What happens to social spending in IMF-supported programmes?

Abstract

This article finds that education and health spending has risen during International Monetary Fund (IMF)-supported programmes at a faster pace than in developing countries as a whole. The analysis is based on the most comprehensive dataset assembled thus far for this purpose, with data covering 1985 to 2009 for 140 countries. Controlling for other determinants of education and health spending, including macroeconomic conditions, the results confirm that IMF-supported programmes have a positive and significant effect on social spending in low-income countries. Over a 5-year period with IMF-supported programmes, spending for education increases by about ¾ percentage point of Gross Domestic Product (GDP); and for health, by about 1 percentage point of GDP. IMF-supported programmes are also associated with increases in the share of government spending allocated to education and health.

Keywords:

• IMF
• social spending
• fiscal policy
• education and health

JEL Classification::

• C33
• E62
• H51
• H52

Acknowledgements

This article has benefitted substantially from comments from David Amaglobeli, Anthony Annett, Andreas Bauer, Gerwin Bell, Dora Benedek, Carlo Cottarelli, Antonio David, Victor Davies, Koba Gvenetadze, Alvar Kangur, Jean Le Dem, Prakash Loungani, Jeremy Mark, Paolo Mauro, Prachi Mishra, Roger Nord, Christine Richmond, Magnus Saxegaard, Mauricio Soto, Yuan Xiao and an anonymous referee. Excellent research assistance was provided by Matias Antonio and Lilla Nemeth.

Notes

¹ Social spending is defined here as public spending on education and health.

² See IMF (2009).

³ In a similar note, Ooms and Schrecker (2005) argue that health spending targets included in the medium-term expenditure framework, required by the IMF under debt relief initiatives, functioned as a de facto spending ceiling, thereby preventing donor aid from boosting not total health spending. On the other hand, Ooms et al. (2010) remark that the finding by Lu et al. may reflect the reallocation of domestic resources to other priority spending. Gupta (2010b) confirms that a broader definition of poverty-reducing spending (which is country specific and can include spending on health, education, agriculture and rural development) increased at a faster pace than health spending alone.

⁴ Hajro and Joyce (2009) examine the direct effects of IMF-supported programmes on social indicators and find mixed results.

⁵ The dataset is available at http://www.imf.org/external/pubs/ft/sdn/2011/data/sdn1115.xls

⁶ For an examination of health spending across emerging economies, and a comparison with advanced economies, see IMF (2010).

⁷ Data for the CIS and CEE start, on average, between 1992 and 1994, after the initial decline in output and spending during the transition to market-based economies.

⁸ Between 1985 and 1999, the median annual increase in education and health spending in low-income programme countries was 0.04% and 0.01% of GDP, respectively. This compares with 0.07% and 0.06% of GDP, respectively, in the period since 2000.

⁹ Tax revenues rose by a median of 0.19 percentage point of GDP per year in programme countries, compared with 0.14 percentage point of GDP in nonprogramme countries.

¹⁰ See, for example, Gupta et al. (2002) and Selassie et al. (2006).

¹¹ For an examination of conditionality on social spending in IMF-supported programmes in low-income countries, see Gupta et al. (2000). Since 2002, there have been no programmes with benchmarks or performance criteria on spending, but the number of programmes with indicative targets for social spending have increased from none in 2002/2003 to about eight in 2008/2009.

¹² A higher value for the index indicates a more flexible exchange rate regime.

¹³ The second lag of the dependent variable was added to the system-GMM equation for health expenditure as a share of total spending (Equation 4 in Table 2). This was done to ensure a satisfactory result for the p-value for the AR(2) test; without this lag, the p-value was 0.03, indicating serial correlation in the error term.

¹⁴ IMF-supported programmes could also potentially affect spending shares through their effects on the government balance. In Equation 4, the coefficient is negative, but very small (−0.05). This suggests that countries have other priorities for spending when budget balances improve.

¹⁵ IEO (2003) also undertook an assessment of the effect of a 2-year programme on social spending. They found that the programme would raise education spending by 0.4 percentage point of GDP by the second year, which is comparable to our results. On health, the IEO found spending would rise by 0.3 percentage point of GDP. The IEO estimates were based on a sample that included all developing economies.

¹⁶ The median annual increase in tax revenue to GDP ratios in low-income programme countries was about 0.22 percentage point of GDP per year, compared with 0.06 percentage point per year in other programme countries. As indicated in Fig. 4, changes in the composition of spending in favour of education spending were greater in low-income countries than in programme countries as a whole. This is not the case for health, although this should be interpreted with caution, given that this simple comparison does not control for other factors that influence spending shares. The econometric results that control for other factors indicate that IMF-supported programmes have a significant effect on spending shares for both education and health in low-income programme countries, but not for other programme countries. This also reflects the fact that these outlays are lower (in percent of GDP) in low-income countries: combined, the median of education and health spending was 5% of GDP in the sample, compared with 7% of GDP for other programme countries.

¹⁷ A Wald test confirms that the effect of IMF-supported programme on health spending as percent of GDP is not statistically significant for the Developing Asia region.