OPINION: Growth model and IMF conditionalities — VI

In addition to achieving macroeconomic stability, the other goal of the extended fund facility (EFF) programme is to put the country on the path of sustainable economic growth.

Having said, an important element in achieving these goals requires enough push from the demos on public policy so that important institutional, organisational, and market reforms are carried out by the government, which are otherwise against moneyed interest, and where such vested interests over time have continued to gains influence over public policy.

Yet, the highly neoliberal and austerity-based orientation of IMF programme in general, including the ongoing Extended Fund Facility (EFF) programme, is not allowing reaching appropriate levels of social spending – for instance, in health and education sectors – which, in turn, reduces political voice and lowers the capacity of demos to make that needed push. Moreover, while under austerity emphasis of IMF programmes a lot of economic growth sacrifice is made, yet this does not – mainly for the reasons indicated above – result in programme countries in general, including Pakistan, to reach neither sustained macroeconomic stability, nor get on an inclusive, sustainable economic growth pathway.

READ MORE: OPINION: Growth model and IMF conditionalities — V

Here, among the binding conditionalities or ‘qualitative performance criteria’ (QPC) of the EFF programme in terms of quantitative conditionalities has been to reach, and sustain primary surplus – which the country has achieved over the course of the ongoing IMF programme – or positive fiscal balance under the overall fiscal consolidation effort.

The highly neoliberal and austerity-based orientation of IMF programme in general, including the ongoing Extended Fund Facility (EFF) programme, is not allowing reaching appropriate levels of social spending – for instance, in health and education sectors – which, in turn, reduces political voice and lowers the capacity of demos to make that needed push.

Having said, the ongoing article series has amply indicated – based primarily on the research highlighted in the book ‘A thousand cuts: social protection in the age of austerity’– that not only IMF conditionalities overall, including quantitative conditions, primarily fiscal consolidation, but also certain structural conditionalities like those in labour policy, over the years has on average in programme countries, including Pakistan, has significant negative causality for government spending on health.

READ MORE: OPINION: Growth model and IMF conditionalities – IV

The book ‘A thousand cuts: social protection in the age of austerity’ pointed out with regard to how the austerity agenda of IMF does not support reaching sustained macroeconomic stabilization, or economic growth as follows: ‘The austerity agenda is, at its core, only a short-term and short-sighted solution to fiscal problems. It frees up resources for government to repay debt, but damages people’s lives and livelihoods in the process. In the longer term, austerity is neither socially nor economically sustainable.

This is because social protection and good health – which are undermined by conditionality – are investments in the population, or “human capital” in the economic patios. …Without social protection policies to maintain livelihoods and stimulate economic demand, public finances will ultimately suffer and development will falter.

READ MORE: OPINION: Growth model and IMF conditionalities — III

In other words, austerity becomes self-defeating – let alone profoundly costly in social terms – and cannot remain the primary policy response to the macroeconomic problems facing countries. …Indeed, recent evaluations of the IMF’s economic policy advice by the United Nations Human Rights Council found that its advocacy of austerity systematically neglected distributional consequences and hampered the realization of basic human rights…’

Here, it needs to be pointed out that the above assertions are not criticisms based on some abstract thinking, nor on some anecdotal evidence stitched together to form some logical sounding arguments, but are based on strong reasoning at the back of visible experience of a number of countries, and deep empirical evidence, including in the book in great detail, specifically with regard to social spending, and income inequality.

Some of the underlying problems with the country’s growth model are increasingly neoliberal- and austerity-based policies, perpetuated over time under multiple IMF programmes that the country has subscribed to, and through subscription to similar policy advice by dominant ‘Chicago boys’-styled policymakers in policy circles.

READ MORE: OPINION: Growth model and IMF conditionalities — II

This has mainly resulted in unjustifiably small role of public sector, over-board privatisation, lesser regulation, and liberalization of prices, trade, and capital. This has led to growth, and financial markets related boom-and-bust cycles at short intervals, reducing, in turn, resilience, skewing distribution in favour of high-income groups, creating high price volatility, and lowering political voice over time and, which has led to reduced pressure on policy to work in the interest of larger public interest.

Moreover, those who advocate for going to IMF like visiting a doctor, and that not just any doctor but one belonging to an ICU, given the intensive care a country facing threat of default, or of a lesser nature balance of payments crisis, or both, should remember that there is something called ‘taking a second opinion’ or a third opinion, or so on, especially when the same doctor is being consulted around two dozen times, and when similar policy prescription is what is heard being voiced in domestic policy, or majority voice apparently selected for airing on media outlets in general, which then provides a deeper basis to the claim by Clara Mattei in her book that austerity project is there to sustain the ‘capital order’.

This capital order – discussed earlier in the article series is what strongly assists perpetuation of the elite order, both among the elites in developing countries, as those mostly exposed to IMF programme(s), and in developed countries that hold major say in multilateral institutions like IMF.

READ MORE: Growth model and IMF conditionalities — I

The same book pointed out in this regard, ‘The imprint of Western power can be found throughout the governance mechanisms and operational management of the IMF… Its voting appointment is skewed in favour of Western countries… Countries in the Global North have historically not been on board with calls to abandon austerity… This is because banks and other financial institutions exposed to distressed economies – which end up as IMF borrowers – are typically based in high-income countries, so such countries appeal to the interests of Fund management and staff in order to protect their financial interests by ensuring debt is repaid in a timely manner and in full… The IMF also opens up business opportunities for firms from Global North by calling for trade and financial liberalization, deregulation, and the privatization of state-owned enterprises… Our agenda therefore implies, at minimum, reapportionment of voting rights towards low- and middle-income countries, overhaul of staff expertise away from the narrow and homogeneous training from a handful of elite Anglo-American universities… and toward greater intellectual and disciplinary diversity, and elimination of the gentleman’s agreement guaranteeing European leadership.’

Will multilateral, domestic policy, like-minded intellectuals, and media understand, especially as a fast-unfolding climate change crisis, and needs of an age of fast-growing artificial intelligence requires greater depth of capacity to deal with crises to create adaptive infrastructure, and human resource? Not short-term fixes over election cycles, nor doing the same and expecting different economic outcomes continue to be apparently the guiding principles of policy, which will likely not help meet the enormous challenge at hand, and that is to get on a sustainable growth path, and one that is inclusive and green.

In making these assertions of the deep misgivings of an austerity-based agenda centred public policy, the book taking long-term data on IMF programme countries, including Pakistan, brought forth negative implications of IMF programme conditionalities on social spending, especially with regard to government health spending, establishing, in turn, not only a negative correlation between conditionalities, and health outcome, but using multivariate regression analyses, the book also pointed towards presence of significant negative causality of overall IMF programme conditionalities. Here, within overall programme conditionalities, most negative causation came from quantitative conditionalities, while certain policies under structural conditionalities – like labour policies – also had significant negative causation for health spending related outcomes.

While the above has been discussed in detail in the previous parts of this article, the book points out interesting analysis on (i) ‘…relationship between IMF lending and income inequality’, (ii) …evaluate statistically the impact of IMF conditionality on the Gini coefficient of disposable income…’ and (iii) ‘…leverage new data on the extent of IMF-mandated fiscal austerity… to investigate how it affects concentration of income into deciles.’

Firstly, it needs to be understood that the debate on the accuracy of ‘fiscal multipliers’ used to calculate the extent of cuts in spending has not settled. For instance, as per the same book ‘…in the case of Greece’s bailout by the IMF and European institutions, initial estimates of these multipliers put them at circa 0.5. This would mean that a €1 decrease in government expenditure would only result in €0.5 decrease in the level of GDP. The organization designed its fiscal consolidation conditions accordingly. However, it was later calculated that these multipliers were actually in 0.9 to 1.7 range… Hence, there is a meaningful level of embedded ‘accuracy risk’, and the writer is unaware of reported related discussion by authorities, of IMF with regard to Pakistan, or otherwise, or a technical note estimating this risk published separately or made part of the country reports on IMF programmes with Pakistan.

Taking an over-board austerity policy approach by giving much more emphasis on squeezing the aggregate demand side to achieve macroeconomic stability, than adopting a more balanced approach by focussing appropriately on boosting the aggregate supply side, by for instance, more binding conditionalities on improving governance, and incentive structures, there is a risk of over-sacrifice of economic growth to start with to achieve at best short-lived macroeconomic stability due to this aggregate-demand side heavy policy approach.

Here, in the context of relationship between conditionalities, and income inequality, the book taking data on 194 countries, pointed out: ‘…we plot the association between average annual income Gini and the total number of conditions between 1980 and 2017. …We observe a weak positive correlation between the two variables, correlating at 0.18.’ Moreover, from the analysis in the book it could be seen that the three data points – 1980, 1990, and 2010 – Pakistan remained as quite a high-level income inequality country, falling in the third highest group with 30% to 40% income inequality. With regard to the reason of taking ‘Gini coefficient of disposable income’ the book indicated that it ‘…is the most widely used measure of income inequality… [where] Gini index measures the income distribution across a population… [and that] a higher Gini coefficient thus indicates greater inequality, with higher-income individuals receiving larger share of the total income of the population.’

Moreover, the analysis has also found that programme countries that were faced with more conditionalities than average number of conditionalities for a programme country had more inequality than countries with less-than-average conditionalities. Hence, one can only imagine the positive impact of IMF conditionalities on income inequality for Pakistan, which during 1980-2019 faced the most conditionalities: 1,303.

Secondly, to analyse that IMF conditionalities are not just correlated with income inequality, and that there exists a positive causation for income inequality, a number of control variables were taken, and a multivariate regression analysis was adopted in the book. With regard to the results, the book indicated, ‘We find an effect for the total number of conditionalities on the Gini coefficient of disposable income… On average, each additional binding IMF condition increases the income Gini by 0.013 percentage points, all other variables held equal.’ Although the analysis here found that most causation came from ‘quantitative conditionalities’ yet as subsequent analysis in terms of individual ‘structural conditionalities’ found ‘…a statistically significant positive effect pertaining to external sector policies on trade and the exchange rate… [where] each additional condition is this policy area increases the income Gini by 0.124 percentage points.’

Also, while policy area with regard to ‘fiscal issues, revenues & taxation’ showed a positive causation at 0.044 percentage points, but remained insignificant, the book indicated: ‘A potential reason the evidence was not stronger is that we used a noisy measure: the extent of fiscal consolidation required is not captured and, in any case, not all conditions in the policy area pertain to fiscal consolidation.’

Using a more nuanced measure in the shape of ‘IMF fiscal adjustment indicator’, in turn, helped leverage an otherwise quite logical conclusion that fiscal consolidation positively impacted income inequality. With regard to this indicator, the book pointed out: ‘For our main explanatory variable, we use a new dataset on IMF fiscal conditionality… measuring the intensity of fiscal adjustment required by countries participating in IMF programs… The IMF fiscal adjustment indicator is then calculated as the cumulative, annualized change in government fiscal balanced between the baseline and the floor, expressed in percentage points of GDP per year. An increase in surplus or decrease in a deficit is shown as a positive value (i.e., more austerity), whereas a decrease in a surplus or increase in a deficit is shown as a negative value (i.e., less austerity).’

Here, seeing at nature of conditionalities in general, and also in the ongoing Extended Fund Facility (EFF) programme, the country is apparently going through ‘more austerity’ causing fiscal policies. Hence, rather than government being ‘ambitious’ – by shifting towards a non-neoliberal policy – on the aggregate supply-side governance, and incentive structures related reforms, it is (wrongly) over-emphasizing austerity policies, rather than adopting at best mild fiscal consolidation policies at the back of rationalising non-development expenditures, broadening tax base, practicing progressive taxation, along with shifting towards income-based taxation, rather than income inequality enhancing consumption-based regressive taxation.

Also, the analysis indicates that Pakistan is not an exception, which points towards a systemic problem in IMF understanding, and exhibiting heavy path dependency not allowing it to better internalize a fast-growing number of studies that show a positive impact of IMF conditionalities on income inequality. The book elaborated on this through the following words: ‘Within this small-but-fast growing body of literature on the global determinants of income inequalities, debates surrounding the impact of IMF programs have persisted over time. Most scholarship on the impact of IMF programs on inequality… suggests adverse effects that can persist over the medium-run.’ Moreover, the book indicated ‘Figure 5.6 plots the IMF fiscal adjustment for the period 2002 to 2017. It shows these values are concentrated close to zero, and that these deficit floors do not always require fiscal consolidation: 194 (58.4 percent) are austere, requiring the headline fiscal balance to increase, while 130 (41.6 percent) of them offer leniency for the headline fiscal balance to fall.’

Further analysis pointed out that fiscal austerity had a significantly negative impact on lower, and middle-income groups, where fiscal adjustment negatively impacted in an increasing way for the first six income deciles – with most negative impact for the sixth income decile –whereas for the seventh decile the impact although still negative but diminished as compared to the sixth decile. For deciles eight and nine the impact although negative, but becomes insignificant, while for the tenth decile – the group representing the most rich - the impact not only turned positive, but also became the most pronounced.

The book pointed out in this regard: ‘Based on the point estimate, a country on an IMF program requiring an annual fiscal adjustment of 10 percentage points can expect the share of income of decile one – the sum of incomes of the poorest 10 percent of the population as a proportion of total income – to decrease by 1.34 percentage points on average, and we can say with 90 percent confidence that this decile is between 0.50 and 2.18 percentage points. At income decile share six – the sum of incomes between the bottom 50 percent and 60 percent of the population as a proportion of total income – the same fiscal adjustment of 10 percentage points would reduce the share of income by, on average, 2.33 percentage points. While the fiscal adjustment effects for income decile shares eight and nine are also broadly comparable, they do not reach the 90 percent threshold of statistical significance. For income decile 10 – the sum of incomes of the richest 10 percent of the population as a proportion of total income – the effect of IMF fiscal adjustment turns positive and is much larger relative to other deciles. An IMF programme requiring an annual fiscal adjustment of 10 percentage points would increase the share of income in this decile by 17.05 percentage points, and we are 90 percent certain that it is between 8.07 and 26.02 percentage points.’

This, in turn, reflects fiscal consolidation policies of IMF leading to income shifting from the lower- and middle-income groups to the highest income group, while the group just below the highest feeling virtually no significant negative, or positive impact on consolidation. Such analysis, if not already made, holds strong potential in terms of reaching important ‘specific’ implications for Pakistan, although the above analysis is meaningfully indicative, nonetheless, in the ‘broad’ sense because the sample being analysed in the book does include Pakistan. Overall, income redistribution due to fiscal consolidation heavy policies is likely not to lead to sustainable economic growth, because it apparently results in diminishing of inclusivity as income – or greater consumption, and investment capacity – shifts the most to the few.

Moreover, with regard to the analysis done using IMF fiscal adjustment indicator, the book’s analysis points towards a significant positive consequence of fiscal austerity policies on income inequality. It pointed out in this regard: ‘These results indicate that IMF fiscal consolidation fostered inequality by concentrating income into the top 10 percent of earners. While other deciles lose out (with possible exception of decile eight and nine), the biggest losses are accrued by deciles four to seven – the middle-class earners – plausibly a product of wage, employment, and pension cuts for civil servants [and government servants due to segregation of the two, but both of whom are receiving employment and income from government]. Findings are also consistent with the pathway related to taxation, whereby value-added taxes – favoured over income and corporate taxes – place a greater burden on poorer households.’

Here, it needs to be highlighted in the light of the findings above that the claim that IMF programmes take suitable steps to create appropriate level of protection, becomes all the more suspect, with strong likelihood that this may not be the case in the overall context of the IMF programme, where strong fiscal consolidation thrust likely to overtake a generally relatively small amount budgeted for social protection programmes, and subsidies for the lower- and middle-income groups. The book pointed out in this regard: ‘Furthermore, the evidence strongly affirms that fiscal austerity will not protect the most vulnerable, as deciles one to three also experienced declines in their income share’.

(Concluded)

Copyright Business Recorder, 2026