Rethinking austerity? The IMF and social safeguards

This article originally appeared on LSE Blogs.

In the last two months, the International Monetary Fund has published two major reports examining its approach to social safety nets and social protection. André Broome analyses whether the IMF is in the process of rethinking austerity and social protection priorities in loan programmes, and what this may mean for the future of IMF lending in Europe and beyond.

Christine Lagarde, Credit: IMF/Stephen Jaffe (CC BY-NC-ND 2.0)

In an apparent break with its past practices, the IMF’s policy advice shifted towards being more open to fiscal stimulus packages during the global financial crisis in 2008-2009, especially for large economies that are systemically important as growth engines for the world economy. There was evidence of an incremental change underway in the IMF’s policy paradigm and how staff think about fiscal policy.

However, most borrowing countries that used IMF stand-by arrangement loans during the financial crisis continued to be encouraged to prioritise what the IMF terms fiscal consolidation (what we know as austerity) to get their economies back on track. The effects of these cuts in public spending imposed harsh adjustment costs on many of the poorest and most vulnerable people in these societies, prompting widespread protests that heralded a new ‘age of dissent’. But based on recent policy reports produced by the IMF, this approach to austerity may be about to change.

Social protection in IMF loan programmes

In recent years, the IMF has attempted to strike a delicate balance between calling for austerity and protecting growth, one which presents fiscal consolidation as necessary while also cautioning governments not to impose too much austerity in case it harms economic output and investor confidence. However cautious and qualified the IMF’s official position is, this implies greater recognition of the trade-off between austerity and growth. At the same time as its fiscal policy advice to developed countries has evolved, the IMF has increased the use of ‘social safeguards’ in loan programmes for low-income developing countries.

Over half of IMF loan programmes since 2010 have been concessional loans to low-income countries under the Poverty Reduction and Growth Trust (PRGT), which currently have an interest rate of 0 percent. The IMF defines social safeguards broadly as measures to protect the level of social spending on poor and vulnerable groups, including reforms that strengthen and expand social safety nets. This is based on the World Bank’s definition of social safety nets as ‘noncontributory measures designed to provide regular and predictable support to poor and vulnerable people’, although a variety of definitions are used across different organisations. Following a legislative mandate from the US Congress that required the US executive director at the IMF to push for strengthening protections for social spending in loan programmes, the Executive Board approved a major revamp of the architecture of lending for low-income countries in 2009, which attached greater importance to the use of social spending targets in IMF loan programmes.

A new report prepared by the IMF’s Strategy, Policy, and Review Department (SPR) conducts a stocktaking of social safeguard practices since the policy change became effective in 2010, and examines the use of social safeguards in 68 loan programme requests by countries.* The report, which has been endorsed by the Executive Board, paints a largely positive picture of the benefits of incorporating social safeguards in IMF loans. Quantitative indicative targets have been widely used to establish ‘floors’ to protect the level of social spending, as well as other public expenditures that governments deem ‘priority’ spending. The SPR report found that from 2010 to 2016 such indicative targets were used in almost all PRGT programmes (but were used in only one-quarter of programmes supported by the General Resources Account that are available to all member states), with spending targets achieved in over two-thirds of cases.

The limitations of social safeguards and country ownership

One particular challenge for expanding the IMF’s use of social safeguards is that the definition of ‘social and priority spending’ can be stretched by governments to include expenditure unrelated to health, education, and other social spending that protects vulnerable groups. For example, indicative targets to establish spending floors have sometimes been used to protect spending on infrastructure, while health and education targets are blunt instruments that often cover total spending in these areas rather than ring-fencing spending on the poor and vulnerable groups in particular. Indicative targets on social and priority spending therefore serve as a highly imperfect measure of the quality, social purpose, and effectiveness of public expenditures.

Part of the conundrum is that it is largely left to borrowing governments to determine what should count as social and priority spending. As staff noted more than two decades ago in a 1993 paper on the IMF’s approach to social safety nets in economic reform, ‘the successful integration of social safety nets in reform programmes depends, more than any other factor, on the active efforts of the member governments’. In their discussion of the SPR report on social safeguards prior to publication, executive directors called for country authorities to ‘retain flexibility in setting spending targets, to better reflect national priorities’. This can prove to be problematic, however, due to the temptation for some governments to include other spending preferences within defined categories of ‘social and priority spending’.

It is difficult to see how this limitation could be overcome without the IMF expanding conditionality to encompass more intrusive and universal definitions of social safety net spending, and a more itemised approach to protecting education and health budgets. Such a development would prove extremely controversial by drastically reducing country ownership of loan programmes, as well as lending further credibility to broader critiques of the IMF’s approach to development as organised hypocrisy. It remains to be seen how the IMF can effectively balance the need for governments to determine the definition of social and priority spending in loan programmes against the use of social safeguards as conditions that are meant to bind the hands of governments to prevent spending cuts that hurt the poor and most vulnerable.

The evolution of IMF conditionality and social protection

The June 2017 SPR report on social safeguards suggests the IMF may be in the process of rethinking how conditionality works in loan programmes, including greater recognition of the challenges involved in reducing countries’ budget deficits without doing so on the backs of the poor and most vulnerable in society. This was followed by the release in July of a new assessment from the IMF’s Independent Evaluation Office (IEO) on the IMF and social protection. The IEO report catalogues the broad scope and variation that characterises the IMF’s involvement with social protection policies across all its member states, including developed countries.

It found staff practices range from in-depth involvement and analysis of social protection policies in some countries to a box-ticking exercise in others. It also raised perennial challenges for the IMF, such as the problem of ensuring that policy advice is sufficiently tailored to local conditions, and the dissonance that exists between the targeted, means-based approach to social protection favoured by the IMF and the World Bank compared with the universal, rights-based approach favoured by the International Labour Organization (ILO) and UN agencies. This dissonance continues despite collaboration between the ILO and the IMF on pilot projects for the Social Protection Floor Initiative in several countries since 2010.

The IMF’s approach to low-income countries has already evolved significantly over the last two decades, and another comprehensive review of its lending programmes for low-income countries is scheduled for early 2018. Moving forward, the SPR Department has been tasked by the Executive Board with devising new staff guidance that will inform how staff approach social safeguard measures in loan programmes and policy surveillance. Importantly, the new staff guidance on social safeguards will cover loans and surveillance in all member states, not just low-income countries.

Due to the IMF’s preference for targeting social safeguards on the poor and most vulnerable, however, it is possible that these changes in staff guidance might not have prevented the serious social problems caused by steep health spending cuts and increased user charges in recent bailouts for Greece, Ireland, Portugal, and Cyprus. Significant tension persists between the IMF’s objective of ensuring that policy advice is sufficiently attuned to local conditions and its preference for highly targeted social protection policies, especially in countries with universal welfare systems or which target entire social groups regardless of income.

It seems clear that how the IMF approaches the links between fiscal policies and economic and social outcomes is undergoing a process of (incremental) change. But whether its evolving approach to social safeguards in policy surveillance and loan programmes adds up to a fundamental rethink of the costs of austerity in terms of growth and social protection currently remains an open question. Unfortunately, this question may only be fully answered in the context of future economic and financial crises.

*Disclaimer: the author was a member of an external advisory panel that provided input and feedback to the IMF’s SPR Department on the drafting process for this report between June 2016 and the publication of the report on 6 June 2017.

Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.

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