IMF Policy Advice Helps Members Build Framework for Poverty Alleviation

• Pages: 395-396

Page 395

The following article is based on a paper by the Expenditure Policy Division of the IMF's Fiscal Affairs Department, delivered at the Development Assistance Committee-Organization for Economic Cooperation and Development Seminar on Key Elements in Poverty Reduction Strategy, in Paris on December 4-5.

Since the late 1970s, the focus and scope of the IMF's work has broadened beyond managing aggregate demand and attaining macroeconomic stability to include a concern for high-quality growth-a key element of which is growth with enhanced equity and reduced poverty rates. The IMF's policy advice can have a positive impact on the poor through three channels: macroeconomic policies and structural reforms, social safety nets, and public expenditures.

Macroeconomic Policies and Structural Reform

A major objective of the IMF's advice is to promote sound monetary, fiscal, and exchange rate policies to achieve macroeconomic stability. In the short term, stability directly benefits the poor by reducing inflation and promoting realistic exchange rates. More important, over the long run, a sustainable macroeconomic framework is critical for achieving the broad-based growth necessary to alleviate poverty.

Failure to correct serious macroeconomic imbalances can have high social costs. High and variable inflation hurts the poor because they usually have limited access to mechanisms that protect consumption and real income levels in such an environment. High inflation can also erode the tax base-and consequently affect the government's ability to maintain social expenditures.

To the extent that inflation stems from monetizing government fiscal deficits, IMF policy advice calls for limiting government's access to bank credit to ensure that the private sector receives an adequate share of total credit. The quality of fiscal adjustment is also critical: changes in expenditures or tax policy should be sustainable and have a lasting impact on the fiscal balance over the medium term.

Exchange rate policy is another important element of the policy mix. An overvalued exchange rate is likely to have a negative effect on the incomes of the rural poor who depend on agricultural exports.

In addition, structural reforms designed to sustain growth by promoting efficient resource use and providing incentives for competition and private initiative are usually needed to create...