IMF Survey: Concern over IMF Impact on Health Spending

IMF News, December 11, 2009

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Published: December 11, 2009

Core concern: indirect IMF impacts on health spending

The IMF’s role is described as ensuring sovereign debt payments and creditworthiness, not as a development organization; this gives it leverage over bilateral and multilateral aid donors who look to the IMF’s assessment before giving foreign aid.
The IMF’s emphasis on short-term financial sector variables is said to subordinate real-sector variables (long-term developmental goals, industrialization, higher employment, increased public investment), producing long-term consequences for health budgets and infrastructure.
Two specific IMF policy targets are identified as particularly controversial:
- keeping inflation at or below 5–7 percent per year;
- keeping budget deficits below 3 percent of GDP.

Mechanisms by which policies can affect health financing

Restrictive inflation and deficit targets can:
- raise interest rates to lower inflation, making credit less affordable to government and firms;
- limit government deficit financing and public investment;
- constrain domestic private sector expansion, employment, and tax revenue generation;
- result in lower growth, lower employment, lower taxes, and lower public spending—including on health.
The trade-off is framed using the economists’ term “sacrifice ratio” — the amount of GDP output forgone to reduce inflation to lower levels.

Evidence and critique of IMF numeric targets

Criticism: “The IMF has little empirical evidence in the economics literature to justify pushing inflation down to the 5–7 per cent level” because studies produce widely varying estimates of the inflation–growth “kink” and whether such low inflation is warranted.
Cited literature and views referenced in the critique:
- Pollin and Zhu: “There is no justification for inflation-targeting policies as they are currently being practiced throughout the middle- and low-income countries.”
- 2007 Center for Global Development study: “Empirical evidence does not justify pushing inflation to these levels in low-income countries.”
- House Financial Services Committee (Letter dated November 14, 2007): concern about IMF “adherence to overly-rigid macroeconomic targets.”
- 2008 Spence Commission: notes some countries have grown with persistent inflation of 15–30 percent and warns that constraining infrastructure spending can prevent take-off.
- 2001 U.S. Government Accountability Office report: “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.”
Rowden’s argument stresses the lack of consensus on the appropriate inflation threshold and on the long-term fiscal costs (especially foregone public investment as a percent of GDP).

Policy recommendations and demands from health advocates (as presented)

Explore more expansionary but still feasible options for higher public spending, especially for long-term public investment.
Conduct transparent and inclusive policy processes involving:
- line ministries,
- key legislative committees,
- labor,
- civil society,
- domestic media.
Assess alternative options that target:
- higher employment and public investment;
- enhancement of domestic productive capacities;
- mobilization of more domestic resources;
- adoption of a rights-based perspective on spending and development.

IMF response: key rebuttals and arguments

The IMF identifies three principal criticisms and responds as follows:

1. On fiscal deficit targets below 3 percent of GDP:

The IMF states evidence does not support a “one-size-fits-all” approach and cites the Independent Evaluation Office 2003 report and 2007 report on Sub-Saharan Africa.
Fiscal targets vary widely; programs have accommodated larger deficits during the food and fuel crisis and the global financial crisis.
An “overwhelming majority of programs have budgeted higher social spending for 2009.”

2. On inflation targeting to the 5–7 percent range:

The IMF counters that program design is responsive to changing inflation outlooks; programs adapted to accommodate higher inflation in 2008 and adjusted downward in 2009 as commodity prices fell.
The 2009 GAO report is cited: “for low-income countries, empirical evidence generally suggests inflation is detrimental to economic growth after it exceeds a critical threshold of approximately 5 to 12 percent. This threshold is broadly consistent with the inflation targets of 5 to 10 percent in the 31 IMF-supported programs we reviewed.”

3. On short-term priorities versus long-term development:

IMF argues that Fund-supported programs are framed within a medium-term macroeconomic framework that incorporates longer-term development objectives and, for low-income countries, are anchored in country-owned Poverty Reduction Strategies.
The IMF states program targets are developed against this framework and reviewed and adjusted as country circumstances evolve.

The IMF’s stated objective: “to promote high and sustained growth, which will improve the well-being of the poor and create fiscal space for increasing priority spending, including on health.” (Sanjeev Gupta; Catherine Pattillo)

Subsequent rejoinder by the author

Rowden reiterates his concern that the IMF response mischaracterizes his argument: the central issue is foregone long-term public investment as a percent of GDP, which he contends the IMF reply does not address.
He critiques the sampling frame and methodology of the IEO 2003 study and the 2009 GAO report, arguing that important earlier studies were excluded and that the GAO’s methodology produced a narrow threshold estimate (5 to 12 percent) that aligns with IMF policy but may not survive peer review.
He emphasizes the need to address falling public investment as a percent of GDP and how it can be increased to support development and health outcomes.

IMF Survey: Concern over IMF Impact on Health Spending — From: Rick Rowden, December 11, 2009; includes IMF response by Sanjeev Gupta and Catherine Pattillo.