At this year’s Spring Meetings of the International Monetary Fund (IMF) and World Bank, US Treasury Secretary Scott Bessent criticized the IMF for “mission creep,” arguing that it has diverted attention from its essential functions—such as macroeconomic and financial stability—toward issues such as climate change, gender issues, and social policy. He urged the IMF to “stay true to its missions” and focus on core areas including exchange rates, fiscal policy, monetary oversight, financial sector health, and surveillance.
Bessent’s comments have prompted thoughtful responses highlighting areas where the IMF’s role could be strengthened such as IMF surveillance and the quality of its lending and debt sustainability framework. Bank of England Governor Andrew Bailey echoed and endorsed Bessent’s call for sharper focus.
In this blog post, however, I want to examine the evolution of the IMF’s thinking on social policy and how it has become integral to its policy advice. Social policy now permeates many aspects of the IMF’s work, including fiscal policy, banking systems, trade and industrial policies, and growth-oriented reforms. Here, I will focus specifically on the fiscal dimensions of social policy.
Although the IMF is not a development institution, many of its members are developing countries. And understanding development requires engaging with issues that extend beyond the IMF’s traditional core mandate.
Social policy in the IMF’s fiscal advice first entered the IMF’s agenda in the late 1980s, when it became clear that the economic and political sustainability of adjustment programs that it supported in developing countries depended on incorporating social safety nets. These were designed to protect vulnerable groups from the adverse effects of fiscal adjustment and structural reforms, and to safeguard their access to essential public services such as health and education. Such considerations were particularly pressing in countries emerging from the breakup of the Soviet Union and the former Yugoslavia in 1990s, where the transition to market economies also led to sharp declines in government revenues, which meant that these countries had substantially reduced resources to maintain existing social programs.
Before the 1980s, the IMF largely focused on the overall size of public spending consistent with macroeconomic stability, leaving decisions on its composition to member governments. Subsequent research, however, showed that the composition of spending matters greatly—not only for growth but also for social cohesion.
In 1996, the IMF, together with the World Bank, launched the Heavily Indebted Poor Countries (HIPC) Initiative. Debt relief under HIPC was tied to increased pro-poor spending, particularly in health and education, consistent with donor priorities. Beneficiary countries were also required to prepare three-year poverty reduction strategy papers, updated annually. The broadening of social concerns in IMF programs for low-income countries was reflected in the creation of the Poverty Reduction and Growth Facility (PRGF) in 1999, which was later replaced by the Extended Credit Facility (ECF) in 2009. These concessional loans, with below-market interest rates and long maturities, continue to incorporate attention to social needs in reforming economies. These facilities recognized that macroeconomic stability is necessary but not sufficient for growth. While the Fund’s primary role was to secure macro stability, taking that role seriously also meant addressing other factors essential for growth—many of which lay in the social sectors.
With growing concerns about income and wealth inequality across virtually all IMF member countries—and evidence from economic literature that growth and sound social policies can reinforce one another—the IMF has come to recognize that well-targeted social spending within a sustainable fiscal framework can help achieve distributional objectives.
Consider two examples from Africa and Asia. In the early 2000s, energy subsidies in Ghana and Indonesia exceeded an unsustainable 2 percent of GDP. Both governments reduced these budgetary costs by adjusting prices while introducing measures to cushion vulnerable population groups from higher prices. Experience shows that redistributive spending policies are generally more effective than tax instruments in protecting vulnerable groups during fiscal adjustment—a lesson underscored globally during the COVID-19 pandemic.
Fiscal policy remains at the core of the IMF’s mandate. Yet any changes in taxes or reduction in generalized subsidies (whether modest or far-reaching) and in the composition of public expenditure, inevitably, carry social and distributional consequences. In other words, IMF staff influence income distribution in carrying out their core functions. Over time, the Fund has increasingly acknowledged these implications in its surveillance of member countries’ policies, the design of IMF-supported reform programs, and its capacity-building efforts.
While the Fund’s engagement with social policy initially grew out of concerns for vulnerable groups in developing and transition economies, it has gradually become relevant in advanced economies as well. These countries are grappling with high debt levels, persistent fiscal deficits, and interest payments on debt exceeding 3 percent of GDP. At the same time, demographic pressures are driving up healthcare and pension spending, further straining fiscal positions. The fiscal adjustments that advanced economies will inevitably need to undertake must therefore incorporate social considerations to maintain equity and political sustainability.
Importantly, incorporating social concerns into IMF policy advice does not mean the institution must carry out this work on its own. It also draws extensively on the expertise of others, such as the World Bank and the OECD.
The IMF’s fiscal policy advice has improved significantly over time by systematically integrating social concerns. A reversal of this progress would represent a major setback for member countries.
I wish to thank Mark Plant for insightful comments on the earlier draft.
