Neoliberalism and selective memories

Since the financial crisis I can't make new memories.... everything fades....

OK – here we go again. Deborah Doane writes on the Guardian Poverty Matters blog about how we should uniformly reject all neoliberal policies. One of her examples?

In fact, four of the five fastest growing developing countries in the late 1990s were those that rejected neoliberalism. After a severe famine in 2005, Malawi rejected IMF and World Bank prescriptions and subsidised fertiliser for poor farmers. As a result, during the 2007/08 food price crisis, Malawi was not only able to feed its population, but became a bread basket to the region.

A seemingly simple story about a developing countries throwing off the shackles of structural adjustment in order to do the right thing? Maybe not – Ms. Doah has failed to do her homework on Malawi’s recent history with the IMF.

Let’s rewind a bit to the beginning of multi-party democracy in Malawi, which also introduce a surge in inflation. The two-term presidency of the first democratic president, Bakili Maluzi, was marked by excessive government spending, poor macroeconomic management and a surge in corruption and theft of public funds.


Inflation is sometimes seen as a bit of a boogeyman, but there is very little that is pro-poor about a 40% annual inflation rate. It was only through the hard work of the Malawian government and the IMF (under the PRGF) that inflation was brought under manageable level, as was government spending. There were probably some negative consequences to this imposed austerity (many assert that the IMF’s pressure to keep the wage bill down hurt social programs in the country, although the evidence of this is mixed), but I think few people would consider Malawi’s position before the introduction of the PRGF to be sustainable.

In 2006 Malawi finally reach its HIPC completion point, resulting in a slashing of its debt burden by nearly $3 billion dollars. The amount that Malawi saved on immediate debt from this relief nearly equaled the amount they chose to spend on fertilizer in the subsequent budget year, so the benefits of the relief are quite clear. Aside from the immedite benefits, being nearly debt-free gave the country the wiggle-room necessary to pursue more expansionist fiscal policy, and it is highly doubtful that they could safely be spending so much on fertiliser today if they hadn’t behaved a little beforehand.

What’s the lesson here? Sometimes `neoliberal’ policies are beneficial and sometimes they aren’t. Blanket policies are not very useful in the post-crisis world, but neither are blanket condemnations.

Health spending, suggestive studies and the IMF’s guilt-by-association

Larry Elliot of The Guardian reports this morning that “Oxford University-led research finds signs that tough loan conditions imposed by IMF has led to health aid being diverted for other uses”.

Wow? Research from Oxford University? This must be true.

Alas, the devil is still firmly seated in the details. I took a gander at the study this morning, titled International Monetary Fund and Aid Displacement (International Journal of Health Services, 41 1: 67-76). You can find a temporarily ungated version here.

It is an interesting paper, but rather limited in its ability to provide a causal story. The authors compare the growth in health spending in countries that have been borrowing from the IMF since the mid-1990s to those that haven’t, and conclude that there is less `divergence’ (what we used to call fungibility) in countries which don’t take IMF loans.

There is an urgent, painfully obvious problem with concluding anything causal here: countries which decide to accept IMF loans are likely to be very different than those that don’t, and these differences are going to have impacts on health spending, above and beyond the restrictions imposed by IMF conditions.

The authors do recognize this, but they don’t make a big deal about it (they do say included some more controls in alternate specifications, but they don’t bother reporting them!).

A final important point is that countries seeking IMF support are likely to differ from countries that are not, and a request for an IMF loan is often associated with severe economic problems. Nonetheless, even in such circumstances,it is reasonable to expect aid from donors to have at least some positive impact on health funding, especially given that health needs are often greatest at such times.

Unfortunately, I don’t think all of us would consider that a reasonable expectation. There are further issues with this study, which is similar to the study on fungibility that ruffled some feathers last year which David Roodman subsequently demolished.

That doesn’t stop both The Guardian from making a very roundabout conclusion that it might be the IMF’s fault that some countries aren’t meeting their MDG targets:

In an investigation of more than 100 low and middle-income countries, the report sought to explain why increased aid spending had left many countries well off track to hit the United Nations millennium development goals (MDGs) for health, which include a two-thirds reduction in infant mortality and a three-quarter decline in maternal mortality.

They said one likely explanation was that the curbs on public spending stipulated by the fund were encouraging governments in poor countries to use health aid for other needs. Countries that did not borrow from the IMF were found to have channelled 45 cents into health systems for every dollar of aid received.

What needs to happen? The Guardian economics editor needs to start reading articles in non-economic journals with the same skepticism he would apply to econometric studies in economic journals, especially before he begins drafting articles which go about the painstaking task of desperately trying to suggest to the reader that there is a causal story without actually saying it – articles with headlines like “IMF loans `Divert aid from public health’”.

What we also need to see is more push back from academic bloggers. Newspapers will forever keep making causal conclusions from studies which can’t make the same claims, we need to call them out when they do so.

A final important point is that countries seeking IMF support are likely to
differ from countries that are not, and a request for an IMF loan is often associated
with severe economic problems. Nonetheless, even in such circumstances,
it is reasonable to expect aid from donors to have at least some positive
impact on health funding, especially given that health needs are often greatest
at such times.