The Invisible Hand: The Invisible Hand: How the IMF Undermines Health How the IMF Undermines Health Systems in Developing CountriesSystems in Developing Countries

Paul JensenPaul JensenRESULTS Educational FundRESULTS Educational Fund

June 13, 2008June 13, 2008Ottawa, CanadaOttawa, Canada

OverviewOverview

Role of the IMF in Low-Income Role of the IMF in Low-Income CountriesCountries

IMF Programs – Indirect but IMF Programs – Indirect but significant impact on health significant impact on health spending, including HRHspending, including HRH

Interest & AdvocacyInterest & Advocacy Action StepsAction Steps

ContextContext

MDGs, Abuja, G8, Universal Access, Global MDGs, Abuja, G8, Universal Access, Global HR Roadmap - will take sustained period of HR Roadmap - will take sustained period of higher investment from both LICs and higher investment from both LICs and donorsdonors

Higher health spending is esp critical in Higher health spending is esp critical in LICs – most health systems can’t provide LICs – most health systems can’t provide basic package of interventionsbasic package of interventions

Recent increases have only offset previous Recent increases have only offset previous reductionsreductions

*Disclaimer**Disclaimer*

IMF policies do not DIRECTLY IMF policies do not DIRECTLY determine the quantity or the quality determine the quantity or the quality

of health financing. However, they of health financing. However, they INDIRECTLY impact health spending INDIRECTLY impact health spending

by constraining the size of the by constraining the size of the national budget and by promoting national budget and by promoting policies that can slow the speed of policies that can slow the speed of

economic growth at the cost of economic growth at the cost of revenue.revenue.

How Is the IMF Influential?How Is the IMF Influential?

1. Advising countries on 1. Advising countries on macroeconomic policy: IMF programs macroeconomic policy: IMF programs help determine national economic help determine national economic policiespolicies

2. “Signaling effect”: IMF program = 2. “Signaling effect”: IMF program = access to assistanceaccess to assistance

Program negotiations are Program negotiations are “transparency-challenged”“transparency-challenged”

Rules of IMF ProgramsRules of IMF Programs

Neo-liberal economic modelNeo-liberal economic model Goals:Goals:

• Small deficitsSmall deficits• Low inflation (5-7%)Low inflation (5-7%)

Priority on macroeconomic stabilityPriority on macroeconomic stability Less emphasis on public investments Less emphasis on public investments

for human needsfor human needs Sees limited role for governments vs. Sees limited role for governments vs.

the private sector the private sector

IMF Program TargetsIMF Program Targets

Fiscal targets – Impact budget sizeFiscal targets – Impact budget size• ““Fiscal space”Fiscal space”

Fiscal targeting indirectly impacts Fiscal targeting indirectly impacts health spending through impacting health spending through impacting size of the national budgetsize of the national budget

Fiscal policy that’s too risk averse Fiscal policy that’s too risk averse can eliminate options for key can eliminate options for key spendingspending

National Budget

National Budget

National BudgetNational Budget

National Budget

National Budget

NY TimesNY Times

““There is a desperate need for greater policy There is a desperate need for greater policy coherence in a period when many national coherence in a period when many national governments, including Washington, are sensibly governments, including Washington, are sensibly exhorting African governments to spend more on exhorting African governments to spend more on primary health care and education while primary health care and education while international financial institutions largely international financial institutions largely controlled by those same Western governments controlled by those same Western governments have been pressing African countries to shrink have been pressing African countries to shrink their government payrolls, including teachers and their government payrolls, including teachers and health care workers.”health care workers.”

  -- The New York Times. “Africa at the Summit,” 2005-- The New York Times. “Africa at the Summit,” 2005

IEO ReportIEO Report

Looked at 29 countries in SSA with Looked at 29 countries in SSA with IMF programs from 1999-2005IMF programs from 1999-2005

Each new $1.00 in expected aid Each new $1.00 in expected aid increases led to $0.27 in additional increases led to $0.27 in additional spendingspending

Only countries meeting IMF program Only countries meeting IMF program fiscal and monetary targets were fiscal and monetary targets were permitted to program new aidpermitted to program new aid

IEO ReportIEO Report

IMF paid “almost no attention to IMF paid “almost no attention to sectors such as education, health or sectors such as education, health or infrastructure”infrastructure”

No evidence that the IMF “took into No evidence that the IMF “took into account possible trade-offs” b/t account possible trade-offs” b/t financing constraints and financing constraints and opportunitiesopportunities

CGD ReportCGD Report

““The evidence suggests that IMF-The evidence suggests that IMF-supported fiscal programs have often supported fiscal programs have often been too conservative or risk averse. been too conservative or risk averse. In particular, the IMF has not done In particular, the IMF has not done enough to explore more enough to explore more expansionary, but still feasible, expansionary, but still feasible, options for higher public spending.” options for higher public spending.”

IMF Program TargetsIMF Program Targets Monetary targets – Inflation reduced to 5-Monetary targets – Inflation reduced to 5-

7% range7% range ““The IMF and other global policy-setting The IMF and other global policy-setting

institutions strongly support low inflation institutions strongly support low inflation targets, usually at about a 5% threshold. targets, usually at about a 5% threshold. Yet there is almost no evidence that Yet there is almost no evidence that holding inflation at such a low level holding inflation at such a low level necessarily promotes economic growth.” necessarily promotes economic growth.” – – Pollin, Epstein & Heintz (2008)Pollin, Epstein & Heintz (2008)

““Empirical evidence does not justify Empirical evidence does not justify pushing inflation to these levels in low-pushing inflation to these levels in low-income countries.” - CGDincome countries.” - CGD

Review of Inflation Literature Review of Inflation Literature Some empirical studies on ‘kinks’ in the relationship between

inflation and growth

IMF Papers Outside Papers Estimated Inflation Thresholds  Fisher (1993) 15-30 %

  Bruno and Easterly (1998) 40%

  Burdekin, et al (2000) 3% for developing and 8% for rich countries

  Gylfason and Herbertsson (2001) 10-20%

  Pollin and Zhu (2005) 15-18%

  Bruno (1995) 20%

  Barro (1996) Finds that a 10% increase in the annual inflation rate is associated on impact with a decline in GDP’s annual growth rate of only 0.24%.

Sarel (1996)   8%

Khan and Senhadji (2001)

  11-12% for developing & 1-3 % for rich countries

Ghosh and Phillips (1998)

  Finds that the inflation-growth relationship is convex, so that the decline in growth associated with an increase of 10-20% inflation is (1998) much larger than that associated with moving from 40 to 50% inflation.

Pollin, Epstein & Heintz, 2008Pollin, Epstein & Heintz, 2008

-- Pro-growth alternatives for monetary and financial policies in sub-Saharan Africa. International Poverty Centre, UNDP. Policy research brief No.6

Pollin et al (2008)Pollin et al (2008)

…”…”Setting the inflation threshold at 5% Setting the inflation threshold at 5% creates by itself a slow growth bias creates by itself a slow growth bias since the primary methods since the primary methods recommended for dampening recommended for dampening inflationary pressures are to raise inflationary pressures are to raise nominal interest rates and cut nominal interest rates and cut government spending. …government spending. …

Pollin et al (2008)Pollin et al (2008)

“…“…Of course, policymakers need to be Of course, policymakers need to be vigilant about controlling inflation. vigilant about controlling inflation. But they should address this problem But they should address this problem by determining the sources of by determining the sources of inflationary pressures and whether inflationary pressures and whether economic growth and employment economic growth and employment expansion [think HRH] could, indeed, expansion [think HRH] could, indeed, benefit from a less restrictive benefit from a less restrictive macroeconomic environment.”macroeconomic environment.”

Further SupportFurther Support

““Getting inflation down from 40% to 10% Getting inflation down from 40% to 10% is not so bad. It’s getting inflation further is not so bad. It’s getting inflation further from 10% to 5% that really hurts.”from 10% to 5% that really hurts.”

- Peter Howitt- Peter Howitt ““Policies that are overly concerned with Policies that are overly concerned with

macroeconomic stability may turn out to macroeconomic stability may turn out to be too austere, lowering economic growth be too austere, lowering economic growth from its optimal level and impeding from its optimal level and impeding progress on poverty reduction.” - GAOprogress on poverty reduction.” - GAO

Further SupportFurther Support

IEO – “[T]he evidence points to IEO – “[T]he evidence points to inflation concerns as a major driver inflation concerns as a major driver of cross-country differences in of cross-country differences in programmed spending of programmed spending of incremental aid…countries with incremental aid…countries with inflation rates below 5% get to spend inflation rates below 5% get to spend 79% of anticipated increases, on 79% of anticipated increases, on average, whereas countries with average, whereas countries with higher inflation get to spend only higher inflation get to spend only 15% of such increases, on average.”15% of such increases, on average.”

Wage Bill CeilingsWage Bill Ceilings

Place cap on hiring/wages of public Place cap on hiring/wages of public employeesemployees

CGD – 17 of 42 IMF programs from CGD – 17 of 42 IMF programs from 2003-2005 included some ceiling on 2003-2005 included some ceiling on the wage bill: “have been overused”the wage bill: “have been overused”

June 2007 IMF board announcementJune 2007 IMF board announcement IMF should desist from using wage IMF should desist from using wage

bill ceilings as a means of influencing bill ceilings as a means of influencing allocationsallocations

Interest and AdvocacyInterest and Advocacy 1 Oct. 2007 – CSO letter to DSK1 Oct. 2007 – CSO letter to DSK 120 signatories120 signatories 5 points:5 points:

• Allow greater use of foreign aid for its intended purposeAllow greater use of foreign aid for its intended purpose• Enable the exploration and adoption of more Enable the exploration and adoption of more

expansionary fiscal and monetary policiesexpansionary fiscal and monetary policies• Publicly state that the IMF will cease its use of wage bill Publicly state that the IMF will cease its use of wage bill

ceilingsceilings• Provide immediate debt cancellation for all impoverished Provide immediate debt cancellation for all impoverished

countries without harmful policy conditions attachedcountries without harmful policy conditions attached• Provide more robust consultation process with more Provide more robust consultation process with more

stakeholders about the potential impacts of various stakeholders about the potential impacts of various policy options before actions are takenpolicy options before actions are taken

Described in Nov 2007 Described in Nov 2007 LancetLancet World Report: World Report: “Experts call for reform of the International “Experts call for reform of the International Monetary Fund”Monetary Fund”

Interest & AdvocacyInterest & Advocacy

14 Nov 2007 – U.S. House Financial 14 Nov 2007 – U.S. House Financial Services Committee Letter to DSKServices Committee Letter to DSK

9 committee staff signatories9 committee staff signatories ““We are concerned by the IMF’s adherence We are concerned by the IMF’s adherence

to overly rigid macroeconomic targets in to overly rigid macroeconomic targets in [low-income] countries…It is particularly [low-income] countries…It is particularly troubling to us that the IMF’s policy troubling to us that the IMF’s policy positions do not reflect any consensus positions do not reflect any consensus view among economists regarding view among economists regarding appropriate inflation and reserve targets.”appropriate inflation and reserve targets.”

Interest & AdvocacyInterest & Advocacy Gold sales provides critical opportunity – Gold sales provides critical opportunity –

Requires US Congressional approvalRequires US Congressional approval WSJ – “Global gold diggers”WSJ – “Global gold diggers” US CSO letter – 80 signatoriesUS CSO letter – 80 signatories Requests sales conditioned on:Requests sales conditioned on:

• Eliminating restrictive fis. & mon. targetingEliminating restrictive fis. & mon. targeting• Aid used as intendedAid used as intended• Debt cancellation de-linked from Debt cancellation de-linked from

conditionalitiesconditionalities• Improved transparencyImproved transparency• Democratic program negotiationsDemocratic program negotiations

Interest & AdvocacyInterest & Advocacy CHOGM meeting – UK, July 2008CHOGM meeting – UK, July 2008 ““We recognize that sovereign states must We recognize that sovereign states must

have the capacity and freedom to have the capacity and freedom to determine national goals and implement determine national goals and implement national policies and strategies.”national policies and strategies.”

““We intend to pursue the redefining of the We intend to pursue the redefining of the purposes and governance of the Bretton purposes and governance of the Bretton Woods institutions…”Woods institutions…”

Developing Action Plan on Reform of Developing Action Plan on Reform of International Institutions, w/CSO International Institutions, w/CSO involvementinvolvement

Extraordinary meeting in Sept. 2008Extraordinary meeting in Sept. 2008

REF ProjectREF Project

REF research and advocacy projectREF research and advocacy project 3 countries – Kenya, Tanzania and Zambia3 countries – Kenya, Tanzania and Zambia Purpose: analyze the impact of IMF Purpose: analyze the impact of IMF

program policies on budget process; raise program policies on budget process; raise awareness of issue among CSOs and urge awareness of issue among CSOs and urge wider stakeholder participation in the wider stakeholder participation in the negotiations of IMF programsnegotiations of IMF programs

Partnering w/ CEGAA to conduct researchPartnering w/ CEGAA to conduct research Approaching advocacy partners nowApproaching advocacy partners now

Action StepsAction Steps

1.1. Demand the IMF to revise and publicize the Demand the IMF to revise and publicize the macroeconomic constraints implemented via macroeconomic constraints implemented via IMF programsIMF programs

2.2. Demand that costs and benefits of more Demand that costs and benefits of more expansionary policy options be more fully expansionary policy options be more fully exploredexplored

3.3. Demand greater stakeholder involvement in IMF Demand greater stakeholder involvement in IMF program negotiationsprogram negotiations

4.4. Call on government to raise this issue through Call on government to raise this issue through representation on IMF Exec Board (which representation on IMF Exec Board (which approves IMF programs)approves IMF programs)

5.5. See ActionAid International brief for more infoSee ActionAid International brief for more info

SummarySummary A transformation in development (e.g., toward A transformation in development (e.g., toward

MDGs) requires a major scaling up in public MDGs) requires a major scaling up in public investment – current rules limit this.investment – current rules limit this.

There is mounting evidence that key IMF program There is mounting evidence that key IMF program policies are too conservative in light of national policies are too conservative in light of national investments needed to meet health crises, pursue investments needed to meet health crises, pursue the MDGs, hire & retain health workers. the MDGs, hire & retain health workers.

Advocacy is key to the promotion of more Advocacy is key to the promotion of more “expansionary” policies that enable a scale-up in “expansionary” policies that enable a scale-up in health investment, including for HRH.health investment, including for HRH.

ConclusionsConclusions

““The worst of all worlds would be for The worst of all worlds would be for the IMF to pretend that it can the IMF to pretend that it can continue to play its current major continue to play its current major role in [low-income] countries role in [low-income] countries without adapting its way of doing without adapting its way of doing business to the new challenges they business to the new challenges they face.”face.”

- David Goldsbrough, CGD- David Goldsbrough, CGD