Ideas to Action:

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Does the IMF Cap Health Spending in Developing Countries?

October 10, 2006

David Goldsbrough

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.