Despite Crisis, Poor Countries Try to Maintain Social Spending

• Author: Maureen Burke
• Position: IMF Survey online

For low-income countries in particular, preserving social spending is vital, as many people in these countries were already coping with the effects of higher food and fuel prices when the global economic crisis struck.

But maintaining social spending-usually defined in low-income countries as spending on health and education-poses a profound challenge in times of crisis. Government are seeing their revenues decline, yet as the ranks of the unemployed grow, allocating money for social spending becomes all the more critical.

"In low-income countries, people have very few options," says Yongzheng Yang, Deputy Chief of the IMF’s Low-Income Strategy Unit. "There’s no well-established safety net, so when a crisis hits, they risk losing their ability to survive."

Accommodating higher social spending

For some low-income countries, maintaining social sector spending despite the fall in revenue is possible because they had built up some buffers during the good times of strong growth in recent years. In Africa, for example, low-income countries grew 6½ percent on average between 2004 and 2007. Stronger economic fundamentals as a result of past economic stabilization efforts have enabled some countries to borrow domestically during the crisis to finance part of the increases in government spending. Increased donor aid has also helped, though it has fallen short of commitments.

"Some countries have followed good macroeconomic policies over the past few years. That, combined with debt relief, has created the fiscal space for many of them to expand social spending," said Sanjeev Gupta, Deputy Director of the IMF’s Fiscal Affairs Department.

Increased flexibility in IMF programs also enables many countries to maintain, or even increase, social spending. Of the 19 low-income country programs initiated in 2008-09, 16 have budgeted higher social spending. Under a new lending framework, which is expected to be effective soon, many IMF loan programs will place even greater emphasis on safeguarding social spending, including by setting explicit program targets for it where possible. These indicative targets vary from country to country and are not rigid conditions.

"IMF programs aim for macroeconomic frameworks that are supportive of poverty reduction and growth," says Yang. "To achieve the goal of poverty reduction, you need a certain amount of...