Forging a Stronger Social Contract—the IMF’s Approach to Social Spending

June 14, 2019


Good afternoon. It is an immense privilege to address you today in this magnificent Palais des Nations, which stands as an enduring emblem of multilateralism. Let me thank my most gracious host, my dear friend Guy Ryder, who himself stands as a towering pillar of the global common good.

To my friends at the ILO: congratulations on your centennial! For a hundred years now, you have served the noble cause of social partnership and social justice.

When you think about it, the founding of the ILO has a lot in common with the founding of the IMF.

You were founded after the First World War, on the premise that lasting peace is founded on social justice. We were founded after the Second World War, on the premise that lasting peace is founded on economic cooperation between nations.

You bring together the social partners in the service of ensuring decent work for all—knowing that decent work is not only about a paycheck, but is also a source of meaning, purpose, and dignity. We bring together the nations of the world—189 of them—in the service of promoting financial stability and sustainable and inclusive economic growth—knowing that this is a precondition for true human flourishing.

In this context, my topic this afternoon—social spending—could not be more relevant. Relevant to both of our institutions. Relevant to the challenges facing our global economy.

1. Social Spending—a Key Policy Lever

Let me begin by defining my terms. By social spending, we mean social insurance, social assistance, as well as public spending on health and education. Hence social spending is a broader concept than social protection as it includes spending on health and education—which are especially critical in low-income and developing countries.

There is no doubt that these programs are vital to promoting the well-being of citizens and social cohesion. Public pensions can make all the difference between poverty and a dignified life for our elderly loved ones. Health care does not just save lives, it extends them and improves their quality. Primary and secondary education give our youngest citizens the opportunity to reach their full potential and contribute to society.

At a deeper level, I would argue that social spending is a core component of the social contract needed to fulfill the missions of our respective institutions.

This is not a new insight. The importance of providing financial security to citizens to keep the peace and foster harmonious social relations is a lesson that goes all the way back to the ancient civilizations.

It is a lesson learned during the industrial revolution, as politicians responded to new social and political challenges with different forms of social protection—think of the Bismarckian reforms in Germany.

It is a lesson learned after the darkest days of the 1930s. Economic historian Barry Eichengreen makes a convincing case that the vastly different political paths taken by Germany and the UK over that decade was at least partly due to the UK’s better functioning unemployment insurance scheme in the face of crippling unemployment.

And it is a lesson learned in the postwar era, when the three decades of strong and shared growth in the advanced economies— les trente glorieuses—were underpinned by an accompanying social contract with broad participation and widespread social and political support.

What this tells us is that for economies to be resilient and growth to be sustainable, this growth needs to be inclusive—which calls for social spending. This in turn provides the social and political buy-in for growth-supporting policies—and in doing so, builds trust.

The bottom line: social spending matters. It matters today as we are bombarded by new challenges. More retirees, fewer workers. The effects of technology on work and wages. Rising inequality and demands for greater fairness. Barriers to women participating in the economy and realizing their full potential. The existential threat of climate change. Diminishing trust, rising discontent, and a turn away from global cooperation.

There is no simple policy response to these complex challenges. Yet while social spending is not the only lever in such a response, it is undoubtedly one of the most important. It is no surprise that surveys indicate rising public support for income redistribution policies in many countries.

Social spending must therefore take its rightful place at the center of macroeconomic policy discussions.

2. The IMF’s Strategy on Social Spending

With this in mind, let me now address the IMF’s new strategy on engaging in social spending issues, which is being published today.

As social spending issues have become increasingly important for our members over the past decade, we have significantly stepped up our engagement on inclusive growth and social spending.

For instance, our analysis has found that high inequality can undermine sustained growth. Research has also found that public investment in health and education boosts productivity and growth, and reduces inequality of opportunity and income. Likewise, social spending programs that redistribute from higher-income to lower-income groups can decrease poverty and inequality. They can also increase the resilience of lower-income households to economic shocks—including from demographics, technology and climate—which are expected to become more frequent and disruptive.

At the country level, we found that four out of five IMF mission chiefs—the people who lead our engagement on the ground—view social spending as “macro-critical” in their countries. This is important, because macro-criticality is the quintessential trigger for IMF engagement on all structural issues. And nearly half view social spending as essential to socio-political stability and investing in people.

For all these reasons, we have stepped up our engagement on social spending at the country level. For example, we helped Ghana create the fiscal space to increase spending on public education—so that it can achieve its goal of universal secondary education. We helped Japan develop options for pension reform, so necessary in an aging society. In Cyprus, we helped the government strengthen the social safety net during a time of severe crisis—including with the introduction of a new guaranteed minimum income program. Likewise, in Jamaica we supported the expansion of social assistance programs during a period of belt tightening.

In all of our programs, protecting the poor and vulnerable is now, and will continue to be, a core objective.

At the same time, we are providing technical assistance to countries to help them raise more domestic revenue—support in this area nearly doubled between 2010 and 2018. And we estimated the additional spending needed to finance core SDGs—health, education, and priority infrastructure. We found that this requires an extra 15 percentage points of GDP on average for low-income developing countries in 2030.

It is clear, then, that social spending is not just an expense, but rather the wisest of investments in the well-being of our societies. Expansion of access to education and health generates broader productivity gains across the population, allowing all citizens to flourish. To reap the rewards of a stronger global economy tomorrow, we must begin by strengthening social programs today.

But at the same time, we cannot play the role of Pangloss. In the real world, the best of intentions run up against the firmest budget constraints.

So how do we move forward? We must start from the premise that social spending needs to be adequate, yet also efficient and financed sustainably. Spending adequacy. Spending efficiency. Fiscal sustainability. These are the yardsticks we will use to assess the “macro-criticality” of social spending.

We expect this new strategy to lead to more effective IMF engagement on social spending issues, and to strengthen the quality and consistency of our policy advice. It collects best practices gleaned from years of engagement on social spending issues and lays out a clear road map for consistently applying these best practices to our engagement.

Over the next year and a half, we will flesh out the strategy by providing more specific guidance to our staff underpinned by augmented tools and databases; ongoing analytical work; and background notes on issues such as pensions, social assistance, education, and health.

Our strategy should ensure that our engagement is more consistent and hopefully more effective—and also better tailored to our members’ specific preferences and circumstances.

3. A Partnership for Success

Doing things better, however, will require a little help from our friends—and this brings me to my final point today: the need for a “partnership for success”, a key pillar of our strategy.

That means all of us working together—international organizations, academics, country authorities, civil society and the private sector. This is why we undertook a broad consultation process when developing the strategy. I believe it has greatly benefited from this engagement—and here, a big “thank you” goes to the ILO.

This experience has shown clearly that close engagement between the IMF and organizations like the ILO can prove highly valuable. You have significant expertise on social spending that can help IMF teams. And we can help by raising the profile of social spending issues in the broader economic policy discourse surrounding stability and growth.

We would also benefit from closer collaboration with other stakeholders. Civil society, academics, think tanks, and labor unions all offer unique perspectives on social spending—and these perspectives can enrich the IMF’s view, help us to resist any temptation toward groupthink, and enable us to better appreciate country-specific circumstances.

Of course, there is no one-size-fits-all when it comes to designing social spending programs to reduce poverty, boost inclusion, and protect vulnerable households. Countries have different preferences, face different challenges, and hold different long-term aspirations. But by working together, we can ask the right questions and hopefully find the right answers.

At the end of the day, we have an obligation to the poor and vulnerable; to those facing financial insecurity and poor health; to those left behind with few opportunities, including women and girls; to future generations. We have an obligation to help countries achieve the Sustainable Development Goals by 2030.

As Franklin D. Roosevelt—a great friend and supporter of the ILO—once wisely noted, “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little."

This is not just ethically right, it is economically sound. So let us work together to develop social spending policies that are both smart and compassionate.

Thank you very much.