Wednesday, 28 August 2013

Austerity and inequality: the IMF going unorthodox?

By Carlos Fortin

Isabel Ortiz has brought to the attention of the Recovery with a Human Face network a recent IMF Working Paper on the distributional effects of fiscal consolidation(1). It makes interesting reading, not least in that it seems to indicate a departure from orthodox thinking on the matter.

The paper explores the impact on inequality of measures of fiscal consolidation, defined as "policy actions—tax hikes and/or spending cuts—taken by governments with the intent of reducing the budget deficit"(p.4). It is based on information on 173 episodes of fiscal consolidation for 17 OECD economies during 1978-2009, whose magnitude ranges between 0.1 and about 5 per cent of GDP, with an average of about 1 per cent of GDP; this is correlated with the behavior of the Gini coefficient as well as with the distribution of income as between profits and wages and with short-term and long-term unemployment in the countries concerned.

What the IMF found... 

Fiscal consolidation episodes have
(i) increased inequality in the very short term and in the medium term;
(ii) led to a significant and long-lasting fall in the wage income share of GDP; and
(iii) raised long-term unemployment over the medium term.

The impact is particularly striking in the correlation with the Gini coefficient. As the Figure below shows, fiscal consolidation episodes, on average, have been typically associated with an increase of the Gini of about 0.3 percentage point in the short term (two years after the occurrence of a consolidation episode) and of about 1.5 percentage points in the medium term (8 years after the occurrence of a consolidation episode).

Figure: The effects of fiscal consolidation on inequality Source: Ball et al. (2013)

Equally striking – although not unexpected – is the finding that reductions in spending tend to have larger distributional effects than tax-based consolidation measures. Specifically, the medium-term effect of fiscal consolidations on income inequality is about 1 percentage point for spending-based consolidations and 0.6 percentage point for taxes-based measures.

Austerity hurts the poor more than it hurts the rich

So, there we have it: the IMF beginning to recognise (2) that the austerity it has advocated for so long hurts the poor more than it hurts the rich. The policy conclusions the authors draw from their findings are, however, rather general and bland: "governments should pay special attention to the fiscal measures that they adopt"; "the distributional effects of consolidation must be balanced against the potential longer-term benefits that consolidation can confer"; "fiscal measures that are approved now but only kick in to reduce deficits in the future—when the global recovery is more robust—would be particularly helpful."(p.11).

And yet, it is possible to conceive of fiscal contraction that would be specifically designed to protect the poor and vulnerable and to reduce, rather than increase, inequality. In another paper (PDF) Isabel Ortiz and Matthew Cummins illustrate this possibility with the example of Iceland:

"In designing fiscal adjustment, the authorities introduced a more progressive income tax and created fiscal space to preserve social benefits. Consequently, when expenditure compression began in 2010, social protection spending continued to rise as a percentage of GDP, and the number of households receiving income support from the public sector increased. These policies led to a sharp reduction in inequality. Iceland’s Gini coefficient—which had risen during the boom years—fell in 2010 to levels consistent with its Nordic peers."

Surely an example to be followed.

Carlos Fortin is an IDS Research Associate currently working on the relationship between the emerging international trade regime and human rights.

  1. Laurence Ball, Davide Furceri, Danie Leigh and Prakash Loungani (2013) The Distributional Effects of Fiscal Consolidation, IMF Working Paper WP/13/151.
  2. The cautious wording takes account of the disclaimer included in all IMF Working Papers to the effect that "views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy."
  3. Isabel Ortiz and Matthew Cummins, "The Age of Austerity: A Review of Public Expenditures and Adjustment Measures in 181 Countries", Initiative for Policy Dialogue and South Centre Working Paper, March 2013 (PDF).
  4. Ibid, p. 38, quoting from Iceland’s IMF Article IV Consultation 2012

Previous Globalisation and Development blog posts on inequality:

Monday, 5 August 2013

Paying for nutrition? Challenges and lessons in selling healthy foods to the poor

By Ewan Robinson

Following the Nutrition for Growth event in June and the expansion of the New Alliance for Food Security and Nutrition, there is more interest than ever in using markets to tackle undernutrition, especially the so-called ‘hidden hunger’ of micronutrient deficiencies.

Some big businesses are trying to make low-cost products that are fortified with key nutrients, and to sell these to poor populations. Examples include Grameen Danone Foods in Bangladesh and Japanese multinational Ajinomoto’s venture with development donors in Ghana.

Early initiatives have shown that there are considerable challenges to be overcome. Despite operating for several years, Grameen Danone Foods hasn’t been able to turn a profit selling yogurt to rural mothers. In India, DuPont subsidiary Solae tried to market soy protein to poor women, but ended up closing the pilot due to inconsistent demand.

Obstacles to ‘selling nutrition’ to the poor
First off, very poor households already spend as much as 70% of their income on food, and are increasingly squeezed by volatile food prices. Social protection and getting people out of poverty has to be the first step. But for a number of reasons, it won’t be enough.

A second obstacle is that undernutrition is invisible. The groups who need nutrients most are babies and pregnant mothers (they also need to have access to water, sanitation, etc. so they can be healthy enough to use these nutrients). But the health benefits of good nutrition are years away. So you’re asking people to pay today for benefits in the future, which is always tricky.

And even if people know what nutrients they should be getting, it can be impossible to tell whether foods really contain these nutrients. (See this earlier blog post for more about the problem of invisible nutrients.)

People want much more than nutrients
This one is obvious: we choose to eat certain foods for many reasons: because they taste good, indicate our social status or connect with our identities. Most of the time, our main consideration is not nutrition.

Some recent research shows that once people move from extreme poverty to being able to afford enough rice, bread or cassava so they aren't hungry, they don’t use any additional money to ‘buy nutrients’. A study in China’s Hunan and Gansu provinces found that when the prices of staple foods were subsidised, very poor consumers decided to buy products that tasted good (like fish), and cut back on ‘poor person’s foods’ (like bean curd and vegetables). As a result, they actually got fewer nutrients in their diets.

A fourth problem is how people use foods once they have access to them. Some foods must be eaten regularly to provide health benefits (this is especially true for infant foods). Will poor consumers – whose incomes could fluctuate week-to-week – be able and willing to buy fortified products daily or weekly?

In spite of all this, there is evidence that poor people will pay relatively high prices for foods when they perceive them to be necessary for health. In Ghana and Nigeria, many lower-income households buy NestlĂ©’s Cerelac, a fortified product aimed at infants above 6 months. They prefer it over local products, even though Cerelac’s high price means they can’t afford enough of it.

The challenge of creating consumer demand for nutrition
Convincing poor people of the value of nutritious foods – whether nutrient-rich vegetables or fortified products – will be crucial to donors’ and businesses’ efforts.

Current initiatives are trying to create this demand in a number of ways:
  • through social marketing channels (tried by Grameen Danone) that deliver products to where standard distribution systems don’t reach, while also providing information on nutrition (and promoting the product);
  • by integrating messages about products into nutrition and health behaviour campaigns (tried by USAID in Ghana);
  • by focusing on a narrow range of products, especially those targeted at infants 6 months to 2 years old.
Will these efforts be enough to change how people buy food? How do they square with rapidly changing food systems, where many people increasingly aspire to eat the processed and branded products associated with higher income lifestyles? We need more evidence to say conclusively. But it seems that, given the scale of the problem, we need more comprehensive approaches.

Share your experiences: What examples can we learn from?
There is much to learn from research and experience with how markets work in other areas. Large-scale evaluations have tested how charging a fee for vital products, such as vaccines and bed nets, affects people’s use of these products. (See this J-PAL Bulletin for a useful summary of several of these studies.) The key findings include:
  • Small changes in cost have a major influence on whether people buy a product.
  • Charging even a small fee can exclude a major portion of the poor.
  • Although programmes long assumed that if people paid for a product, they would be more committed to using it properly; this turns out not to be true.
  • Educating people about the benefits of a product doesn’t necessarily make them willing to pay for it. (This one is particularly worrying for nutritious foods.)
What about you? There are surely many more examples to learn from. Do you have experience promoting the use of nutritious foods? What can we learn from other markets, places and contexts? Share your thoughts in a comment below!

Ewan Robinson is a Research Officer in the IDS Globalisation Team working on agriculture nutrition value chains, in order to contribute to policies that leverage value chains for nutrition.

Previous Globalisation and Development blog posts on nutrition: