consider the supply side benefits of
  additional spending on spare capacity
  utilization, investment, and future output
  growth.
• Wage bill ceilings have been overused (were
  included in ½ of recent IMF programs in LICs).

23
IMF Executive Board Responses -PIN no. 07/83
(July 19, 2007)

• The Fund should not actively engage in mobilizing
  a scaling up of aid resources.
• The Funds baseline aid projects should continue
  to represent staffs best estimates only.
• Staff may provide assistance in preparing
  alternative scenarios but only if they are
  consistent with maintaining macroeconomic
  stability and ensuring debt sustainability.
• Fund-supported programs should generally support
  full spending and absorption of aid but only if
  macroeconomic stability is maintained.

24
IMF Executive Board Response Business as Usual

• Consideration should be given to the issue of
  safeguarding competitiveness (low inflation) in
  the context of scaled up aid.
• Because of aid volatility, expenditures should be
  smoothed over time.
• Spending must be carefully monitored to ensure
  debt sustainability.
• Monetary programs should seek to reconcile the
  absorption of aid with price stability and
  reserve adequacy and also avoid crowding out of
  private investment.

25
IMF Executive Board Responses

• Wage bill ceiling have been used to protect
  legitimate concerns about macroeconomic stability
  and still may be needed in exceptional cases, but
  their use should become less frequent.
• Measures for eventually reducing aid reliance
  should be integral to macroeconomic policy in
  managing scaled-up aid.
• Strengthening fiscal institutions and public
  financial management systems is critical for
  effective utilization of scaled-up aid.

26
NGOs Continuing Critique

• Deficit- and inflation-reduction targets
  indirectly and negatively impact health and
  education budgets.
• Macroeconomic stability is never adequately
  defined and current targets are unjustified in
  the economics literature.
• The prevalence of wage bill ceilings and their
  future use is still deeply problematic.
• The IMF continues to prioritize bigger currency
  and aid volatility buffers, inflation and debt
  reduction, and expenditure smoothing even if they
  prevent significant new investments in human
  resources for health and education and health and
  education system strengthening.

27
NGOs Continuing Critique

• IMF continues to ignore the reality of
  underutilized domestic capacity and the positive
  development impacts of investments in health and
  education similarly, it ignores the importance
  of creating and preserving human capital.
• Conversely, the IMF overemphasizes the
  inflationary effects of such expenditures.
• IMF continues to prioritize overly conservative
  stability conditionalities over more aggressive
  pro-growth/pro-employment policies.

28
NGOs Continuing Critique

• IMFs policies have undermined absorptive
  capacity by defunding teachers and trainers for
  both educators and health workers.
• There has also been underinvestment in health and
  education planning and management capacity.
• IMF should support broader and deeper debt
  cancellation, without conditionalities, to allow
  needed investment in health and education.
• IMF should allow outside experts and public
  stakeholders to participate in developing
  alternative policy scenarios and in impacting
  policy decisions.