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Doing a decent job? IMF policies and decent work in times of crisis

05 October 2009

The IMF has stated that it has changed its traditional stances on tight fiscal and monetary policy advice and lending conditions and has become “more flexible”. However, experience so far indicates that the IMF is still imposing inappropriate, pro-cyclical1 conditions on many borrowers. These may unnecessarily exacerbate economic downturns in a number of countries.

This report examines three recent IMF loan programmes for El Salvador, Ethiopia and Latvia. The objective is to examine the extent to which the IMF is changing its traditional policy advice and conditions in the context of the financial and economic crisis. In particular we investigate to what degree the IMF loan programmes call for measures that support counter-cyclical policies to boost equitable and home-grown growth; social protection spending; and the implementation of the Decent Work Agenda and commitments made by the ILO and its constituents in the 2008 Declaration on Social Justice for a Fair Globalisation and the 2009 Global Jobs Pact.  The assessment of the recent IMF programmes in El Salvador, Ethiopia and Latvia reveals that there has been some easing of fiscal targets compared to historic IMF positions. This allows for slightly higher budget deficits on a temporary basis. As always, though, the devil is in the detail, and these governments’ very narrow fiscal space – and often constrained monetary policy choices – has effectively limited their opportunities to adopt more decisive counter-cyclical monetary and fiscal policies.  In all three cases examined very few of the Decent Work Agenda principles or Global Jobs Pact policy initiatives are being adopted or supported as priorities; and, although increased social protection spending seems to be consistently supported by the IMF, its budget cut requirements effectively limit the fiscal space available to increase social protection and anti-crisis programmes. At best, social protection spending is only maintained (Ethiopia) and in some cases (Latvia) is drastically cut.

More worrying is the IMF programme limitation on sustaining expansionary policies over time. Where there is a loosening of the fiscal targets, this is very narrow and temporary, as often the IMF expects the country to bring down the deficits to pre-crisis levels as soon as 2011 (Ethiopia, Latvia). The IMF seems to be strictly focused on tight fiscal and monetary policy (balanced fiscal positions and rebuilding the reserve buffers) to increase resilience of these countries in the future. The possibility of implementing more flexible macroeconomic policies which could be combined with micro interventions to increase the resilience of these countries (investment in social protection systems, enhancing access to credit by small and medium enterprises, capital controls, or more progressive taxation systems) do not seem to be on the table for discussion.

However, interviews with different stakeholders in the three countries also reveal that the political economy of the decisions taken is complicated. In El Salvador some civil society and trade union activists argue that the past (conservative) government has been greatly co-responsible for “20 years of privatizations and other neoliberal policies, which led to a 40% decrease in the number of jobs. However, with the recent change in government, there is a new window of opportunity.” And the new government recognises that “the IMF has never been so soft” when negotiating with El Salvador. And in Latvia, the political economy of the negotiations between the Fund and the government is even more complicated because of Latvia’s commitment to join the Euro by 2013, which leaves very little room for flexibility on fiscal and monetary policies. 

A crucial problem in all countries assessed is the lack of involvement of line ministries, parliamentarians, trade unions and civil society during the negotiations of the IMF loans and the respective budget laws or structural reforms associated with the Fund’s finance. The lack of genuine policy alternatives and more decisive counter-cyclical policies seems to be the result of a combination of the IMF narrow-mindedness on broad macroeconomic objectives and a certain degree of blindness towards the broader development strategy of the government, and the Finance Ministries own agenda to keep the budgets balanced. The IMF focuses on a specific budget deficit target regardless of where spending cuts are made or where the income comes from and Finance Ministries sometimes also see social protection spending, investment and industrial policies as just a secondary priority.

In a recent briefing, IMF representatives expressed their hopes that in 2011 the world would experience the resumption of the “healthy growth of the last decade”. However, the crisis has shown that this world economic growth was based on rotten foundations. International Institutions, such as the IMF, and national governments should learn the lessons from this crisis and start – from now – building the recovery on a more solid basis.  For this purpose it is crucial that counter-cyclical policies are geared towards boosting equitable and home-grown growth; increased social protection spending and investment in social capital; and that economic policies are matched with internationally agreed social and labour standards outlined in the Decent Work Agenda and commitments made by governments at the ILO and its constituents in the 2008 Declaration on Social Justice for a Fair Globalisation and the 2009 Global Jobs Pact.  To ensure that the IMF uses its huge increase in financial resources in an effective way to create decent work, reduce inequality and eradicate poverty the institution should radically depart from the economic orthodoxy that has informed its past policy advice and conditionality. It should:
Make available additional resources for counter-cyclical action in countries facing fiscal and policy constraints and urge the international community to provide development assistance, including budget support, to build up a basic social protection floor on a national basis. Rather than signalling its traditional “aid pessimism” the IMF should work with donors and borrowers to develop a set of more expansionary fiscal and monetary policy options to be considered in broad dialogue with civil society and trade unions.

Allow governments to adopt expansionary fiscal and monetary policies which provide them with the necessary fiscal space to invest in social protection and home-grown growth, including active labour market policies.
Allow governments to use industrial policies to enhance economic diversity by building capacity for value-added production and services to stimulate both domestic and external demand.

Actively seek to complement their country surveillance with ILO monitoring of the employment and social agenda, as indicated in the ILO’s mandate from the G20. Interagency cooperation should ensure that IMF’s macroeconomic frameworks for borrowing governments accommodate the ILO’s mandate to:
• Promote the establishment of minimum wages (ILO Minimum Wage Fixing Convention, 1970, No. 131) that can reduce poverty and inequity, increase demand and contribute to economic stability.
• Help governments to more meaningfully address the problem of informality of the workforce to achieve the transition to formal employment.

In the short-term enhanced interagency cooperation linking the IMF’s surveillance to that of UN agencies, such as the ILO, can help ensuring that the IMF’s macroeconomic policy advice and conditions accommodate the necessary government expenditure to ensure enforcement of basic social and economic rights. However, as the IMF lacks a development mandate and has a very limited capacity on development economics it will be necessary to empower or create alternative bodies or institutions with the mandate and relevant capacity to conduct macroeconomic assessment and provide macroeconomic policy advice which is sensitive to the needs of low-income and developing countries.

media coverage 

Download the entire report: English and Spanish versions available here

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