A new report by Medicins sans Frontieres is among the latest to call on the IMF to drop wage bill ceilings with low-income countries. Alongside three other recommendations, MSF recommends that the IMF and ministries of finance drop wage bill ceilings given their distortionary and negative impact on the expansion of the health care workforce to combat HIV/AIDS. In my work with David Goldsbrough and the Working Group on IMF Programs and Heath Expenditures, I've become convinced that this demand is mostly correct, at least as far as the IMF is concerned.
The IMF currently has programs in dozens of low-income countries, mainly through its Poverty Reduction and Growth Facility (PRGF). The Fund rarely lends significant amounts of money in these arrangements but they function as a signal to donors and investors on the macro-economic conditions of a country. Wage bills have become a frequent element of conditionality in these programs with 17 out of 42 PRGF programs (13 of 24 PRGF programs in Africa) from 2003-2005 having some form of wage bill ceiling.
In my opinion, there is a case for IMF intervention when the government wage bill spins so far out of control that the government no longer knows who it is paying and the fiscal liability threatens to undermine macroeconomic stability. Zambia circa 2003 is a case in point of this. Unfortunately, the IMF has continued to use what is an instrument of short-term macroeconomic conditionality to try to influence other policy decisions - such as long term choices on how much public spending should go towards wages or to encourage civil service reform (highly desirable but not likely to be achieved through a wage bill ceiling).
IMF wage bill ceilings are blunt instruments that cover the whole budget (there is no recorded case of an IMF wage bill ceiling on health or education) and most IMF programs make serious efforts to ensure that the ceiling allows for an expansion in the health and education workforce. IMF program documents are replete with statements, often taken to ludicrously specific levels, that a program allows for recruitment of 5,443 teachers and 1,767 health workers (to use the example of the second review of the most recent PRGF program with Mozambique). Unfortunately, political realities often allow politically "stronger" ministries to crowd out "weaker" ministries (read: health and education) in hiring under the budget-wide ceiling. Certain sectors, namely education and health, have particularly heavy wage expenditure components and fundamentally political considerations on inter-sectoral expenditure allocations should drive the size of the overall wage bill. If a country chooses to invest heavily in HIV/AIDS treatment through a larger health workforce, and the wage bill subsequently rises but does not pose a serious macroeconomic risk, it is not the IMF's role to artificially impose ceilings. It's time for the Fund to retire the wage bill from its conditionality toolbox except in those rare cases where a payroll explosion truly endangers macroeconomic stability.
