Social Dimensions of the IMF'S Policy Di Alogue (Reprinted 1998) P047

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1995
• eBook ISBN: 9781557754790

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Contents

Summary

Introduction

IMF Involvement in Social Issues

Sustained Economic and Social Development: The IMF’s Perspective

Social Dimensions of IMF Policy Advice

Policy Advice: Surveillance and Program Support

Social Policy Issues in Surveillance Activities

Social Policy Issues in Program Design

Policy Mix

Short-Term Social Effects and Social Safety Nets

Longer-Term Social Policy Measures

Technical Assistance

Collaboration with Other Institutions in Program Design and Monitoring

Improving the IMF’s Contribution

Boxes

1. Role of the IMF in the World Economy

2. Italy: Reforming the Health Care System

3. Jordan: Subsidy Targeting Through a Coupon Scheme

4. The Kyrgyz Republic: Replacing Generalized Subsidies with Cash Compensation

5. Ghana: Severance Payments to Retrenched Workers

6. Sri Lanka: Rationalization of Poverty Alleviation Programs and Civil Service Reform

7. CFA Franc Zone: Promoting Economic Growth and Shielding the Poor Through Appropriate Program Design

8. Uganda: Peace Dividend in a Stable Macroeconomic Environment

9. Peru: Securing Macroeconomic Stability to Increase Pro-Poor Spending

IMF Involvement in Social Issues

IMF involvement in social issues has to be seen in the context of the IMF’s mandate. This mandate, as laid down in its Articles of Agreement, is clear: (i) to promote international monetary cooperation; (ii) to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income; (iii) to promote exchange stability and to maintain orderly exchange arrangements among members; (iv) to assist in the establishment of a multilateral payments system; and (v) to give confidence to members by providing temporary financial resources to help them correct balance of payments disequilibria. Given this essentially macroeconomic mandate, the IMF’s contribution to social development is mainly indirect, and its role in social policy advice is necessarily limited. Nevertheless, the IMF’s involvement in social issues has evolved over time, drawing not only from its own experience but also from that of member countries and of other agencies (see Box 1).

During the 1950s and 1960s, when the IMF provided financial assistance mainly to industrial countries, its policy advice focused primarily on macroeconomic policies. With the shift to lending to developing countries since the 1970s and economies in transition since the late 1980s, much greater attention has been given to the complementarity of macroeconomic policies and structural reforms and to the formulation of policies in a medium-term context.² With this broadening of focus, the interrelationships between economic and social issues have also increasingly been recognized. The experience has shown the need for protecting vulnerable groups during the adjustment period by constructing well-targeted social safety nets and by safeguarding their access to basic public services, such as primary health and education. These measures would also serve to enhance the political sustainability of economic reforms.

Box 1. Role of the IMF in the World Economy

The IMF—the world’s central international monetary institution—has the responsibility for carrying out effective surveillance over its members’ exchange rate and macroeconomic policies. Thus, one of the IMF’s key tasks is to help countries pursue sound macroeconomic policies aimed at sustained economic growth. It advises members on economic and financial policies and promotes policy coordination among the major industrial countries.

The IMF also provides temporary balance of payments financing to members to help them to correct their external payments difficulties. Financial assistance has been provided to both developing and industrial countries to carry out economic reform and transformation, such as the re-establishment of market economies in the countries of Eastern Europe and the former Soviet Union, and adjustment and structural change in the economies of Africa, Asia, and Latin America. In providing financial support, the IMF pays attention to social aspects of economic adjustment.

The broader context for the IMF’s policy advice has called for much closer collaboration than in the past among international agencies, with a delineation of responsibilities according to each agency’s mandate and expertise. Much of the analysis and policy and technical advice on social issues is undertaken by international agencies other than the IMF, such as the World Bank, regional development banks, the FAO, the ILO, the UNDP, and UNICEF, as well as by bilateral donors and nongovernmental organizations. The issues are complex, and analysis and action are often hindered by weaknesses of data and administrative structures; given the difficulties, it has been important that the various parties build not only on their own experience but also on that of members and other agencies.

In its policy advice to member countries, the IMF is constrained not only by resource limitations and its general focus on macro-economic policies but also, at times, by member countries’ difficulties in developing domestic political support for improving social spending policies and their targeting. Notwithstanding the IMF’s role in advising governments on policy design, the choice of social and economic policies belongs ultimately to the member.

The increasing involvement of the IMF in social matters has been discussed by its Executive Board on several occasions. In 1988, for example, the Board stressed the need to assist member countries to evaluate the implications of IMF-supported adjustment programs for income distribution and poverty, to strengthen the staff’s understanding of the channels through which adjustment policies affect the poor, and to draw more extensively on the expertise of the World Bank and UN institutions. At the same time, it reaffirmed its decision not to establish conditions on the use of IMF resources related to income distribution. The joint World Bank-IMF Development Committee, which also has discussed social issues, has encouraged both the World Bank and the IMF to further intensify their efforts, working closely together, to help design and implement well-targeted measures to mitigate the costs of adjustment.

Social Dimensions of IMF Policy Advice

Policy Advice: Surveillance and Program Support

The IMF provides policy advice to member countries primarily in the context of its “surveillance” of their economic policies and its financial support for their adjustment programs. IMF surveillance is rooted in its Articles of Agreement and aims at promoting international monetary cooperation, balanced growth of international trade, and a stable system of exchange rates, as well as regional and global coordination of growth-oriented policies. The objective of IMF policy advice to member countries is to contribute to the promotion and maintenance of high levels of employment and real income and to the development of their productive resources. An important element of this advice in the surveillance process is to encourage the initiation of appropriate policy measures before serious macro-economic imbalances surface. In this way, surveillance helps to identify emerging issues and problems of importance to member countries and the world community to facilitate an early policy response.³ Whenever a country faces macroeconomic imbalances that arise from lax financial policies or external shocks and requests the IMF’s financial support, the IMF’s policy advice aims at restoring domestic and external balance and price stability while removing structural rigidities, thereby paving the way for sustained economic growth, gains in employment, and reduction in poverty in the medium term. By catalyzing substantial amounts of external assistance in the form of creditor/donor support and debt relief, IMF-supported programs help attract financing for higher investment and domestic consumption, including consumption by the poor. Experience suggests that failure to adjust to serious macroeconomic imbalances has high social costs in various forms, including through implicit loss in agricultural income, loss from rising inflation, and cuts in social expenditures. The rural poor suffer when attempts are made to repress inflation through price controls on their agricultural output, or when overvalued exchange rates depress prices of export goods produced by them. In addition, the poor are often left to buy consumer goods at substantially higher prices on parallel markets. Generalized consumer subsidies, ostensibly given to protect the poor, have been found to be of greater benefit to the relatively better-off consumers. High inflation often hurts the poorest the most, as their limited income and financial saving are quickly eroded. And very high inflation can result in a collapse of tax revenues, thereby disrupting governments’ ability to provide basic services and particularly hurting the poor. Weak economic policies also tend to reduce foreign financing from both official and private sources.

Social Policy Issues in Surveillance Activities

The IMF’s policy advice during Article IV consultation discussions with individual countries has given consideration to social policy issues, taking into account each country’s circumstances. The major issues discussed with member countries have included unemployment and various types of social expenditures.

High levels of unemployment have been an important concern in many European countries, since failure to reduce unemployment to acceptable levels, namely, compatible with low inflation, entails large economic and social costs. The IMF has therefore advocated comprehensive labor market reforms to reduce the incidence of high unemployment, together with policies for better education and training to improve skills and productivity. The IMF has also emphasized that labor market reforms have to be accompanied by appropriate adjustments to tax and expenditure policies in order to address social concerns.

In other areas of public expenditures, the IMF has paid increasing attention to health and social security spending, in particular in many industrialized countries where such spending has increased rapidly. While this increase can mainly be explained by a pronounced trend toward population aging and higher levels of service and unit costs, it is often difficult to sustain. Consequently, the IMF has explored with country aut...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Summary
• Introduction
• IMF Involvement in Social Issues
• Sustained Economic and Social Development: The IMF’s Perspective
• Social Dimensions of IMF Policy Advice
• Technical Assistance
• Collaboration with Other Institutions in Program Design and Monitoring
• Improving the IMF’s Contribution
• Boxes
• Footnotes