When Reality Doesn’t Bite—Misconceptions about the IMF and Social Spending

By Benedict Clements and Sanjeev Gupta

(Versions in عربي, Français)

All too often we hear the claim that the programs the IMF supports in low-income countries hurt the most vulnerable by forcing cuts in social spending. This is a misconception.

Our study concludes that, contrary to these claims, IMF-supported programs boost education and health spending in low-income countries for as long as countries are engaged with the IMF.

Let the numbers do the talking

We based our analysis on public spending on education and health in 140 countries between 1985 and 2009. The dataset is the most comprehensive ever assembled to assess this issue. The results show the beneficial effects for social spending in program countries in several respects.

First, social spending increased at a faster pace in countries with programs compared to those without, particularly for low-income countries with programs (see chart). This is true for social spending in relation to GDP and as a share of total government spending, as well as increases in per capita social spending after adjusting for inflation.

Second, the benefits for social spending have accelerated over time in low-income countries.

  • The median annual increase in education and health spending in low-income program countries since 2000 was more than double the average increase during 1985-1999. The rate of increase since 2000 implies that education and health spending, as a share of GDP, would increase each decade by 0.7 percentage points and 0.6 percentage points, respectively.
  • Because GDP is also growing rapidly in these economies, increases in spending relative to GDP imply large increases in spending per capita. The rate of spending growth since 2000 suggests that education and health spending per person, after adjusting for inflation, would rise by about 50 percent and 60 percent, respectively, over a 10-year period.

Of course, IMF-supported programs are not the only determinants of a country’s social spending. Many other factors—age profile of the population, income levels, and macroeconomic conditions—come into play. A fair test of the impact of IMF-supported programs on this spending must take these factors into account.

Using statistical techniques that distill the impact of an IMF-supported program, as distinct from these other factors, we again find that IMF-supported programs have a positive, and even stronger, effect on the rate of increase in social spending in low-income countries. For example, over a five-year period with IMF-supported programs, education spending increases in low-income countries by about ¾ percentage point of GDP; and by about 1 percentage point of GDP for health spending.

Facilitating social spending

The IMF is committed to help protect or increase social spending in the programs it supports in low-income countries. In this regard, there are numerous channels through which programs help spur higher spending in education and health, including:

  • Reforms that increase government revenues—on average, program countries increase revenues at a brisker pace than non-program countries—help create “fiscal space.”
  • IMF-supported programs help countries mobilize donor financing.
  • To the extent that programs lead to higher growth, they can help generate greater fiscal space.
  • Finally, the emphasis in these programs on using additional resources—including those generated by debt relief—to support poverty-reducing spending contributes to rising shares of education and health spending.

The results suggest that IMF-supported programs are compatible with the efforts of countries to boost critical social spending to improve social outcomes. But, it will be equally important, as many scholars have emphasized, to improve the targeting and efficiency of public spending to make it a more powerful instrument for bettering the lives of the poor.

4 Responses

  1. The crisis in Europe started in Germany with banks lending cheap money to Ireland, Portugal, Greece, Italy and Spain. And as the crisis started in Germany so must the solution. If you were in business you would write down some of this debt and find a working solution to generate economic growth again.

  2. This is with reference to IMF supported low income countries which have been reported to have the following allocations of their GDP for social spending for the following sectors:

    Education – less than .05% of GDP
    Health care – little more than .03% of GDP

    That much allocation even if improved gradually as indicated in the above IMF post will take decades to cover the basic needs of the masses of the LICs of Asia and sub-Saharan African countries. Like in Pakistan more than 70% of the population lives in the rural areas where majority of the people do not have access to clean water (specially in Balochistan and the peripheral area of Sindh provinces) . In Sub-Sahran African countries, the situation is much more worse because of frequent famines..

    There is another tragedy in the low income countries that they have uncontrollable corruption, political instability and weak governments like Somalia.

    In order to have substantial improvement in the above sectors, it is strongly recommended that a reasonable part of the funds granted to these countries, should be exclusively allocated only for education and health sectors and that should be interest free..

    Commitment for gradual increase in social spending should be made a pre-requisite for granting Fund’s facilities . This formal conditionality in the shape of performance criterion should be imposed and compliance ensured strictly.

    • Thank you for your comment. We would like to clarify the nature of the figures you cite.

      The figures of 0.05 percentage point of GDP for education and 0.03 percentage point of GDP for health refer to the average annual increase in spending per year for countries with IMF-programs. The average annual level of education spending to GDP in developing economies is about 4 percent of GDP and 3 percent of GDP for health.

      Sincerely,
      The editors, iMFdirect

  3. To whom it may concern

    Re: Misconceptions about the IMF
    report 31/08/11

    Sirs,
    With all due respect, this report of yours is a load of bull; how dare you? Your study dating from 1985/2009 and if you guys got your heads out of the sand, you will see this is 2011 and most of the mess caused by the banks started in mid-2008; and as for the both of you to claim that the IMF-supported programs boost education and health spending, it is in a word a joke. Countries such as Ireland are being forced to make cuts in education and health and in all other areas, all other departments are being forced to make cuts. People are losing their homes, losing their jobs, all because these Fat-Cat bankers and developers. And as for the I.M.F./E.U./E.C.B. these three do not give a toss about the state of people’s health, nor do they care if a person loses his/her job, as long as the I.M.F/E.U./E.C.B can help out their friends in the banks.
    The cuts being forced/imposed on countries such as Ireland and Greece are made by the I.M.F / E.U / E.C.B and you two sit there and say the I.M.F is helping. Your report is out of date as you two are. Maybe it’s time for people like you two to came into the real world.
    P.J.Carroll
    Dublin

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