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After listening to Dominique Strauss-Kahn’s speech at the CGD-SAIS conference on April 23, I almost had to pinch myself: new lending instruments without conditionality and without pre-established limits? Stand-by agreements with social conditionality—that is, requirements designed to protect the poorest? These are very important steps for an institution, which until recently, developing countries saw as the “bad cop” for decades.

This new IMF 2.0, as Time magazine has called it, can help on three important fronts. First, the Flexible Credit Line (FCL) can help countries deter attacks on their currencies that have little or nothing to do with their governments’ economic policies. Second, because the FCL is offered to countries that have sound policies in place, there are no conditions. The “no conditions” dimension will end up eliminating the stigma of requesting IMF support because it will no longer signal that governments are doing things wrong. The proof that this is working already is that in countries that have requested the FCL as a precaution (Mexico, Poland and Colombia, thus far), the currencies appreciated after the announcement was made. Third, the so-called social conditionality can help protect the poor and vulnerable from the consequences of fiscal adjustment. In the past, the IMF did not make an effort to identify a pro-poor “triage” in the budget cuts that were part of its stand-by loans conditions. Consequently, because the poor are also the powerless, pro-poor spending could be subject to cuts that did not make any sense. But social conditionality can go even further. It can help create the fiscal space for new programs that help mitigate the impact of adjustment on the poor. Protecting the pensioners who are poor from budget cuts (as was done in some stand-by agreements in Eastern Europe) or implementing cash transfer programs for the poor (as in Pakistan), are very good examples of how fiscal austerity measures can be pro-poor.

It seems that the Fund is in the process of embracing socially responsible macroeconomics. For the sake of the world’s poor, we should all hope that it succeeds.

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CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.