FE201|Q10

Social safety nets are the IMF's response to the failure of IMF stabilization policies in low-income countries. Discuss.
As a result of some of the IMF financial programming approach then a significant increase in poverty resulted.

...Kanbur shows that with a given relative distribution of income among income groups, the initial percentage decline in total domestic expenditure can result in a six-fold increase in poverty.

The structural adjustments are managed mostly through the demand management process that entails demand compression. And one place this played out was in reducing Fiscal Deficits by curbing government expenditures that in many cases curtailed social expenditures.

Two things over the past decade changed some of the emphasis in the IMF:
1. The East Asian Crisis was blamed on the IMF for causing widespread increases in poverty through the Fiscal Deficit reductions.
2. The growth of the Poverty Reduction Strategy Process and the Poverty Reduction and Growth Facility.

Social Funds (SF)

Many of them were formulated with the political objective of reducing domestic opposition to the adjustment process. Greater impact on poverty would have required increased resources, more permanent relief structures, improved planning and targeting and, especially, better timing in relation to the fiscal cuts entailed by macroeconomic adjustment.

Social Emergency Funds were developed for the 'adjustment poor' but then on other stages this distinction from 'chronic poor' that did not benefit from growth and welfare programs. Third phase was the creation of Social Investment Funds (SIFs) which was called "a programmatic shift from income maintenance to community-based provision of social services".
Social Protection Systems in the Pre-Adjustment Era
1. Formal, Insurance-based, Social Security Programs
2. Employment-based Safety Nets (Chile)
3. Consumer Subsidies.

The Social-Funds Introduced During the Adjustment-Transition Era
1. Social Emergency Funds (SEF) introduced in the wake of mounting criticism about the 'social cost of adjustment'.
2. Social Investment Funds (SIF) as economic recovery took hold, SEFs were to be replaced by SIFs.
3. Social Action Programs (SAP) less frequently used and are generally very flexible and less easy to characterize neatly.

All in all, SFs (especially SEFs and SIFs) distinguished themselves from traditional social programs because they had a strong short-term anti-cyclical component; were mostly multi-sectoral (as opposed to the 'vertical programs' of line ministries); emphasized employment generation through public works and human capital formation (and less food subsidies), and the expansion of social insurance and assistance; often exhibited high cost per capita for both wage and non-wage items,

Rationale for the Introduction of Social Funds:
1. Compensating the poor for the social cost of adjustment.
2. Compensating the poor for the costs of non-adjustment.
3. Political economic factors. Without having popular support for adjustment policies then in the end the poor could have suffered even more because of a return to unsound macro policies.
4. Surrogatory approach and institutional innovation.

Even under normal circumstances, most branches of public administration suffered from low efficiency and inertia, and were unable to develop autonomously, 'new approaches to the delivery of social services'...

5. Removal of structural causes of poverty. In many developing countries, poverty is visibly related to lack of human capital.

...it appears that SFs have been extremely common in Latin America, very common in Sub-Saharan Africa and rare, but becoming more common in South Asia.

Interesting note:

In industrialized countries, recessions have a greater impact on profits than wages because of the stickiness of the latter, and because well-developed social safety nets cushion most of the loss of wage income.

And the developing countries are opposite where wages are downwardly flexible and not much social safety nets thus labor share in total income falls and income concentration rises. (Pastor 1987)

Indeed, unsurprisingly, the new SFs have worked best where such institutional frameworks already existed. This conclusion emphasizes the urgency of building, in normal times, permanent and cost effective social security systems...

...further efforts to address poverty and distributional concerns in future adjustment programs need to take into consideration the following points:
1. Adjustment programs should strive to avoid overly large initial social expenditure cuts.
2. It is essential and urgent to overhaul and develop during normal times permanent and cost-effective social security systems.
3. During periods of crisis and adjustment the anti-cyclical components of the social safety nets need to be allocated adequate domestic resources.
4. The sequencing and administration of SFs also requires attention.
5. Finally, the targeting of the social protection programs should also be considered.

References:
Buira, Ariel (2003), 'Challenges to the World Bank and IMF-Developing Countries Perspective', London: Anthem Press

Kanbur, Ravi (1998) "The Implications of Adjustment Programs for Poverty: Conceptual Issues and Analytical Framework", Ke-young Chu and Sanjeev Gupta
RAVI KANBUR-Recent Papers:




Cornia, Giovanni (1999) "Social Funds in Stabilization and Adjustment Programs: Studies on International Monetary and Financial Issues" G24 Technical Group Meeting, Sri Lanka.

Can the Voices of the Developing World be Heard? Calling for Deep Reforms to the International Financial Institutions-Review of above book.

THE IMF AND DEMOCRATIC GOVERNANCE

The International Aid System 2005-2010:
Forces For and Against Change

Intra-household inequality is not measured at present?
Poverty line drawn based on nutritional standards in India and Sri Lanka.