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Macroeconomic Policy Advice and the Article IV Consultations: a Development Perspective ILO Research Paper No. 2 Macroeconomic policy advice and the Article IV consultations: A development perspective Iyanatul Islam Ishraq Ahmed Rathin Roy Raquel Ramos * August 2012 International Labour Office ________________ * Iyanatul Islam is affiliated with the Employment Policy Department, International Labour Office, Geneva; Ishraq Ahmed was an ILO intern when this work was completed. Rathin Roy and Raquel Ramos are attached to the UNDP. For further enquiries on this paper, please contact the first author ([email protected] ). Copyright © International Labour Office 2012 First published 2012 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Permissions), International Labour Office, CH - 1211 Geneva 22 (Switzerland) or by email: [email protected]. The International Labour Office welcomes such applications. Libraries, institutions and other users registered with reproduction rights organisations may make copies in accordance with the licences issued to them for this purpose. Visit http:/ifrro.org to find the reproduction rights organisation in your country. ISSN 2306-0875 (web pdf) The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval. ILO publication and electronic products can be obtained through major booksellers or ILO local offices in many countries, or direct from ILO Publications, International Labour Office, P.O. Box 6, CH-1211 Geneva 22 (Switzerland). Catalogues or lists of new publications are available free of charge from the above address, or by email: [email protected]. Visit our site: http://www.ilo.org/pubins Table of contents Acknowledgments Abstract 1 Introduction………… ............................................................................................................... 1 2 Methodology…. ........................................................................................................................ 3 2.1 Variables representing fiscal adjustment ........................................................................... 3 2.2 Variables representing inflation targets ............................................................................. 4 2.3 Variables representing employment creation, poverty reduction and extension of social protection ............................................................................................................ 4 3 Fiscal adjustment and the Article IV consultations: Key findings and implications … ............ 5 3.1 Fiscal adjustment: The alignment between country-level advice and the IMF’s global posture .................................................................................................................... 6 3.2 Debts and deficits: Prudential targets and the Article IV consultations ............................ 7 3.3 Fiscal adjustment and the risks of a ‘one size fits all’ approach: Some country-specific examples ................................................................................................. 14 4 Inflation targets and the Article IV consultations: Key findings and implications ................... 15 4.1 Inflation targets and developing countries: An overview.................................................. 15 4.2 Inflation targets and the Article IV consultations: A continued emphasis on low, single digit inflation .......................................................................................................... 17 4.3 Moving beyond single digit inflation targets: distinguishing between general principles and numerical targets ........................................................................................ 20 5 Employment creation, poverty reduction and social protection and the Article IV consultations: Key findings and implications ............................................................................ 21 5.1 The employment-poverty link: the long road to MDG 1b ................................................ 21 5.2 From narrowly targeted programs to a social protection floor: An overview ................... 22 5.3 Employment, poverty and social protection and the Article IV consultations: Key findings ...................................................................................................................... 23 6 Conclusions and discussion… ................................................................................................... 27 References….. .................................................................................................................................. 29 Appendix : Article IV and equivalent reports used in this paper ..................................................... 32 Acknowledgements The authors would like to thank Duncan Campbell for incisive comments on an earlier version of this paper. It was also presented at the IMF’s ‘Jobs and Growth’ seminar on 11 May, 2012. Comments provided by two discussants (Atish Ghosh and Andrew Berg) are reflected in this revised version. The standard disclaimer applies: any remaining errors or omissions are the sole and collective responsibility of the authors. Abstract This paper undertakes a content analysis of 2009–2010 IMF Article IV consultations for a sample of 30 low-income and 20 middle-income countries on the following themes: (a) fiscal adjustments (b) inflation targets (c) employment generation, poverty reduction and expansion of social protection. Insufficient attention appears to have been given to employment generation, poverty reduction and expansion of social protection. ‘New’ generation Article IVs might need to be modified to respond to this lacuna. This might be best achieved when the IMF works with other development partners to broaden the content and scope of the IMF’s regular consultations with member states. Keywords: development policy, employment, fiscal and monetary policy, international agreements and observance, macroeconomic policy, social protection JEL classification: E61; E63; F53; O23; O24 Macroeconomic policy advice and the Article IV consultations 1 1 Introduction Under the IMF’s article of agreements, Article IV consultations play an important surveillance role. As the IMF observes: Article IV consultations usually take place once a year. IMF economists visit the member country to gather information and hold discussions with government and central bank officials, and often private investors and labor representatives, members of parliament, and civil society organizations. Upon its return, the mission submits a report to the IMF’s Executive Board for discussion. The Board’s views are subsequently summarized and transmitted to the country’s authorities. Currently, nine out of ten member countries agree to publication of a Public Information Notice (PIN), which summarizes the staff’s and the Board’s views, and four out of five countries agree to publication of the staff report itself.1 Public access to Article IV consultations is of comparatively recent origin. It emanates from a pilot project that the IMF initiated in April 1999 to improve its transparency.2 These consultations are an excellent source of information on the nature of macroeconomic policy advice offered by the IMF to member states. Yet, unlike the extensive – albeit contentious- literature on the nature and impact of conditionalities that are enunciated under the IMF’s lending arrangements, relatively little effort has been invested in undertaking a ‘content analysis’ of staff reports that support the Article IV consultations in order to decipher the nature of the macroeconomic policy advice that is offered to member states.3 This paper intends to deal with such a lacuna by undertaking a content analysis of 2009- 2010 article IV consultations (and equivalent country reports if such consultations are not available) for a sample of 30 low-income and 20 middle-income countries on the following themes : (a) fiscal adjustments (b) inflation targets (c) employment generation, poverty reduction and expansion of social protection. The list of low and middle income countries is drawn from World Bank sources. This is supplemented by drawing on another study that assesses the IMF Article IV consultations for 25 low- and middle-income countries.4 A discourse on the nature of macroeconomic policy advice as dispensed by the IMF to a selected sample of its member states is timely because of the proclamations by the Fund that it is now necessary to engage in a wholesale re-examination of macroeconomic policy principles in the wake of the Great Recession
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