Social Dimensions of the IMF's Policy Dialogue

Sustained Economic and Social Development: The IMF's Perspective

While economic policies of individual countries can have diverse objectives, there are three key points with--as experience has shown--particular relevance for social development.

Economic growth is required for sustainable social development. In the last few years, a broader concept of high-quality growth has emerged, namely, economic growth that brings lasting employment gains and poverty reduction, provides greater equality of income through greater equality of opportunity, including for women, and respects human freedom and protects the environment.

Controlling inflation can prevent or mitigate real income losses, against which the poor are least protected since their income is often fixed in nominal terms and they tend to hold much of their assets in the form of currency.

By promoting the agriculture sector, which employs most of the poor, many developing countries can achieve a lasting reduction in poverty.

To achieve progress in these three areas, the main pillars of economic policies include sound macroeconomic and structural policies, with a strong social policy component, and good governance and participatory development.

MACROECONOMIC POLICY. Sound macroeconomic policies--fiscal, monetary and credit, and exchange rate policies--are needed to secure financial stability and external viability with low inflation. In the absence of these conditions, it is difficult for a country to encourage productive investment or to promote the efficient use of scarce resources, both of which are essential for durable growth.

STRUCTURAL POLICY. Structural reforms are often vital to promote a market-based environment with an outward orientation. These include liberal and open systems of prices, exchange, trade, and investment; a fiscal system that emphasizes efficient resource allocation and minimizes adverse effects on incentives; agricultural marketing arrangements that promote competition; a financial system that is free of direct credit allocation and effectively channels financial savings to productive investment; and policies that take into account their impact on the environment.

SOCIAL POLICY. Social and supplementary structural policies are also needed to strengthen the social dimensions of economic development. These include labor market policies aimed at ensuring high employment through competitive and flexible wages and at removing other rigidities while adhering to ILO principles; public expenditure programs aimed at protecting and, when possible, increasing cost-effective programs for human development and reducing poverty (such as generally accessible health, education, and social security programs); a tax system that ensures a fair distribution of the tax burden; and well-targeted social safety nets to mitigate negative effects of economic reform on vulnerable groups.

GOOD GOVERNANCE AND PARTICIPATORY DEVELOPMENT. Effective governance involves such diverse elements as publicly accountable institutions for formulating and executing the budget, efficient tax administration and public expenditure management, prudent banking supervision, a transparent foreign trade and exchange regime, and a fair and transparent legal and regulatory framework. Transparency and checks and balances, at both the political and administrative levels, can help limit the influence of special vested interests.

There is a broad consensus among governments and in the international community on the importance of most of these elements. But translating them into concrete policies and priorities involves difficult choices concerning income distribution, as well as present and future consumption and investment. Consensus building often involves disseminating information, explaining policies to the general public, and, where appropriate, decentralizing the decision-making and implementation process. It is critical that key players--especially people at the grass-roots level--have a stake in economic policymaking, and that the social policies are compatible with the administrative capacity.