The IMF and the Poor

Changes in Poverty and Income Inequality Under IMF-Supported Programs

Have countries with IMF-supported programs reduced poverty and income inequality? This question is important not only in itself, but also because recent research suggests that inequality can hinder growth.

In 1986, the IMF's Fiscal Affairs Department studied how adjustment programs affected the distribution of income in 94 countries (International Monetary Fund, 1986). The study concluded that, although there was no evidence that IMF-supported programs worsened income inequality, different policy measures had different effects on different income groups. Measures that made the distribution of income more equal included devaluation of the exchange rate in countries where small farmers depended on agricultural exports, elimination of exchange controls, expansion of access to credit markets, expansion of the tax base for property and income taxes, and reallocation of expenditures toward basic education and health care. Measures with adverse distributional effects included increases in indirect taxes (for example, customs duties and the value-added tax). A follow-up study (Heller and others, 1988) that focused on seven countries concluded that the distributive effect of IMF-supported programs depended on the policy mix used to achieve fiscal adjustment.

In seven SAF/ESAF countries for which data are available, poverty rates declined by an average of 20 percent under IMF-supported adjustment programs, implying an average annual reduction of 5.3 percent (Figure 5). The reduction for the two SAF/ESAF countries in Africa (Ghana and Tanzania) was somewhat stronger, at 6.3 percent each year. Poverty rates declined significantly in Asia (Bangladesh, Pakistan, and Sri Lanka); in Latin America, urban poverty increased in Bolivia––mainly because of the migration of rural poor to urban areas––while poverty declined at the national level in Honduras.

Figure 5. Poverty Rates and Gini Coefficients
Under SAF/ESAF-Supported Programs

Sources: Deininger and Squire (1996); Jayarajah, Branson, and Binayak (1996); and World
Bank (1996a and 1996b).
1 Figures for urban areas only.
2 Figures for rural areas.

For income inequality, the data indicate that, on average, the distribution of income improved in countries with SAF/ESAF-supported programs (Figure 5). The decline in the average Gini coefficient––a measure of the inequality of income distribution––was nearly 1 percent each year, from 0.41 to 0.39. For the two SAF/ESAF countries in Africa for which data are available (Ghana and Uganda), income inequality increased in Uganda and fell in Ghana. For the three Asian countries, poverty reduction was, on average, accompanied by a more equal distribution of income, with especially sharp declines in the Gini coefficient in Bangladesh and Sri Lanka. In contrast, for the two Latin American countries––Bolivia and Honduras––income inequality increased. Similar trends can be observed for the evolution of the income share of the richest 20 percent of the population relative to that of the poorest 20 percent. However, given the small sample, it is difficult to generalize these results for other SAF/ESAF countries with IMF-supported adjustment programs during that period.

The IMF's deepening interest in income distribution issues reflects the belief that, as a matter of social justice, all members of society should share in the benefits of economic growth. Adjustment programs that are equitable and growth that is equitable are more likely to be sustainable (Camdessus, 1998; Fischer, 1998; International Monetary Fund, 1998). As a result of these considerations, the IMF hosted a major conference on income distribution and sustainable development in 1995 and a conference on economic policy and equity in June 1998. The 1998 conference focused on operational aspects in addressing equity.7

Addressing Poverty Concerns in Other Core IMF Activities

The increased focus on high-quality growth has been incorporated not only in program design but also in the other core activities of surveillance and technical assistance. With respect to surveillance, the IMF's policy advice has focused on a wide range of current economic policies, including structural policies and the reforms needed to improve the quality of growth and economic performance. For example, policy advice to some European countries has stressed the importance of labor market reforms to reduce unemployment. To address the social effects of these labor market reforms, policy advice has focused on appropriate adjustments in tax and expenditure policies.

In many industrial countries, demographic trends indicate that the rapid aging of the population may raise expenditures on health and social security to unsustainable levels (Chand and Jaeger, 1996; and Heller, 1997). In these countries, IMF advice on reforms has focused on the long-term viability of health and social security spending.

The IMF's technical assistance has included advice on efficient and equitable tax and expenditure policies, which is a necessary adjunct to program design if the objectives for growth and poverty reduction are to be achieved. Some of the areas in which such assistance has been provided are public expenditure management, tax policy, tax administration, public expenditure policy, and social safety nets. Since 1991, the IMF has fielded about thirty technical assistance missions to help member countries design cost-effective and financially sustainable social safety nets.

7 The IMF's interest in this area is also reflected in studies that have recently been undertaken (see, for example, Clements, 1997; and Tanzi and Chu, 1998). Clement's recent study on Brazil found ample evidence in the literature that income inequality is largely explained by the extreme disparity in educational attainment levels. Since the Real Plan of July 1994, inequality in Brazil has been lessened, although the distribution of income in that country remains one of the most unequal in the world.