Saille Willow:According to Oxfam the removal of subsidies on loans for maize and fertiliser by the IMF and the world Bank, were making farmers in Southern Africa poorer and more vunerable than ever. In a paper entitled "Death on the Doorstep of the Summit", Oxfam documented the effect of the World Bank and IMF policies on food security and pverty in Mozambique, Zambia and Malawi.
More on some of Oxfam's views are shown below.
Bob
http://www.caa.org.a...imf/growth.html
2. The IMF in poor countries: slow growth and declining access to basic services (excerpts)Nowhere has the IMF's influence on policy been more marked than in sub-Saharan Africa. Most of the region has been in a permanent state of structural adjustment, under IMF-World Bank auspices, for almost two decades. Today, more than 20 countries in sub-Saharan Africa are implementing the IMF's ESAF programmes, a key condition not only for the aid flows on which the region depends, but also for debt relief. The presumption of the wider development community is clearly that ESAF works. Is this presumption justified?
The view of IMF staff is unequivocal. As one recent staff paper puts it, 'we believe that the ESAF contributes positively and effectively to sustainable economic development in the many countries that make use of it.' This assessment is based on the proposition that the ESAF has generated growth and equity, and that it has helped to boost spending on priority social services.
Such assessments are difficult to square with the evidence. The record of economic growth under ESAF programmes is poor, and their record in improving income distribution is poorer still. Evidence on social-sector provision is more mixed, but the accessibility of basic services has deteriorated in many cases. In this section we look at the ESAF record on economic growth and basic service provision, and consider some of the key reform issues.
IMF programmes: good for growth and distributionThere has been a tortured debate, stretching over almost a decade, over the question of whether or not ESAF has boosted growth.
Part of the problem with evaluating such claims is that it is almost impossible to separate the effects of ESAF from other factors, such as commodity price trends, civil conflict and wider economic reforms. It is common sense that a favourable policy environment will improve growth prospects. But can we assume that IMF programmes produce a favourable policy environment?
Not on the basis of the evidence available. In 1997, ten years after launch of the ESAF, the IMF carried out a major evaluation of programmes.
At risk of understatement, the findings for sub-Saharan Africa were not encouraging:
o Average income growth per person in countries undergoing IMF programmes fell by 0.5 per cent a year during the first half of the 1990s.
o On average, only about half of the targeted reduction in budget deficits was achieved, and progress in reducing inflation was limited.
o Savings rates (which determine domestic capacity to finance investment and future growth) remained unchanged. At the time of writing, the IMF was updating its ESAF data amid claims from staff that the corner has been turned. On the basis of (so far unreleased) data for 1995-1997, the Fund says that real incomes per person in ESAF programme countries have been rising at an average of 3.6 per cent a year. However, this headline figure obscures more than it reveals.
First, almost the entire increase in per capita income for the period from 1995 to 1997 is explained by a marked improvement in terms of trade for low-income countries. For non-mineral exporters commodity prices increased by about 20 per cent. The collapse of commodity market prices in 1998 has led to a marked downturn in growth rates, especially in sub-Saharan Africa.
Second, per capita growth rates for ESAF countries in sub-Saharan Africa grew at about half of the average rate for ESAF countries, at about 2 per cent a year during 1995-97. In 1998, the growth rate declined to 1 per cent. By any standards, this is a poor performance. Measured against sub-Saharan Africa's needs, it represents a disaster. Recent estimates by the Economic Commission for Africa and others suggest that per capita income growth of between 2-3 per cent a year will be necessary if sub-Saharan Africa is to have any chance of reaching the 2015 target of halving income poverty. Such growth rates have been achieved in other regions. However, they imply a sharp break with what has been achieved under ESAF programmes.
Why has the growth record under ESAF been so lamentable? Weak implementation is part of the problem: many governments undertaking IMF programmes have failed to carry out the reforms necessary to reduce budget deficits, such as privatising loss-making state enterprises. Over two-thirds of IMF programmes are interrupted before completion because of a failure to meet loan condition targets. This high rate of breakdown raises questions about the IMF's willingness to maintain programmes in countries where the commitment to economic reform is weak, for instance in Kenya and Zimbabwe. It also suggests that programme design and the failure to generate a sense of national ownership are serious problems in their own right.
The most serious problem in programme design is the focus on stabilising economies by compressing demand. There is now a general recognition that running large budget deficits, allowing money supply to expand too rapidly, and ignoring currency over-valuation, is unwise. But IMF programmes have attached far too much weight to squeezing demand through stringent controls on public spending and high interest rates. Supply-side considerations, such as the expansion of output over the long-run through investments in areas such as rural infrastructure and education, have been ignored.
The upshot is that, even where growth has taken place, it has been fragile and unstable. In Uganda, high rates of growth have not so far been backed by increased investment, which has increased only marginally. During Ghana's growth spurt in the first half of the 1990s, private investment never climbed above 6 per cent of GDP - a far lower proportion than in other low-income countries such as India. As the 'External Evaluation of the ESAF', written by a group of independent experts noted: 'The conjunction of high growth and low investment is not sustainable: either investment must rise or growth will fall.'
Distribution of growthFor the purpose of poverty reduction, it is the quality, as well as the quantity, of growth that matters. The larger the share of growth captured by the poor, the faster the rate of poverty reduction. Unfortunately, ESAF has been no more successful in improving income distribution than it has in raising growth.
Even in countries that have achieved stronger economic performances, the conversion of growth into poverty reduction has been limited:
o Ghana achieved a growth rate of 4 per cent a year in the second half of the 1990s, high by sub-Saharan African standards. But at this rate the average poor person will have to wait 30 years to see their incomes raised above the poverty line; the poorest of the poor will have to wait 40 years. One of the reasons for the slow rate of poverty reduction is that large sections of the poor have been excluded from the growth process. Poverty levels among staple food producers in the northern Savannah region have remained unchanged, and urban poverty is increasing.
o Uganda has achieved high rates of growth, but the benefits in terms of poverty reduction have been restricted by distributional problems. Per capita incomes in Uganda have been rising by over 3 per cent a year for a decade. Between 1992 and 1996, the incidence of rural poverty fell by 10 per cent. However, the rate of poverty The IMF in poor countries 17 reduction for households engaged in food-crop production fell at less than one-third of the rate for households growing cash crops. The rural area closest to urban markets - the Central Region - enjoys average incomes twice as high as in Uganda's northern and eastern regions. IMF programmes do not directly address distributional concerns; rather. it is assumed that the benefits of higher growth will automatically trickle down to the poor. This ignores the way in which markets work. While budget stabilisation and wider economic reforms can create market opportunities, poor people are often excluded from these opportunities because of a lack of assets, or because of the absence of a marketing infrastructure. Poverty reduction requires not just macroeconomic stability and efficient markets, but redistributive strategies backed by increased spending on priority social services.
The loan conditions attached to IMF programmes are not neutral in the way they affect distribution of growth; in fact, they frequently have negative outcomes. The impact on public spending - and hence on the access of poor people to health-care and education facilities - is an obvious example, which we consider below. But macroeconomic reforms often have a more significant impact on distribution. In Zambia, the IMF's loan in 1991 for an ESAF included a requirement that government liberalise its agricultural marketing system. The aim was to facilitate the entry of private traders, but in many rural areas the loss of the state-run marketing infrastructure prevented some of the poorest producers from getting access to the new private markets. This was hardly surprising, as almost half of the poorest households live more than 5km from a rural feeder road. Yet neither IMF staff -- nor, indeed, World Bank staff -- considered the implications of liberalisation, and exclusion from markets contributed to a 30 per cent decline in rural incomes in 1991-94.
In an assessment of its own programme in Zambia, the IMF has observed that improvements in macroeconomic indicators 'have been overshadowed by limited success in significantly reducing the incidence of poverty' It has been less forthright about considering its own role in creating an economic environment in which the number of poor people living in rural areas has increased from 3.7 million to 4.9 million, and in which worsening poverty has contributed to increased child death rates.
Has the IMF defended access to basic social services?Improved access to basic services such as health-care and education is vital if the objective of growth with equity is to be achieved. Education not only boosts growth and improves public health indicators, but it offers poor households with a way out of poverty. Similarly, improved health enables poor people to increase their production and reduces their vulnerability. According to the IMF, its programmes have a good record in protecting access to basic services. Once again, its claims are not supported by the evidence.
At the centre of the IMF's defence of its record is a claim that countries undergoing ESAF have increased their spending on basic social-sector budgets. One recent study produced by the Fund's Fiscal Affairs Department uses the familiar method of comparing spending before and after ESAF programmes in 32 countries. It concludes that spending on health-care and education per person rose by 2.8 per cent, and argues that this has contributed to improvements in social indicators such as primary school enrolment, infant mortality, and literacy.
In fact, the trend data on human welfare shows no change. But the more informative evidences emerges from a disaggregation of the IMF's own data, which casts its record in sub-Saharan Africa in a very dim light:
o Per capita spending on education in sub-Saharan African countries undergoing ESAF programmes fell by 0.7 per cent a year in per capita terms during the decade up to 1996.
o In a survey of average annual spending trends for 16 countries in sub-Saharan Africa, 12 suffered cuts in education spending per person.
o In the health sector, spending per person in Africa did increase, but very slowly (and at one-third of the rate in non-African countries). Once again, several countries - including Mali, Tanzania, Zambia, and Zimbabwe - were found to have suffered significant cuts in health spending under IMF programmes. In some cases, cuts in social-sector budgets have been extremely large. In Zambia, per capita spending on education during the 1990s has fallen by about 18 per cent from already low levels.
Meanwhile, an estimated 665,000 children are not in school; over half of those who are in primary school lack notebooks, and illiteracy rates are increasing. Public spending cuts under IMF programmes do not just affect the supply of basic services or the morale of staff whose wages are being cut. When governments fail to finance the provision of health-care and education, poor communities step in to fill the gap with their own resources and efforts. In Zambia, Oxfam is working with desperately poor families in the Copperbelt who are attempting to provide their children with an education in the face of rising poverty and deteriorating public services.
For the poorest households, however, education is often unaffordable. Over three-quarters of the children who drop out of primary school in Zambia do so because their parents cannot afford the fees. --------------------------------------------------------------------------------
If present trends continue, the number of children out of school in sub-Saharan Africa will increase from 47 million to 56 million in 2015.
-------------------------------------------------------------------------------- Similar problems have been reported in the health sector.
In Zimbabwe, per capita spending on primary health-care was cut by one-third in the first half of the 1990s. The government introduced cost-recovery measures in an effort to finance services by charging users. Once again, the poorest households were excluded. Registration for ante-natal care fell by one-third. The damaging consequences for human welfare are reflected in the fact that mortality rates for unregistered mothers were five times higher than the national average.
When confronted with evidence of cuts in spending on basic services, the IMF and World Bank are quick to point the finger at governments. They are often right to do so. Faced with a need to reduce budget deficits, many governments think first of 'soft' targets such as health-care and education, rather than areas such as military expenditure and subsidies to state enterprises, which are defended by powerful political interest groups.
But while governments may carry primary responsibility, the Fund itself has not been blameless. Once again, bad programme design lies at the heart of the problem. In Zimbabwe and Zambia, IMF loan conditions demanded that the government liberalise financial markets in spite of a large budget deficit financed by government borrowing and public debt. In both countries, financial liberalisation resulted in large increases in interest rates, driving up government debt repayments and reducing the resources available for priority social-sector investments. In Zambia, the share of government spending in GDP fell by half in a two-year period. In Zimbabwe, spending on social services collapsed. In both cases, as the 'External Review on the ESAF' puts it, 'sequencing problems contributed to avoidable reductions in per capita spending on health and education'.
As in evaluating the ESAF's record on growth, its record on basic services has to be put in context. The yardstick for good performance should not be whether per capita spending has moved marginally in one direction or the other. More relevant are the financing requirements for achieving the targets for 2015 agreed at the 1995 World Summit on Development.
At present, sub-Saharan Africa is further off track than any other developing region.
Child mortality: Using UNICEF data, Oxfam has projected the child mortality trends for the period 1990-97 of heavily indebted countries (a group which includes most countries undergoing ESAF programmes) to 2015. The target rate is 52 deaths per 1,000 live births compared to 154 deaths at present - a 66 per cent reduction over the 1997 rate. On current trends, the likely outcome will be an 18 per cent reduction. The gap between target and projected outcome represents about 2 million additional child deaths per year.
Education: If present trends continue, the number of children out of school in the region will increase from 47 million to 56 million in 2015. Seeking to defend the IMF's record by claiming, as some of the papers written by its staff do, that social-sector budgets have been protected relative to other items of expenditure misses the point. For instance, the Fund can point to evidence that its programmes have maintained the level of spending on primary education per person in Tanzania. But what does this mean when the level in question is less than $1 per child, and when 20 children share a single textbook in many rural areas? Similarly, protecting health-care budgets as low as $3-4 per person - as they are in countries such as Mozambique and Burkina Faso - would be woefully inadequate in any context.
In a situation where already overstretched health systems are collapsing under the weight of HIV/AIDS and new drug-resistant strains of malaria - a disease which claims almost 1 million lives in Africa each year - the problems are even more marked. The IMF could indeed be more vigilant in protecting social-sector budgets. It should work much more closely with the World Bank and the UN on this. However, the real challenge is to ensure that its programmes are maximising the public investment needed to get sub-Saharan Africa back on track for achieving the 2015 targets. This will require better co-operation with national authorities and other agencies, and must involve new approaches to the design of ESAF programmes.
Undermining aid effectivenessCountries with ESAF programmes depend heavily on development assistance, but the way these programmes are designed hampers the efficient use of aid. The issues appear technical, but they have important implications for the role of government in financing the social and economic investments needed to support poverty reduction.
Almost all IMF programmes for sub-Saharan Africa set ambitious targets for reducing budget deficits (the gap between what government collects in revenue and what they spend). Nobody is against fiscal prudence - large government deficits are bad for poverty reduction, because they generate inflation, which undermines the position of the poor; and because they undermine the investment needed to support growth. But the real questions are about the scale and pace of efforts to achieve stable budgets, and the IMF has got the answers wrong.
There is, in fact, no single formula for working out an appropriate fiscal deficit. For the IMF, inflation is the main consideration. However, the single-minded focus on inflation can prevent countries from achieving optimal outcomes for growth and security. Countries which have failed to stabilise must control high inflation, but beyond this - especially once countries have achieved single-digit inflation rates - governments need to consider the trade-off between reducing inflation through lower public spending, and the costs of reduced public spending in terms of lost opportunities for employment, health, and education.
In almost all cases, the IMF's loan conditions are linked to governments achieving a budget surplus, requiring them to collect more revenue than they spend. There is, however, an important twist the Fund's definition of revenue: it does not include donor aid. Under ESAF programmes, aid is insulated in central bank accounts, where it provides foreign exchange cover, rather than being used to finance government expenditure. Given that aid flows often represent more than 4 per cent of GDP in countries with ESAF programmes, the Fund's approach represents a significant restriction on public spending.
How does it justify this approach? First, by pointing out - with some justification - that aid flows are in long-term decline, and hence unreliable. Second, it argues that increasing public spending through aid will have inflationary consequences. Neither argument stands up to serious scrutiny, although both contain elements of truth.
While it is true that total aid flows are in decline, they are likely to increase to countries committed to reform. Donors are increasingly concentrating their aid resources on countries where the policy environment - including macroeconomic stability - is conducive to poverty reduction. For these countries, the scenario is not as bleak as the IMF suggests. In arguing that aid-financed public spending might fuel inflation, the IMF is betraying its monetarist leanings. It focuses on just one factor - public spending - in a complex equation. In countries where productive capacity is not being used because of, say, underinvestment in rural roads, public spending might be expected to increase output and thereby lower inflation. Similarly, where large numbers of children are out of school, or denied access to basic teaching materials, the productivity gains associated with education will be lost in the absence of increased public spending.
Judgements on inflation have to be based on complex calculations. What are the trade-offs between a small increase in investment today, and more children leaving school with an education that will make them more productive and less vulnerable tomorrow? If the government finances the development of an agricultural marketing system for smallholder farmers, how long will it be before the benefits come on stream - and how will they be distributed?
These questions can only be addressed on a case-by-case basis. In countries with very large budget deficits and extremely high levels of inflation, increased aid spending may have damaging consequences. But where budgets have stabilised and productive capacity is being lost because of inadequate spending, there is scope for non-inflationary aid spending. The problem with the IMF's approach is that it uses the same formula for all countries. This point has been taken up by the Chief Economist of the World Bank in a thinly veiled attack on the IMF's approach:
'For the last several years Ethiopia has run a deficit of about 8 per cent of G D P. Some outside policy advisers would like Ethiopia to lower its deficit. Others have argued that the deficit is financed by a steady flow of highly concessional foreign assistance,which is driven not by the necessity of filling a budget gap,but by the availability of high return to investment. Under these circumstances ... it may make sense for the government to treat foreign aid as a legitimate source of revenue,just like taxes, and balance the budget inclusive of foreign aid.'
Evidence from Tanzania strongly supports this appraisal. The target for the country's ESAF programme is a budget surplus equivalent to 2 per cent of GDP. In 1999, the Public Expenditure Review (PER)- a document produced by the government with the support of the World Bank and several donors - suggested that this represents 'a harder budget constraint than is necessary at present'. It is certainly far too hard a constraint for the education sector, where it is jeopardising progress towards universal primary education. As the PER puts it: 'Actual budgetary expenditures per pupil are so far below the targets which are considered desirable that these targets risk providing little practical guidance to sensible budgeting.'
It is true that a less ambitious budget deficit target might slightly increase inflation. But budget stringency and the pursuit of low inflation is not a cost-free alternative for the 1.2 million Tanzanian children who are not in school; or for the many millions of primary school children sitting in classrooms without roofs, books, pencils, and blackboards.
The Fund's highly restrictive approach to aid is especially damaging in countries recovering from emergency and conflict. Because the costs of reconstruction are high while the tax base is low, the fiscal deficits for these countries are likely to be large. However, the returns to public spending are likely to be very high: for instance, reconstructing a bridge in Nicaragua after Hurricane Mitch will enable smallholders to market their produce. But the Fund has failed to consider the specific needs of countries undergoing reconstruction, and - as in Mozambique - is often drawn into conflicts with bilateral donors.
The flaws of the IMF's current approach to fiscal policy under ESAF goes beyond debates about what budget targets are appropriate. Because these targets are set without consultation, there is no structure for considering how to integrate aid flows into medium-term strategies for poverty reduction. The upshot is that potential human development gains are being lost. This point was noted by the 'External Evaluation of the ESAF', which commented:
'The Fund's tendency to plan for a rapid decline in aid dependency seems inappropriate in such case: an increase in aid (and hence in the budget deficit) is both likely and desirable.'
Hampering poverty-reduction strategiesThe policy environment in many countries undergoing ESAF programmes is changing. Donors are placing an increased emphasis on developing national poverty-reduction strategies in partnership with governments. Recognising that old approaches, in which donors finance projects with tight conditions attached to loans, have failed, there has been a shift towards the development of policies across whole sectors, with a premium placed on national ownership. This new policy environment holds great promise for accelerating human development, but IMF policies present a serious obstacle.
At the centre of the new consensus on development is a commitment to a comprehensive approach to poverty reduction. In place of the old approach, which ranked economic fundamentals first and social policy second, the new framework sees economic policy as an integral element in a wider human development strategy which includes stabilisation policies, macroeconomic reform, and redistributive public spending policies. This is the idea behind the Comprehensive Development Framework (CDF) developed by the World Bank President, James Wolfensohn.
Ideas are being turned into practice through a range of innovations, among which the following are particularly significant: Medium-term financial frameworks.These frameworks enable governments to develop budget priorities over a longer period. They are being used to establish the financing requirements for achieving human development goals in areas such as basic education and health-care, enabling governments to project forward annual budgets over time.
Budget transparency and Public Expenditure Reviews (PERs).Far more attention is being paid to the development of transparent budgets and to monitoring expenditure against national priorities. PERs have been used in Tanzania to improve the efficiency of public expenditure and planning in education and other key social policy areas.
Sector-wide Approaches (SWAPs).Instead of financing individual projects, donors pool their resources to support strategies across whole sectors on the basis of partnerships with government. SWAPs help to identify the long-term financing requirements for achieving specified human development goals. An example is the Ethiopian Education Sector Development Plan, under which government and donors have agreed a strategy for achieving universal primary education by 2015.
These three mechanisms have been central to the development of comprehensive poverty-reduction strategies. In Uganda, for instance, the Poverty Eradication Action Plan (PEAP) is part of a medium-term financing strategy for achieving goals set out in sector-wide plans for health-care and education.
The IMF's roleHow does the IMF relate to these mechanisms? In short, not at all. At the centre of the IMF's programmes in low-income countries is the Policy Framework Paper (PFP). Technically, this document is owned by the national authorities and the World Bank, as well as the IMF. In practice, however, it is written by the Fund and then rubber-stamped. IMF staff set the main targets for policy reform in Washington before paying a short visit to the country concerned for discussions with the finance ministry. Social-sector ministries are seldom involved, and other donors, including the World Bank, are barely consulted. The external review of the ESAF noted that IMF programmes had undermined the national ownership essential to successful policy reform.
An obvious consequence of this arrangement is that ESAF targets and loan conditions are - at best - weakly related to the polices developed as part of national poverty-reduction strategies. Human development targets are not factored into ESAF design: in many cases, the prescribed level of public spending is inconsistent with that required to achieve the goals set in national health and education plans. Yet although the IMF is not part of the comprehensive approach to poverty reduction, its programmes define the macroeconomic environment in which others operate.
This situation must be turned on its head. The IMF should be one of many stakeholders in the national poverty-reduction process. If ESAF programmes are to contribute to a policy environment that is conducive to poverty reduction, new approaches to design and development will be needed. Instead of adjusting poverty-reduction strategies to meet IMF targets, ESAF programmes should be integrated into a wider human development framework. The design of ESAF programmes must allow governments sufficient flexibility to pursue strategies for achieving sustained growth with equity. This implies more than a change of IMF policy priorities: it involves new ways of working and different institutional relationships.
The IMF's role should be to identify, through dialogue with others, financing strategies for achieving the human development goals set in national poverty-reduction plans. This would have the additional benefit of making the IMF more accessible to civil society. One option might be to integrate the IMF into the World Bank's Comprehensive Development Framework. What is clear is that business cannot be allowed to continue as usual.
