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International Monetary Fund Programs and Health Spending
This work has now concluded.
Health spending is highly sensitive to overall fiscal policies. As low- and middle-income countries try to optimize health service provision using their own resources and also foreign aid, macroeconomic policies agreed between their governments and the IMF could have the effect of restraining health spending. In this work from 2007, CGD examined the interaction between IMF-supported macroeconomic policies and government health spending in Mozambique, Rwanda, and Zambia, and made suggestions for the IMF, developing country governments, the international community, and civil society.
G-20 heads of state gathering in Washington this upcoming weekend to seek solutions to the global financial crisis should consider ways to strengthen the IMF and the World Bank, the international financial institutions set up after World War II,
to prevent a repeat of the Great Depression. CGD president Nancy Birdsall outlines why and proposes a "Grand Bargain."
Q: How will this meeting of the G-20 be different than previous meetings?
A: The financial crisis has leveled the international playing field in unexpected ways. Interdependence and the need for collective action to solve common problems are more clearly evident now than ever before. Brazil, China, India, and other large emerging market economies are coming to Washington not as poor countries seeking assistance but as key players in helping to keep the global economy afloat in the coming months.
Q: Why should the G-20 heads of state spend time discussing the role of the World Bank and the IMF?
A: Organizations such as the World Bank and the IMF bind the United States and other countries to shared norms and agreed rules of the game. In a hyper-connected world in which collective action is difficult, shared institutions are crucial. It’s a cause for real concern that the IMF was not the first port of call for some emerging market economies when they were first hit by the liquidity crisis. The hesitation reflects two problems. One, the IMF has about $250 billion available—not enough to cover the likely needs of its members in the face of this crisis. Two, many emerging market members prefer to avoid the IMF anyway—whether because of the stigma of “needing” the IMF or because, conscious of what happened to Asian borrowers during their financial crisis in the late 1990s, they are concerned about undue and untimely conditions the IMF might impose. In fact, in the last couple of weeks the IMF has responded with a new liquidity facility— but the underlying problems of limited resources and legitimacy remain.
Q: Why is the IMF short of resources? And isn’t the World Bank awash in capital, with little demand for its loans?
A: Over the past two decades, as many emerging markets enjoyed healthy growth, there seemed little need to increase the IMF’s financial clout to reflect the inherent risks of huge cross-border capital flows—despite the growing global imbalances (including between Chinese surpluses and U.S. deficits). The IMF’s $250 billion to lend globally in response to the current crisis is barely one-third of what the United States has set aside for its own bailout. And that’s not even counting the U.S. outlays to rescue AIG and Fannie Mae and Freddie Mac
The World Bank, meanwhile, has seen a drop in demand for its traditional non-concessional loans, those available to middle-income emerging markets. During the recent boom years, these countries enjoyed high private inflows and sustained growth. In the late 1990s, World Bank lending to countries hit by the Asian financial briefly shot up, but that turned out to have been an aberration and those loans were not typical investment loans but more in the nature of IMF emergency gap-filling. Except for that brief period, the World Bank has gradually become less of a bank and more like one of many aid agencies serving only the poorest countries. But while the bank is flush with capital for traditional country loans, it has had to rely on a hodgepodge of special contributions to support global R&D on energy and agriculture, policy-relevant research, rigorous evaluation and innovations in development investments. The bank has the technical capability to make major contributions in these areas, but it lacks the funds. So there is a mismatch between its financing modalities and what the world needs it to do.
Q: And what about legitimacy?
A: The U.S. and Europe have continued to call the shots at both institutions. It’s not only that the United States names the head of the World Bank and that Europe names the head of the IMF; the old Atlantic alliance powers also have much more influence in board deliberations than the relative size of either their economies or their populations would warrant. This means that the big emerging market economies and the poorer developing countries have comparatively little input into deciding what the IMF and World Bank should do, and how they should do it. Without this input, the Bretton Woods sisters are seen as lacking legitimacy; and without legitimacy, they are at risk of losing their effectiveness as well as their relevance.
Q: So what’s the solution?
A: A Grand Bargain whereby the emerging market economies—and the rich oil economies of the Middle East—get more quotas in the IMF (that is, make a greater financial commitment and get more votes) and contribute to special funds to deal with global issues at the World Bank. In both institutions there would be an agreement on new contributions from the big emerging market economies in exchange for a greater say in how these intuitions are run.
Q: What would the money be used for?
A: In the case of the IMF, the money would be used to stabilize the global financial system and to support countries subjected to sudden shocks. While the conditionality of the IMF has sometimes been seen as misguided or intrusive, I think that everybody would agree that the impartial economic conditionality of the IMF is preferable to political conditionality that could accompany bilateral bailouts. In the case of the World Bank, new contributions would be directed to dealing with the global needs mentioned above, including the shared problems of climate change and lagging agricultural productivity. New contributions might also increase the resources for grants and concessional loans to the poorest countries; that would increase the bank’s readiness to provide countercyclical funding to the poorest countries hit by the ongoing crisis.
Q: Why should the emerging market economies want to prop up the multilateral financial institutions?
A: I think of it as an investment. These countries are struggling with very big and complex problems that no country can solve alone. The international financial institutions, for all their shortcomings, are the best mechanisms yet devised for organizing collective action to solve these problems, that is, to provide what economists call global public goods.There really is a mutual win here: these emerging markets take their rightful place as powerful economies, and the entangling dangers of direct country-to-country bailouts are mitigated by working through existing structures. It is the difference between China propping up Wall Street and the international community working together to solve the crisis.
Q: Do you think that this summit can make a difference?
A: This issue will not be the central concern at the summit—which will focus heavily on coordination of fiscal stimulus packages and on a shared agenda on financial regulations where harmonization across countries is needed—be that clearinghouses for derivatives, leverage limits, the role of rating agencies, or so on. Obviously it won’t be possible to reach a definitive agreement on these issues in a one-day summit, particularly given the U.S. political transition. However, I hope there will be at least a general consensus on the need to consider the future of the IMF and World Bank—including their roles, instruments, and governance. Both institutions currently have independent groups, led by Trevor Manuel in the case of the IMF and Ernesto Zedillo in the case of the World Bank, meant to address their futures. The Summit communiqué could allude to the importance of those efforts and the G-20’s interest in following up on the reports that they deliver.
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.
IMF critics allege that its programs unduly constrain health spending in poor countries, even when external financing is potentially available. The IMF argues that countries set their own spending priorities while the Fund monitors overall spending and fiscal sustainability. The issue has become more pressing, as countries seek to utilize scaled-up aid, including billions of dollars for prevention and treatment of HIV/AIDS. CGD recently launched a new working group to establish what actually happens under IMF programs and to make practical recommendations for improvements.
Working group chair David Goldsbrough, a CGD visiting fellow who was previously deputy director of the IMF’s Independent Evaluation Office, chaired the group’s first meeting last week. The day-long study session brought together a diverse group of experts with experience in analyzing and implementing macroeconomic and health sector policies and setting budgetary priorities. Goldsbrough discussed the group’s task and how it will proceed.
Q: What is the single most important concern about the impact of IMF programs on health spending that the group will study?
A: The key issue is whether the IMF’s approach in low-income countries has unduly constrained the policy options available to governments as they formulate and implement their macroeconomic plans. This could be because the IMF takes too conservative view on what is needed for macroeconomic stability and for longer-term fiscal sustainability or because some of the policy instruments it uses in its programs have unintended consequences for the health sector. Of course, even with debt relief and the prospects of higher aid, countries still face resource constraints that require governments to make difficult choices that will not please all stakeholders. So if health spending in a country is not growing as fast as some critics would like (e.g. to keep on track to meet the MDGs), this does not necessarily mean that the IMF has acted inappropriately. This is why it is useful to couch the key issue in terms of whether IMF actions have unduly narrowed the policy space.
Q: Critics say that the increased use of public sector wage ceilings required by IMF programs are an important part of the problem. How do you plan to evaluate whether this is indeed the case?
A: Wage bill ceilings in IMF programs have become more frequent in recent years, especially in Africa: slightly over half of all IMF arrangements negotiated in 2003-2005 had some form of ceiling on the wage bill. We plan to use a small number of case studies to investigate in depth how and why such ceilings were derived, what provision they made for increased health sector recruitment, and what the consequences were in practice.
Q: The group’s terms of reference say that you will also consider ways to improve the predictability of aid flows. Isn’t this mostly up to the World Bank and bilateral donors rather than the IMF?
A: Yes, it is mainly up to the donors to improve aid predictability, and some the recommendations of the working group may be directed at bilateral donors or the World Bank. But the group will also explore ways in which the treatment of aid flow projections in IMF programs might be improved.
Q: You plan to consider ways to improve the negotiation of IMF programs. What exactly will you be looking at in this regard?
A: We will try to look at two aspects of the IMF “way of doing business”. First, in many low-income countries, macroeconomic stability has been largely restored and the key macro policy challenge is to help manage effectively a scaling-up of aid –financed spending. This requires integrating more fully analysis on sector-level expenditure choices with macroeconomic assessments, in a longer-term timeframe. Second, we will look at ways of introducing greater transparency about the analysis and assumptions underlying IMF programs and policy advice.
Q: These issues are both complex and quite controversial, with strongly held views on both sides. How will you ensure that the group’s work is evidence-based?
A: First, I should emphasize that the purpose of the group is not to revisit such issues as the appropriateness of particular development models or aspects of the so-called “Washington Consensus” set of policies. Nor will the group try to address questions such as the appropriateness or impact of IMF conditionality in general. Second, we will base our conclusions on two types of evidence: (i) cross-country evidence on what actually happened to health spending and fiscal targets in countries with IMF programs; and (ii) in-depth case studies of how recent IMF programs in a small number of countries have interacted with health sector budgeting, drawing upon a detailed review of IMF and country documents and interviews with key stakeholders.
Learn more about CGD’s Working Group on IMF-Supported Programs and Health Spending including working group terms of reference and bios of working group members.
CGD policy experts are urging the International Monetary Fund to push for the inclusion of emerging market and developing countries in the re-write of bank supervision guidelines and other international financial rules that they say is likely to happen soon as a result of the global financial crisis.
“The IMF no longer has the financial heft to act as a lender of last resort,” said CGD president Nancy Birdsall. “But the IMF does have a key role to play in managing today’s crisis. Its leadership can help to restore confidence in the global financial system by insisting that China, Brazil, and other emerging market economies have a voice in rewriting international financial rules,” she said.
Birdsall said she welcomed World Bank president Robert Zoellick’s announcement Monday that he is creating a high-level commission to look into modernizing the governance of the World Bank Group, a step that a CGD working group on the future of the World Bank urged in 2005. She also voiced support for his call to replace the G7 with a new 14-member “Steering Group” that would include Brazil, China, India, Mexico, Russia, Saudi Arabia, and South Africa in addition to the current G7 members.
“Bob Zoellick seems to have taken advantage of the opportunity presented by the unsettled global economic situation and a lame duck U.S. president to open the way for overdue reform of the World Bank to give developing countries greater voice,” she said. “He’s right: more fully engaging rising Asia and other emerging markets at the bank will strengthen the bank’s role in solving urgent global problems. I hope that the leadership of the IMF will follow suit and find ways to ensure that China, India and other key countries are at the table during the re-write of global financial rules.”
Zoellick’s announcement came as the financial crisis that began with the sub-prime mortgage meltdown in the United States spread to Europe and rattled markets in Asia. CGD experts have warned that the crisis will have profound implications for developing countries.
The crisis will be topic number one when finance ministers from around the world convene in Washington this week for the annual meetings of the two Bretton Woods institutions, so-called because they were conceived at a conference in Bretton Woods, New Hampshire, in the waning days of World War II as collective means of avoiding a repeat of the Great Depression. A growing number of economists warn that the unfolding crisis could lead to the worst recession since the 1930s, yet analysts agree that neither institution has the means to avert a severe global downturn with harsh consequences for the world’s poor.
“Developing countries will be badly hurt by this crisis, yet they have had almost no role in shaping the global financial rules that fostered it,” said CGD senior fellow Liliana Rojas-Suarez, a financial economist who has held senior research positions on Wall Street and at the Inter-American Development Bank and the IMF.
Rojas-Suarez said that the IMF should push for developing countries to become active participants in the Financial Stability Forum, (FSF) which coordinates international standards and codes to strengthen financial systems. Membership is limited to a handful of high-income countries and to international financial institutions, including the IMF and the World Bank.
Another important body dominated by the high-income countries is the Basel Committee on Banking Supervision (BCBS), which issues recommendations on banks' capital adequacy requirements, most recently through the Basel II Accord. While the BCBS conducts consultations that include developing countries, rich countries make the decisions. Developing countries have long argued that these bodies fail to address their needs and concerns.
Rojas-Suarez said that she hoped that during the meetings this week IMF Managing Director Dominique Strauss-Kahn would “seize this opportunity to take leadership in the design of a system of global financial regulation that is strong yet flexible enough to meet the needs of countries with very different circumstances.”
Nora Lustig, a CGD board member and development economist who has written extensively on the poverty impacts of financial crises, and who has held senior positions in UNDP, the World Bank and the Inter-American Development Bank, said that both the IMF and the World Bank need to prepare to help developing countries cope with the effects of lower growth on their fiscal and balance of payments accounts, while the World Bank will need to focus on helping countries buffer the negative impact of the crisis on poor people.
“This may entail helping countries in designing and implementing safety net programs or expanding them where they already exist,” she said. “In the poorest countries, it may mean providing financial support to the safety net programs in the form of grants or low cost loans.”
If the global downturn proves to be deep and long lasting, the IMF and the World Bank “may have to go back to their 20th Century role of providing credit to countries that have no access to the international private capital markets,” Lustig said. “While this may not happen to middle-income countries as it did in the 1980s, the countries that are most vulnerable and least attractive to foreign investment will find it hard to access global capital markets.”
By Lawrence MacDonald, CGD director of communications and policy
It is hardly a secret that the International Monetary Fund has won few friends among the many organizations and individuals who work in global health. People who have worked to mobilize unprecedented funding for HIV/AIDS, tuberculosis, malaria and other health programs in low-income countries argue the IMF's approach to macroeconomic management has weakened efforts to improve health conditions in countries that are most heavily burdened by disease. The IMF has responded by noting that its role does not include sector-level decision making and reminding critics that health priorities must take account of an overall budget constraint.
In the fall of 2006, the Center for Global Development convened a Working Group of fifteen 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, chairman of the Working Group, will present the group's key recommendations and discuss recent shifts in IMF policy.
International Monetary Fund (IMF) programs have often been too risk-averse in low-income countries, preventing them from exploring more ambitious, but still feasible options for higher government spending including in the health sector, according to David Goldsbrough, a visiting fellow with CGD.
Controversy surrounds IMF-supported programs in low-income countries and their effect on the health sector. Because having an agreement with the IMF is often a pre-requisite for access to other types of financing, including official debt relief, many low-income countries have IMF programs. Critics argue that the programs unduly constrain health spending at a time when more donor money may be available.
"IMF influences on health spending are indirect but potentially significant," David Goldsbrough reports in a new CGD Brief reviewing the findings of CGD's working group report "Does the IMF Constrain Health Spending in Poor Countries? Evidence and an Agenda For Action".
Goldsbrough says that while the IMF has "no mandate at all on health sector issues" because governments decide what share of resources to spend on health, "IMF activities often have important indirect effects on the health sector, especially in countries that enter into specific agreements with the IMF on their macroeconomic policies."
The CGD working group on IMF-Supported Programs and Health Spending comprised fifteen experts from policy-making positions in developing countries, academia, civil society, and multilateral organizations. CGD president Nancy Birdsall called the report "a major contribution with dispassionate analysis and clear recommendations--for the IMF, the World Bank, the governments of countries working within IMF programs and civil society organizations."
An IMF staff response posted on its website welcomes the report as "a significant input to enhance our understanding of the policy choices facing low-income countries," but argues the report should have taken a "more nuanced view" of several issues including the need for macroeconomic stability as a prerequisite for sustainable and poverty-reducing growth.
In its policy analysis and in case studies of Mozambique, Rwanda and Zambia, the working group explored IMF assumptions about aid flows, and whether caps on the overall public sector wage bill used in many IMF programs, especially in Africa, constrain the ability of health sector leaders to recruit and retain health workers. It also examined whether the IMF's mode of operations limits the number of stakeholders involved in discussions about national spending priorities.
Recommendations for the IMF include: helping countries explore a broader range of feasible options for the fiscal deficit and public spending; clarifying the IMF's role in analyzing alternative aid scenarios; dropping wage bill ceilings in most cases; and becoming more transparent and pro-active in discussing the rationale for policy advice.
Lessons for other stakeholders focus on the need to build better connections between the health sector and overall budgetary processes. They include sharpening national priority setting processes, including the capacity of ministries of health to improve budget planning.
The report findings also suggest that donors should improve the predictability of aid, make longer-term commitments, and provide more timely, sector-specific analysis related to increased spending.
Civil society organizations involved in budgetary and health advocacy issues are pressed to give greater attention to monitoring and influencing the setting and implementation of annual budgets.
These findings and more will be discussed at an upcoming event launching the working group report in early fall 2007.
This brief summarizes the findings of the CGD working group on IMF Programs and Health Spending, convened in fall 2006 to investigate the effect of International Monetary Fund (IMF) programs on health spending in low-income countries. The report offers clear, practical recommendations for improvements—for the IMF, the World Bank, the governments of countries working within IMF programs, and civil society organizations.
This paper examines IMF projections of donor aid to low-income countries and whether these projections changed after world leaders pledged at the 2005 Gleneagles G8 summit to double aid to Africa by 2010. The authors find that IMF projections since the post-Gleneagles Summit have shown little change for countries in sub-Saharan Africa: only two out of 30 such projections showed increases consistent with the commitment to double aid to Africa by 2010. The authors also explore the role of IMF aid projections and argue for greater clarity about the role of the IMF in the aid architecture.