The Invisible Hand: How the IMF Undermines Health Systems in Developing Countries

1. The Invisible Hand: How the IMF Undermines Health Systems in Developing Countries Paul Jensen RESULTS Educational Fund June 13, 2008 Ottawa, Canada

2. Overview • Role of the IMF in Low-Income Countries • IMF Programs – Indirect but significant impact on health spending, including HRH • Interest & Advocacy • Action Steps

3. Context • MDGs, Abuja, G8, Universal Access, Global HR Roadmap - will take sustained period of higher investment from both LICs and donors • Higher health spending is esp critical in LICs – most health systems can’t provide basic package of interventions • Recent increases have only offset previous reductions

4. *Disclaimer* IMF policies do not DIRECTLY determine the quantity or the quality of health financing. However, they INDIRECTLY impact health spending by constraining the size of the national budget and by promoting policies that can slow the speed of economic growth at the cost of revenue.

5. How Is the IMF Influential? • 1. Advising countries on macroeconomic policy: IMF programs help determine national economic policies • 2. “Signaling effect”: IMF program = access to assistance • Program negotiations are “transparency-challenged”

6. Rules of IMF Programs • Neo-liberal economic model • Goals: • Small deficits • Low inflation (5-7%) • Priority on macroeconomic stability • Less emphasis on public investments for human needs • Sees limited role for governments vs. the private sector

7. IMF Program Targets • Fiscal targets – Impact budget size • “Fiscal space” • Fiscal targeting indirectly impacts health spending through impacting size of the national budget • Fiscal policy that’s too risk averse can eliminate options for key spending

11. NY Times “There is a desperate need for greater policy coherence in a period when many national governments, including Washington, are sensibly exhorting African governments to spend more on primary health care and education while international financial institutions largely controlled by those same Western governments have been pressing African countries to shrink their government payrolls, including teachers and health care workers.” -- The New York Times. “Africa at the Summit,” 2005

12. IEO Report • Looked at 29 countries in SSA with IMF programs from 1999-2005 • Each new $1.00 in expected aid increases led to $0.27 in additional spending • Only countries meeting IMF program fiscal and monetary targets were permitted to program new aid

13. IEO Report • IMF paid “almost no attention to sectors such as education, health or infrastructure” • No evidence that the IMF “took into account possible trade-offs” b/t financing constraints and opportunities

14. CGD Report “The evidence suggests that IMF-supported fiscal programs have often been too conservative or risk averse. In particular, the IMF has not done enough to explore more expansionary, but still feasible, options for higher public spending.”

15. IMF Program Targets • Monetary targets – Inflation reduced to 5-7% range • “The IMF and other global policy-setting institutions strongly support low inflation targets, usually at about a 5% threshold. Yet there is almost no evidence that holding inflation at such a low level necessarily promotes economic growth.” – Pollin, Epstein & Heintz (2008) • “Empirical evidence does not justify pushing inflation to these levels in low-income countries.” - CGD

16. IMF Papers Outside Papers Estimated Inflation Thresholds Fisher (1993) 15-30 % Bruno and Easterly (1998) 40% Burdekin, et al (2000) 3% for developing and 8% for rich countries Gylfason and Herbertsson (2001) 10-20% Pollin and Zhu (2005) 15-18% Bruno (1995) 20% Barro (1996) Finds that a 10% increase in the annual inflation rate is associated on impact with a decline in GDP’s annual growth rate of only 0.24%. Sarel (1996) 8% Khan and Senhadji (2001) 11-12% for developing & 1-3 % for rich countries Ghosh and Phillips (1998) Finds that the inflation-growth relationship is convex, so that the decline in growth associated with an increase of 10-20% inflation is (1998) much larger than that associated with moving from 40 to 50% inflation. Review of Inflation Literature Some empirical studies on ‘kinks’ in the relationship between inflation and growth

17. Pollin, Epstein & Heintz, 2008 -- Pro-growth alternatives for monetary and financial policies in sub-Saharan Africa. International Poverty Centre, UNDP. Policy research brief No.6

18. Pollin et al (2008) …”Setting the inflation threshold at 5% creates by itself a slow growth bias since the primary methods recommended for dampening inflationary pressures are to raise nominal interest rates and cut government spending. …

19. Pollin et al (2008) “…Of course, policymakers need to be vigilant about controlling inflation. But they should address this problem by determining the sources of inflationary pressures and whether economic growth and employment expansion [think HRH] could, indeed, benefit from a less restrictive macroeconomic environment.”

20. Further Support • “Getting inflation down from 40% to 10% is not so bad. It’s getting inflation further from 10% to 5% that really hurts.” - Peter Howitt • “Policies that are overly concerned with macroeconomic stability may turn out to be too austere, lowering economic growth from its optimal level and impeding progress on poverty reduction.” - GAO

21. Further Support • IEO – “[T]he evidence points to inflation concerns as a major driver of cross-country differences in programmed spending of incremental aid…countries with inflation rates below 5% get to spend 79% of anticipated increases, on average, whereas countries with higher inflation get to spend only 15% of such increases, on average.”

22. Wage Bill Ceilings • Place cap on hiring/wages of public employees • CGD – 17 of 42 IMF programs from 2003-2005 included some ceiling on the wage bill: “have been overused” • June 2007 IMF board announcement • IMF should desist from using wage bill ceilings as a means of influencing allocations

23. Interest and Advocacy • 1 Oct. 2007 – CSO letter to DSK • 120 signatories • 5 points: • Allow greater use of foreign aid for its intended purpose • Enable the exploration and adoption of more expansionary fiscal and monetary policies • Publicly state that the IMF will cease its use of wage bill ceilings • Provide immediate debt cancellation for all impoverished countries without harmful policy conditions attached • Provide more robust consultation process with more stakeholders about the potential impacts of various policy options before actions are taken • Described in Nov 2007 Lancet World Report: “Experts call for reform of the International Monetary Fund”

24. Interest & Advocacy • 14 Nov 2007 – U.S. House Financial Services Committee Letter to DSK • 9 committee staff signatories • “We are concerned by the IMF’s adherence to overly rigid macroeconomic targets in [low-income] countries…It is particularly troubling to us that the IMF’s policy positions do not reflect any consensus view among economists regarding appropriate inflation and reserve targets.”

25. Interest & Advocacy • Gold sales provides critical opportunity – Requires US Congressional approval • WSJ – “Global gold diggers” • US CSO letter – 80 signatories • Requests sales conditioned on: • Eliminating restrictive fis. & mon. targeting • Aid used as intended • Debt cancellation de-linked from conditionalities • Improved transparency • Democratic program negotiations

26. Interest & Advocacy • CHOGM meeting – UK, July 2008 • “We recognize that sovereign states must have the capacity and freedom to determine national goals and implement national policies and strategies.” • “We intend to pursue the redefining of the purposes and governance of the Bretton Woods institutions…” • Developing Action Plan on Reform of International Institutions, w/CSO involvement • Extraordinary meeting in Sept. 2008

27. REF Project • REF research and advocacy project • 3 countries – Kenya, Tanzania and Zambia • Purpose: analyze the impact of IMF program policies on budget process; raise awareness of issue among CSOs and urge wider stakeholder participation in the negotiations of IMF programs • Partnering w/ CEGAA to conduct research • Approaching advocacy partners now

28. Action Steps • Demand the IMF to revise and publicize the macroeconomic constraints implemented via IMF programs • Demand that costs and benefits of more expansionary policy options be more fully explored • Demand greater stakeholder involvement in IMF program negotiations • Call on government to raise this issue through representation on IMF Exec Board (which approves IMF programs) • See ActionAid International brief for more info

29. Summary • A transformation in development (e.g., toward MDGs) requires a major scaling up in public investment – current rules limit this. • There is mounting evidence that key IMF program policies are too conservative in light of national investments needed to meet health crises, pursue the MDGs, hire & retain health workers. • Advocacy is key to the promotion of more “expansionary” policies that enable a scale-up in health investment, including for HRH.

30. Conclusions “The worst of all worlds would be for the IMF to pretend that it can continue to play its current major role in [low-income] countries without adapting its way of doing business to the new challenges they face.” - David Goldsbrough, CGD