Negotiating better deals

February 19, 2023

Can the government rethink social assistance to reduce inequity?

Negotiating better deals


rime Minister Shahbaz Sharif recently remarked that for a bailout Pakistan will have to agree to unimaginably harsh conditions imposed by the International Monetary Fund. These include the removal of energy subsidies. It seems that the government thinks it has no choice but to accept the IMF conditionalities without protecting its interests. But is that so?

One area where there may be room for a win-win situation for the government, Pakistan and the IMF is social transfers to the vulnerable. Social transfers, especially to women and children, are not only socially just, but also efficient and macro-critical investments for Pakistan to be able to repay its debts in the future.

Take the example of malnutrition. Stunting, a key marker of impaired growth continues to be a significant problem in Pakistan affecting 40 percent under the age of five. A 2022 Lancet study found that Pakistan’s businesses lose between $620.01 and $884.59 million monthly due to its stunted workforce. Earlier estimates suggest that there exists a highly lucrative benefit-cost ratio of around 30 to 1 for stunting reduction in Pakistan. This means that for every rupee invested in stunting reduction, Pakistan will earn 30 rupees. In 2008, a distinguished panel of economists and scientists — including several Nobel laureates — declared combating malnutrition as the world’s best investment. In fact, five of the top 10 solutions involved addressing malnutrition early in life.

Considering increasing concerns about inequality in the backdrop of the 2008 financial crisis, in 2017, the IMF executive board endorsed recommendations for the IMF to scale up its work on social spending. In her 2019 speech, Forging a Stronger Social Contract — the IMF’s Approach to Social Spending, Christine Lagarde, IMF’s then managing director declared:

“In all of our programmes, protecting the poor and vulnerable is now, and will continue to be, a core objective… social spending is not just an expense, but rather the wisest of investments in the well-being of our societies. Expansion of access to education and health generates broader productivity gains across the population, allowing all citizens to flourish. To reap the rewards of a stronger global economy tomorrow, we must begin by strengthening social programmes today.”

The IMF has long been criticised globally for structural reforms that are shortsighted, in that they offer a short-term bandage to stop immediate financial bleeding but while doing so potentially cause serious harm and even more bleeding in terms of an increase in existing socio-economic and health inequities. In medium- to long-term these lead to lower growth and increased poverty and disease. Instead of serving as a big push out of disease and poverty traps, the IMF policies can push more people into a poverty trap. A 2021 study from 79 countries analysed the IMF policies between 2002 and 2018 to find that the austerity measures proposed by the Fund are associated with greater income inequality, higher poverty headcounts and poverty gaps. A 2022 study from 187 countries covering 1990-2017 found that the IMF programmes led to over 70 excess deaths from respiratory diseases and tuberculosis per 100,000 population and that the IMF-mandated privatisation led to over 90 excess deaths per 100,000 population. A 2017 systematic review concluded that IMF programmes have a detrimental impact on child and maternal health by undermining access to quality and affordable healthcare and adversely impacting social determinants of health, such as income and food availability.

Policymakers and the IMF have traditionally mistaken investments in maternal and child health and social spending in general as an economic burden. They see it is a trade-off between what is socially just and what is economically efficient. They also believe that ‘soft’ redistributive expenditures on issues like maternal and early life health can wait till later when the balance of payments crises are resolved, economic growth is high enough and when the IMF loans have been repaid.

But the latest research across biological and economic sciences suggests that investments in early childhood development are one of the soundest ones as, once mature, they improve labour productivity, boost economic growth and reduce budget deficits. IMF’s thought leaders acknowledge this.

At the time of writing this article, an increase of Rs 40 billion (total Rs 400 billion for 2022-23) is proposed in Benazir Income Support Programme (BISP) for 2023. While this is certainly a welcome step in the right direction, both the amount and diversity of spending mechanisms need careful revision. Current inflation is expected to be 33 percent in the first half of 2023, this will make the expected increase of 11 percent in the BISP insufficient to keep up with expected inflation. According to the World Bank’s The State of Social Safety Nets report (published in 2018), the most effective cash transfer programmes in the world have set transfer levels equivalent to 20 percent of monthly household consumption. Based on 2019 estimates from the Household Integrated Economic Survey (HIES), the average household consumption in Pakistan was around Rs 37,159. This suggests that Pakistan should be spending at least 7,432 monthly on its citizens. Given that there may be 9 million families eligible for the BISP in Pakistan by June 2023, this amounts to about Rs 802 billion in annual spending on cash transfers. Clearly, this amount is a far cry from the Rs 400 billion in BSP that is currently proposed.

Moreover, the BISP alone will not be sufficient. An independent impact evaluation of the BISP by the Oxford Management found that although the BISP reduced wasting among girls, there was no effect on stunting levels, child immunisation or diarrhea. Increased spending in initiatives like Ehsaas Nashv-o-numa and conditional cash transfers under Ehsaas programmes that target stunting and uptake of health services are also needed.

The government needs to carefully think of the needs of its vulnerable and social assistance in a way that not only reduces inequities but also boosts its human capital for boosting the domestic productivity of its workers and allocates appropriate funding amounts based on the growing needs of the population.

The question is: will the current government be able to negotiate better with the IMF for minimising potential harm to its vulnerable from structural reforms leveraging IMF’s declared interest in social spending for a stronger Pakistan?

The writer is a global health economist who is currently an assistant professor at the Department of Economics at the University of Georgia, USA

Negotiating better deals