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A Factsheet - March 2001

Social Dimensions of the IMF's Policy Dialogue

The IMF's growing emphasis on social policy issues has emerged from an increased awareness that macroeconomic and structural policies have important social implications, which in turn have ramifications for the domestic ownership of economic reform programs and for promoting sustainable economic growth.

Why is the IMF concerned about social policies?

The IMF's mandate is to promote international monetary cooperation, the balanced growth of international trade, and a stable system of exchange rates. Fulfilling this mandate is the IMF's primary contribution to sustainable economic and human development. In pursuing it, however, the IMF likewise recognizes that the size and quality of social spending can affect long-run growth and poverty reduction; that macroeconomic viability must include policies that directly address poverty and social concerns; and that, in order to support these objectives, social sector spending should be focused on improving the education and health status of the poor. This realization reflects two broad trends: the emergence of more open and participatory forms of policy-making involving the IMF with various elements of civil society (academics, religious leaders, business groups, labor unions, and NGOs); and a growing recognition that popular support-or "ownership" for adjustment programs is an essential precondition for their ultimate success.

For low-income member countries, the IMF has placed Poverty Reduction Strategy Papers (PRSPs) at the center of its efforts (see the Fact Sheets on the PRGF and the HIPC Initiative respectively). PRSPs describe a country's macroeconomic, structural, and social policies, and are designed in collaboration with civil society. As of early 2001, 31 countries had produced PRSPs, with the support of the IMF, World Bank, regional development banks, and donors.

How does the IMF address social concerns?

IMF-supported programs have sought to promote universal access to basic social services; they have increased public spending for such services in countries where this spending was low, supported high-quality expenditures in these sectors, and protected or sought real increases in these expenditures during adjustment periods when poor households might lack the ability to pay for basic social services. Through policy discussions and technical assistance, the IMF also contributes to improving transparency in governments' decision making and their capacity to monitor poverty-reducing spending and social developments.

In its work in these areas, IMF staff relies heavily on the expertise of other institutions. These include the World Bank, regional development banks, the United Nations Development Program, the International Labor Office, the World Health Organization, and other UN agencies. In particular, the IMF looks to the World Bank for policy analysis, reform options, and estimates of their budgetary cost, as well as data on social indicators.

This dialogue enables the IMF to ensure that social and sectoral programs aimed at poverty reduction can be accommodated and financed within a supportive, growth-enhancing, macroeconomic and budgetary framework.

How can governments increase poverty-reducing spending?

One way for governments to create room for poverty-reducing outlays is to cut unproductive spending. For instance, it is heartening to note that the declines in military spending worldwide during the 1990s have been accompanied by increases in social spending in a number of countries. Between 1990 and 1999, for example, military expenditure declined by 1.2 percentage point of GDP in low-income countries with Fund-supported programs, while expenditure on health care and education in these countries rose by 0.8 percentage point of GDP. Nevertheless, in many countries efforts still need to be made to reduce excessive military spending.

What has been achieved under IMF-supported adjustment programs?

A recent review of social spending in a representative sample of 32 low-income countries that received IMF support for the period 1985-99 indicated that these countries have made progress in raising public social expenditures and improving social indicators. This overall progress, however, masks considerable variation in experience across countries. On average, for the entire group of countries, per capita real spending on education and health increased at an annual rate of 3.4 percent and 3.3 percent respectively, although smaller gains in education spending were recorded in Africa. Significant and broad-based gains were achieved in social indicators for education and health, including those associated with the International Development Goals for 2015 (see A Better World for All at /external/pubs/ft/jointpub/world/2000/index.htm). On average, and on an annual basis, overall primary school enrollment improved by 0.9 percent; female primary and secondary enrollment by 1.2 percent and 1.3 percent, respectively; infant mortality by 1.8 percent; under-five mortality by 2.2 percent; births attended by skilled staff by 1.7 percent; and contraceptive prevalence by 5.3 percent.

Social efforts undertaken by member country authorities as part of IMF-supported adjustment programs include the following:

Armenia. Reorienting social expenditures toward the poorer segments of the population; improving coverage of the social safety net; and reforming education and health sectors.

Bolivia. Expanding the coverage and quality of basic education and health; establishing a basic sanitation network; introducing a minimum pension for all Bolivians.

Indonesia. Incorporating into the 1998 IMF-supported program targeted rice subsidies and community-based public works programs, designed by the World Bank.

Mozambique. Improving access to basic education and good quality health care and reducing gender and regional disparities in access to those services; expanding and improving the quality of water provisioning and sanitation.

Why are social safety nets important?

In the short term, some measures needed for economic stability may hurt some of society's most vulnerable groups, while helping other groups. For example, currency devaluations may hurt the urban poor through increasing prices of imported products, while helping low-income smallholders producing export crops in rural areas. In countries where the authorities could foresee that reform measures would have a sizable adverse social impact, the policy mix and sequencing of measures have aimed to take this impact into account within a sustainable macroeconomic framework. For instance, IMF-supported programs have aimed to phase out subsidies for food and other items gradually, rather than all at once (e.g., Indonesia following the financial crisis of 1997). An adverse impact, however, cannot always be avoided, even with an appropriate policy mix and sequencing. For instance, a currency devaluation may be at the heart of a reform program. Thus, a tension may emerge between stabilization and social protection objectives. Social safety nets are a means of easing this tension. About three-fourths of the low-income countries that had Fund-supported programs during 1994-98 included social safety nets in their programs.

Social safety nets can take many forms: Subsidies directed at particular groups or cash compensation in lieu of subsidies; improved distribution of essential commodities, such as medicines; temporary price controls on some essential commodities; severance pay and retraining for public sector employees who have lost their jobs; and employment through public works programs. In most cases, the IMF staff largely relies on the World Bank to take the lead in the design of social safety nets, which are then incorporated into IMF-supported programs.

Can more be done?

The IMF is still in the learning process in the social policy area. In many cases, weak administrative structures and lack of appropriate social policy instruments have made it difficult to strengthen public spending on social sectors and implement social safety nets. In addition, IMF staff is often constrained by lack of data, which makes it difficult to assess the effectiveness of poverty-reducing spending.

The IMF has taken concrete initiatives to address the social content of reform programs. For example, staff has improved their collection of data on government social expenditures, and the monitoring of social output indicators in member countries-particularly the heavily indebted and poor countries. Work on the PRSP process is still evolving, and is expected to forge a stronger link between social spending and social indicators, as well as focus attention more closely on how to assist the poor. In addition, the IMF and World Bank are jointly embarking on an initiative to assist HIPCs in establishing the capacity to track poverty-related spending. We are constantly looking at what we have done, how effective we have been, and how we can do better.


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