The medicine is too bitter

Author: 
Roberto Bissio

"You have to imagine the IMF as a doctor”, said Dominique Strauss-Kahn, head of the International Monetary Fund, in an interview with the German magazine Der Spiegel. "The money is the medicine. But the countries - the patients - have to change their habits if they want to recover. It doesn't work any other way." http://www.spiegel.de/international/world/0,1518,721158,00.html

But the United Nations Children’s Fund (UNICEF) believes there are other ways. And a recent study on the economic policies recommended by the IMF to 126 middle and low income countries concludes that the treatment prescribed to resuscitate their economies may be prejudicial to children and their mothers. http://www.unicef.org/socialpolicy/index_56435.html

In economics you can postpone an investment today to make a bigger profit tomorrow, but, as UNICEF points out, when it comes to children, “the window of intervention in foetal development and growth among young children is very limited”, in other words “their deprivations today, if not addressed promptly, will have largely irreversible impacts on their physical and intellectual capacities, which will in turn lower their productivity in adulthood — this is a high price for a country to pay.”

UNICEF maintains that “providing immediate and adequate support for children and their families is an urgent imperative” and therefore “it requires a careful assessment of the risks facing vulnerable and poor populations and balancing policies to restore medium-term macroeconomic sustainability with those to protect and support the socially and economically vulnerable in the immediate term."

However, when economic policies are formulated, children and vulnerable populations in general count for very little. According to a confidential report from the Organization for Economic Co-operation and Development (OECD) gathering a group of aid donor countries and based in Paris, “the IMF has the obligation to form its own opinion about the macroeconomic policies that are needed to achieve a sustainable balance of payments and make reasonable progress towards price stability.

In each developing country there are highly technical negotiations between the IMF and a small group of finance experts from the central bank, but the consequences of these talks in terms of economic growth and poverty reduction can be very far-reaching.”

The author has gained access to this analysis, but it will not be published unless the IMF approves it. In it, the OECD recognises “criticisms” that call for “objectives and specific goals to be widely debated”. Furthermore, “although there are good examples of energetic countries that have persuaded the IMF to modify its position, a more transparent approach has not been institutionalized”.

Using data from IMF fiscal projections (this study is available at: www.unicef.org/socialpolicy/index_56435.html), UNICEF researchers Isabel Ortiz and Jingqing Chai have shown that nearly half the counties analysed are planning to reduce public spending in the period 2010-2011 comparing 2008-2009 levels.

Around a quarter of the countries will make cuts of an average of 6.9 per cent, a shrinkage in public expenditure “raises concern” given the “still fragile and uneven recovery and the continued crisis impacts on vulnerable populations in many developing countries”.

The report lists the adjustment measures that were frequently considered by policymakers in 2009-2010: (i) wage bill cuts or caps, (ii) limiting subsidies and (iii) further targeting social protection, as well as highlight their potential risks to children and poor households.

The report recognises that macroeconomic stability and an improved fiscal position are important for mitigating another possible crisis in the future, but it questions whether the planned fiscal adjustment policies in some countries – in terms of their extent and speed of implementation - are adequate when it comes to protecting vulnerable households.

UNICEF points out that recent experience of public spending cuts show that “when governments resorted to aggregate fiscal cuts, social spending was typically unprotected.” During the crisis of the 1980s, expenditure on health, education and social security was cut back more than defence spending.

In Argentina in the 1980s and 1990s, the fiscal adjustment measures entailed greater cuts to social spending, and in this area the cuts in employment and assistance programmes for poorer population sectors were more severe than the cuts in universal social services (those catering to the population in general).

In that period in Peru, the cuts to health services were so savage that there was a marked increase in infant mortality. UNICEF concludes that “these findings highlight the need for action to support pro-poor spending at times of aggregate fiscal contraction,” and this is difficult to do when decisions about cuts are made in small secret meetings.

And sometimes the impact of cuts is difficult to predict. Many IMF reports about different countries recommend measures like pay cuts, reducing or eliminating food or fuel subsidies and reforming or “rationalising” social protection.

If these measures are well designed and implemented they should generate fiscal savings that make it possible to improve the health and education services that are indispensable if poverty is to be reduced. However, in the short term pay cuts can lead to delays in payment, a fall in consumption, more severe economic recession, and worse quality services above all in poor areas.

UNICEF has found that in 2009 teachers’ and nurses’ real pay fell as a consequence of rising prices. In half the countries analysed pay in these sectors is inadequate, which makes for absenteeism, a brain drain and deterioration in social services.

And UNICEF considers that even the support measures “focalised” on the very poor that the IMF and the World Bank recommend are often badly designed and exclude many people who need them, or involve very expensive processes or delays in determining who should qualify for benefits and who should not. It may be preferable to have universal benefits, like those that go to all families with children or to a specific geographical region.

Unlike the management of the IMF, UNICEF believes that indeed there are other ways to defend social expenditure in times of crisis, and it has formulated a long series of options that include imposing progressive taxes (on rents, the financial sector, cars or cigarettes), reducing tax evasion, eliminating inefficiency, making cuts to military expenditure, using reserves that have been accumulated in the last decade, and even making changes to macroeconomic policies so as to allow a greater deficit until the economy recovers, something that Indonesia has actually done.

This is not an attempt to defend bad habits, but rather a suggestion that sometimes it is better to change the doctor, or at least to get a second opinion.