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.
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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.
