Last week I reacted to a Lancet op-ed that blamed the International Monetary Fund (IMF) for the Ebola crisis in West Africa. I argued that Liberia, Sierra Leone and Guinea are weak states that couldn’t have spent health money well if they wanted to. And that, for the most part, they didn’t want to. Health spending wasn’t a government priority, because they were focused on rebuilding elsewhere. We’re talking about a country that went without a functioning government for 15 years, still has no power and, until a few years ago, no police.
On Monday, Adia Benton and Kim Yi Dionne recommended five books and articles that will persuade you the IMF is partly to blame for Ebola. In brief, international financial institutions (including the IMF) have discouraged poor governments from spending money on social services when they don’t have the revenues to support them. And aid organizations, which make up for the gap in social spending, seldom listen to locals. Add this to the slave trade and colonialism, they argue, and the West is responsible for an environment where Ebola can thrive. This blurs the argument beyond the IMF’s current policies, but it’s useful to keep the history in mind.
Tuesday, the authors of the Lancet piece also responded. They made several points, but I think the key one echoes Benton and Dionne: the IMF is to blame because it contributes to a system where there are limits set on what a government can spend. This prompts hard choices, where the IMF and others are quick to recommend that public employment and social services go last. They make some good points.
The question is a big one: Who’s to blame for low social spending in Africa?
We could get into a long discussion about how much slavery, colonialism, and the Cold War contributed to the economic and political crisis that swept up much of Africa for the last 25 years. We’d probably argue about whether it’s “a good deal” or “a great deal”.
I’d rather talk about the main and most controversial claim: that current policy by the international financial institutions is responsible for deep social problems in Africa, including crises like Ebola. The idea that financial austerity kills is not unique to West Africa. Most of the world is suffering from austerity, and a lot of people hold the IMF and their ilk responsible. So this is an important question beyond the Ebola crisis.
There are a lot of assumptions you have to make to connect IMF policies to something like Ebola. A whole string of them runs through a simple chain from more money to health outcomes, something like this: If the government had more money, and if it chose to spend it on health, and if it chose to spend it on health investments that would help respond to this particular kind of health crisis, and if more inputs resulted in better health care and systems (meaning something else isn’t holding back good public service delivery), then, yes, more government funding would have helped avert the crisis.
Let’s concede this point for the moment. I believe it works in poor but stable states like Ethiopia or India. I think it’s optimistic in a place like Liberia or Guinea. We can disagree. But this, too, is a distraction from the main and controversial claim.
I think my main comment is this: When we say “spend more money on health” (which can be a good idea) we have to answer a difficult question — “Where will the money come from?” I seldom see this question asked or answered. To me it’s crucial.
Economists are trained to think in terms of trade-offs. Governments could always spend more money. But places like Liberia take in very few revenues. So the gap between revenues and spending has to be made up with either loans or outside aid. And there are limits to the deficits you can run, since no one wants a country to put itself so deep in debt it can’t get out. Every loan for one thing is not a loan for another thing.
That means saying “the IMF shouldn’t restrict health spending” is actually another way of saying that a country like Liberia should either (1) get more loans, (2) get more aid, or (3) spend less money on something else. (Sometimes that “something else” is debt payments, but that’s just another way of saying Liberia deserves more aid).
A lot of people believe that there shouldn’t be any trade-off, that there isn’t a real limit to aid, and we shouldn’t force countries to make hard choices. Morally I agree. Practically I think there are limits. In places like Liberia and Sierra Leone, I think it would have been genuinely hard for the world to spend more money than they did in the last 10 years. They spent a lot.
In my mind, the real problem is the unpleasant accounting you face when you’re poor, have no tax revenues, and only so much aid. You need to spend less on something. The IMF is the messenger, cheerleader, and sometimes the enforcer of this so-called fiscal discipline. They’re bossy, undemocratic, often ideological, and sometimes wrong. Especially in the 1980s and 1990s. But the other enforcement mechanisms are even crueler: bankruptcy or full scale financial meltdown.
So what is it: More loans, aid, or less spending on something else?
I don’t think anyone is saying “more loans.” Besides, the government wants its loans for roads and power first.
I think you could make a case for more aid, assuming you think the government can manage it. Again, this would be easier in a less fragile state.
I think you could make a great case that the existing aid should have been better spent. That’s exactly what Benton and Dionne argued. I agree. Liberia was flooded with health money that ignored the priorities of the government.
But this is a critique of aid donors, not the international financial institutions. The IMF doesn’t give aid.
Actually, that’s not 100 percent true. Debt forgiveness is akin to aid, by turning old loans into grants. Liberia bankrupted itself by at least 14 years of war and political instability, which mostly ended in 2003. It had defaulted on its debts during the war, and no one wanted to lend to them. It had no money, and so it paid zero in debt payments for years. Getting out of this hole was everyone’s first priority, including the IMF’s. The holdouts were private debt holders, not the big financial institutions.
Liberia finally received about 100 percent debt forgiveness in 2008, within 2-3 years of having a functioning government (which is actually pretty fast). This was a big deal, since it meant Liberia could borrow again with a fresh slate. (Sierra Leone got debt relief in 2006, and Guinea in 2012.)
Overall, this left me with a pretty favorable impression of the IMF’s current policies in West Africa. If I had to guess, anger at the IMF often stems from the legacy of IMF policy in the 1980s, when most African countries were facing financial crisis. You can make a good argument that the IMF gave the wrong advice. But to me the root of the problem was the financial crisis itself. And as Nic van de Walle has argued, most countries ignored or reversed IMF reforms pretty quickly anyways.
Could the IMF be back giving the same old bad policy advice? I don’t know the terms of the 2008 debt forgiveness. Maybe the IMF made these countries promise to keep deficits to a particular maximum level. But this seems like enforcing common sense to me. If a government is interested in borrowing more against the future for short-sighted or political reasons (as many are), I think lenders aren’t crazy to set some limits. Now, if the IMF’s limit was unreasonably low then let’s discuss that specifically. You could be right. If you think lenders shouldn’t set limits at all, then we just disagree.
Or perhaps the IMF forced the government to make choices it didn’t want to. If the government wanted to spend money on health instead of something else, and the IMF said no (and made it stick), that would be problematic.
The Lancet authors made this case, based on unmet health goals in national development plans. But spend a week working in Liberia, and you’ll realize that unrealistic and unmet goals is the government’s specialty. In fact it’s the specialty of most governments. We’re even good at it in the United States. Now take away tax revenues, a functioning bureaucracy, and basic services like power and police. It’s hard to know what the government wants. But national development plans are not the answer. All I can say is that after seven years of working there, all I’ve seen suggests that health has been a distant priority in Liberia, and that it was a reasonable decision at the time.
To sum up, I want to suggest a rule of thumb for any public finance question: When someone suggests “This country should spend more on X”, the most important thing you can ask is the unpleasant accounting question: “Where should that money come from?” More loans? More aid? Less spending on something else? The next thing you should do is take back the point I conceded, and ask whether spending equals results. Because of tradeoffs: money wasted on one thing is money not spent saving lives in other ways. Anything less doesn’t add up, IMF or not.