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Does the IMF Constrain Health Spending in Poor Countries? Q&A With David Goldsbrough on CGD Working Group Report

September 4, 2007

Some critics allege that IMF programs in low-income countries unnecessarily limit health spending, hurting poor people. The IMF responds that its programs are designed to ensure the fiscal stability that is needed for poverty-reducing growth and that the IMF merely sets targets for overall spending, with countries themselves deciding what part of the total to allocate to health. In the fall of 2006, the Center for Global Development convened a Working Group of 15 experts from policy-making positions in developing countries, academia, civil society and multilateral organizations to explore this issue and propose alternatives to this impasse. The group studied IMF fiscal policy design, the IMF role in the aid architecture, wage bill ceilings, and the disconnect between macroeconomic and health policymaking. David Goldsbrough, visiting fellow with CGD and chairman of the Working Group, answers questions about the group's key recommendations (see CGD brief and full report) and recent shifts in IMF policy.

The report will be presented at a CGD forum on Friday, Sept. 7.

Q: There has been a lot of debate between the IMF and its critics on the effect of Fund programs on health spending. What did the Working Group find?

A: The Working Group reached several broad conclusions on the IMF role. First, IMF-supported fiscal programs have often been too conservative or risk-averse. Despite some increased flexibility in recent years, they have often unduly narrowed the policy space by failing to investigate more ambitious, but still potentially feasible, options for higher spending and aid. Second, the IMF Board and management have not made sufficiently clear what is expected of IMF staff in exploring the macroeconomic consequences of alternative aid scenarios. As a result, the IMF has risked sending confused signals to donors and recipient governments. Third, wage bill ceilings have been overused in IMF programs and should be limited to the (probably rare) circumstances where a loss of control over payrolls threatens macroeconomic stability. IMF programs have usually attempted to protect hiring and wages in the health and education sectors from the effects of aggregate wage ceilings, but such efforts cannot be enforced in practice. And long-run decisions on the wage bill involve social and economic choices beyond the IMF mandate.

Q: What about the "IMF way of doing business" in low-income countries needs to change?

A: More generally, the IMF needs to adapt its approach in low-income countries to its expected role and be crystal clear about what that role is. The recommendations of the Working Group assume that the IMF will remain a key macroeconomic policy and risk advisor in these countries. But since short-term macroeconomic stability problems are no longer the most pressing issue in most of these countries, the IMF should help countries cope with the macroeconomic challenges of choosing between a broader range of feasible options for the fiscal deficit and public spending, including exploring the prospects for scaled-up aid. This will require less emphasis on negotiating short-term program conditionality and more emphasis on integrating macroeconomic assessments with sector-level analysis of the consequences of different public expenditure options. Since the IMF has neither the mandate nor the expertise to undertake such micro analysis, it needs to adapt its approach to facilitate greater inputs from others and to be humble in its macroeconomic assessments when key information is lacking.

Q: Has there been any response? Is the Fund moving in the direction of the report's recommendations?

A: In addition to a staff response posted on the IMF website, recent policy decisions by the IMF Board in July 2007 are in keeping with our report's recommendations. The Board policy decisions emphasized that, in an environment of scaled-up aid, macroeconomic policy formulation should be based on a longer-term view of spending plans and potential resource availability. The Board also endorsed an approach in which IMF programs should generally support the full spending and absorption of aid, along with greater emphasis on protecting priority expenditures from adverse shocks, provided that macroeconomic stability is maintained. The Board also welcomed the declining use of wage bill ceilings in programs and called for their use in exceptional cases to be justified in a transparent manner.

But more needs to be done. The IMF medium-term strategy and the recent reports fail to make clear what IMF staff should do with regard to assessing prospects for scaling-up aid. The Board has called for baseline scenarios with estimates of what aid is likely to be delivered. But it has not made clear how far the staff are expected to go in exploring the macroeconomic consequences of more ambitious scenarios. The Working Group report called for more explicit guidance on such analysis and suggested that in many cases it is appropriate to investigate a scenario consistent with the commitments to expand aid made at the 2005 Gleneagles Summit—e.g., to double aid to Africa.

Q: What changes do donors, governments, and civil society need to make?

A: The Working Group identified a striking disconnect between macroeconomic and health sector policy-making. Key fiscal decisions are taken with little understanding of the potential consequences for the health sector and health ministries typically cannot make an effective case for health funding. Addressing these gaps will require eternal support but governments must take the lead in setting priorities. The role of parliaments also needs to be enhanced. Donors, who have often worsened the fragmentation of budgetary processes, should improve the predictability of their aid by making longer-term commitments. Civil society organizations involved in budgetary and health advocacy issues should give greater attention to monitoring and influencing the setting and implementation of annual budgets, which is the key battleground for priority-setting and where actual decisions do not always match the political rhetoric on the importance of health.

David Goldsbrough will be joined by representatives from the IMF and the African Union on Friday, September 7th at a public CGD event to further discuss the findings and impact of the Working Group report.