Poverty Concerns in Fund-Supported Programs

International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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It has become increasingly clear since the 1980s that growth and orderly adjustment are essential to any effort to reduce the incidence of poverty. Because of this, the Fund has been paying greater attention—especially since 1986—to poverty concerns in its adjustment programs. By assisting countries in the design of adjustment programs, the Fund has attempted to promote sustained growth in program countries, while minimizing the possible adverse impact of certain policy measures on the poorest. There is also a growing recognition among policymakers in member countries that the effectiveness of any economic program in promoting structural change and sustained growth rests, in large part, on its social acceptability. This article draws on the experience with the design of about 50 Fund-supported programs under stand-by, structural adjustment facility (SAF), extended structural adjustment facility (ESAF), and the extended Fund facility (EFF) that were or became operational in 1989 and 1990.

Fund-supported programs

The principal aim of the Fund-supported adjustment programs is to align domestic demand with the availability of resources in the short term and to pave the way for an efficient and sustainable growth performance with stable prices over the medium term. The restoration of internal and external financial balances may require, inter alia, raising tax revenues and cutting expenditure as a part of the adjustment policy package. In addition, specific policy measures (including exchange rate devaluation) may also be needed to shift relative prices in favor of tradable goods. These measures may have positive effects on the poorer segments of the population in many countries. At the same time this may also cause prices of consumer goods to increase, and in doing so, reduce the real income of certain groups.

Such a fall in real income may be particularly damaging to these poorer groups, who have little, if any, access to safety net provisions. Consequently, many Fund-supported adjustment programs now aim to include measures to mitigate, fully or partially, the short-term negative impact on such groups. It should be stressed, however, that failure to adjust holds far worse consequences for the poor, making them bear the full brunt of a high rate of inflation and extensive price controls. Further, although the Fund assists in the design of the appropriate macro-economic framework, the social choices that are inevitable in this process are left to the countries themselves.

What can be done?

The poor are understood to include groups of households at the bottom of the income and expenditure categories (see article by Michael Walton). The effects of an adjustment program on these vulnerable groups, however, may not be uniform. For example, an increase in the prices of tradables may improve the conditions of the rural poor by raising their income, while worsening the plight of the urban poor by reducing their purchasing power. Diversity in the distribution of poverty and the difficulty in identifying the poorest groups, as well as quantifying the impact of adjustment measures on their consumption levels, undoubtedly complicate the task of policymakers engaged in designing measures to protect the poor.

Fiscal policies should aim at broad-based and efficient taxation to mobilize resources for essential public expenditures. Yet, in some cases, keeping in mind the need to protect the purchasing power of the poorer groups, Fund programs have attempted to avoid tax increases on basic staple commodities (e.g., food items) and exempt levying of consumption or excise taxes on such commodities. For those rendered unemployed in the public sector as a result of expenditure cuts, the program could provide some monetary compensation or, alternatively, contain provisions to assist them in finding other means of livelihood (see article by Dominique van de Walle). The reform measures could also protect budgetary expenditure on social services such as health and education for the poor.

The impact of higher food prices could be cushioned by supplying staple foods at officially fixed prices to well-defined poverty groups and by meeting the cost of this subsidy from the budget. Those in higher income brackets could bear the brunt of the price increases, including increased taxation of items such as gasoline, to finance such subsidies. In some cases, however, it may be possible to supply to these groups cheaper yet nutritionally superior commodities (e.g., brown instead of white sugar, or wheat with higher bran content), thereby lowering the burden on the budget. Compensatory measures would typically involve some costs (e. g., provision of separation grants to departing civil servants) on the budget requiring external financing or fiscal retrenchment in other areas, if sufficient resources cannot be raised through additional taxation.

Alleviating measures

Over the last two years, many Fund-supported macroeconomic programs have included measures to shield the affected poor population. These measures are not necessarily designed by the Fund, but are fully integrated in the budgetary framework negotiated with the Fund. The measures adopted tend to be partly influenced by the authorities’ desire to alleviate the adverse adjustment impact on some influential groups (e.g., government employees) who may not be necessarily the poorest, and partly by the availability of financing from external as well as internal sources for this purpose. In many instances, external financing has been specifically earmarked to support programs for helping the poor during the adjustment period.

The Fund staff has collaborated closely with World Bank staff on the social aspects of adjustment in SAF and ESAF programs, drawing on the latter’s extensive experience in this area. This explains the commonality of measures adopted in Bank and Fund programs, even in countries not having SAF and ESAF programs.

Policy mix. The need to finance schemes aimed at alleviating the impact of adjustment on the poor often requires taxation or price increases. In some instances, the impact of these measures on the poor population has been minimized by a judicious combination of policies. In Jordan, for example, prices of essential items were not increased following the 1989 devaluation, and the resulting budgetary subsidies were financed through revenue measures imposed essentially on the richer segments of the population. A uniform wage allowance was granted to all civil servants in Guinea, which effectively doubled the purchasing power of the lower income earners, to partially offset the higher prices of rice and petroleum products stemming from the devaluation. In early 1989, the Bolivian authorities mitigated the increases in public utility tariffs and tax on beer (heavily consumed by the poor in relation to their income) by granting concurrently a 15 percent increase in public sector wages, with spillover effects into the private sector.

In Sri Lanka, the elimination of subsidies in 1989 through adjustment of administered prices was gradually phased in. The removal of subsidies on wheat flour was spread out one year, while that on rice was stretched over six months. At the same time, excise duties and turnover taxes were raised on tobacco, alcohol, and luxury items. However, since the economic program incorporated certain compensatory schemes equivalent to around 3 percent of GDP, it became clear that much greater selectivity in targeting the poor needed to be exercised to reduce the financial burden on the budget. More recently, in Mozambique, the authorities decided to grant income supplements to the poorest urban households to partly offset the effect of rising prices.

Rationing and targeting of subsidies. To counter the adverse impact of changes in relative prices, more pointed targeting and subsidization of basic commodities has been used in Fund-supported programs. A food rationing system subsidized through the budget was set up in Mozambique in 1989 to help casual and informal sector workers in urban areas, and the much larger rural population. Additionally, specific distribution controls were imposed to ensure availability of consumer goods in the rural areas. The Venezuelan program included an extensive and elaborate system of food subsidies of the seven commodities purchased mainly by the poor (cornflour, rice, noodles, sardines, powdered milk, animal feeds, and fertilizer). However, as is often the case, it is envisaged that these subsidies would only be provided temporarily until the economy picks up sufficiently and the poorer groups have the opportunity to restore their real income levels.

Another example of subsidy targeting has been in Guinea, where lower income groups have benefited from a temporary subsidy for urban transport to counter increased fuel prices. A similar principle has been used in electricity consumption in Bolivia, where low-income consumers have been shielded from the surcharge on commercial and residential electricity use by making it applicable only beyond specified consumption levels.

Expenditure on social services. Several countries have attempted to mitigate the adverse short-term effects on the poor by either protecting or strengthening social expenditures in the budget. This has included rehabilitating rural health centers (e.g., Ghana), expanding rural health services (e. g., Guinea), improving staffing of the primary health care facilities of the community-based health system (e.g., Malawi), improving health and education services for the vulnerable groups (e.g., Guinea-Bissau), providing low-cost housing (e.g., Jamaica), and strengthening agricultural support facilities (e.g., the Philippines). In Bangladesh, Bolivia, Guinea, Malawi, and Niger, the programs laid special emphasis on primary or basic education. In this context, the Malawian program aims at enhancing the access to education of girls and reducing their drop-out rate from schools.

In addition, other schemes, such as creating new job opportunities for the poor through public employment schemes, resettlement of the public servants made redundant, and nutrition programs for those who are likely to suffer during the period of financial stringency have also been included in the program design (see following article by Helena Ribe and Soniya Carvalho). Some programs have also called for initiation of supportive measures that could improve the well-being of the poor households (e.g., population planning in countries such as Bangladesh, the Central African Republic, Madagascar, Malawi, Mozambique, Nepal, Niger, and Zaïre).

Mitigating adverse effects

The various ways mentioned above in which governments have responded to poverty concerns as part of the Fund-supported economic stabilization programs constitute a first broad approach to mitigating the direct impact of program measures, such as increases in prices or reductions in public employment or subsidies on certain poverty groups.

The limitations of some of these approaches are easy to understand. For instance, alleviating the impact of public sector employment retrenchment can be justified on the grounds that public sector employees, particularly in Africa, maintain extended families with a large number of dependents. On the other hand, workers in the informal sector in rural or urban areas may have been even more adversely affected than public sector employees through the price effects of the adjustment program. Similarly, public employment schemes may only capture a small segment of the poorer groups, while neglecting a possibly larger segment of rural wage earners who may not have access to such employment schemes. Maintaining expenditures on social services is important, but there is a need to scrutinize the distribution of these expenditures following the adjustment program. For instance, some shift in spending from the large urban health facilities to primary health facilities in the more disadvantaged, possibly rural areas, may be warranted, if the impact of the program is likely to increase the level of poverty in such areas.

The need to go beyond the maintenance of broad social programs, or the support of partial mitigating measures, has led to efforts toward a more refined approach that can narrow down those groups among the very poor who would be most affected by Fund-supported stabilization and adjustment programs. The challenge here is in attempting to trace to the micro level the impact on the poor from changes in policies at the macro level.

The first task in this respect is to obtain the data necessary to identify who the poor are and what they consume. In a country where the majority of the population is poor, it is necessary under the existing budgetary constraints to identify the poorest who should receive immediate protection. In this respect, the Fund staff is building a data base to construct brief profiles of the poverty situation for many of the member countries, drawing on official data and information available from relevant international institutions and nongovernmental organizations.

The second task is to quantify the impact of policies on the poorest groups and explore ways in which such an impact could be minimized through improvements in program design. For instance, if it is found that the consumption of those who are at a bare subsistence level would drop by, say, 20 percent as a result of an increase in the price of basic foodstuffs (e. g., rice and vegetable oil), several alleviating options may be considered in the design of the program: first, provided financing is available, it may be possible to maintain the domestic prices of these commodities with an explicit budgetary subsidy, while eliminating subsidies on less essential items. This may be inefficient to the extent that the relatively better off would also benefit from the subsidy. In a second phase, prices could be decontrolled with the introduction of a targeted scheme to provide such commodities at lower prices only to the neediest groups. Alternatively, an income maintenance program for the targeted groups could be designed (e.g., food stamps).

If the social safety net is well designed, it is likely that financing may be found from external donors for both phases. Otherwise, further fiscal measures, such as higher taxes may have to be imposed to attain the macroeconomic objectives. Such taxation could be imposed on commodities consumed by the richer groups, but options for mobilizing sufficient resources from these groups are often limited. Another possibility would be to attain the intended reduction in demand and changes in relative prices through tighter fiscal and monetary policies coupled with a more moderate exchange rate depreciation. This would result in a slower pace of price increases. The disadvantage of this approach is that fiscal and monetary instruments would be used to attain objectives more effectively reached through a devaluation and would result in a larger cut in domestic demand than warranted, with adverse employment and growth consequences. Finally, commodities provided through aid could be made available to the poorest groups. This would moderate price increases for certain tradables, but may have the disadvantage of reducing incentives for domestic production and in the long run slow down the increase in domestic supply.

There is little doubt that adapting the program design to alleviate the short-term impact on certain groups of the poor, may affect the pace of stabilization as well as growth prospects in ways that are difficult to trace. There is also a risk that tradeoffs among macroeconomic policies might involve changes in the burden of adjustment among different poverty groups or intertemporally. However, a program that protects the health and nutritional levels of groups already at the bare subsistence level would not only be a moral imperative, but would also strengthen the broad social acceptability necessary for economic reform to succeed.

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