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World Bank and IMF Loans Do Not Benefit the Poor
Daily Policy Digest

International Issues / IMF & World Bank

Monday, February 25, 2002
Promoting growth and reducing poverty are the main goal of the International Monetary Fund's and World Bank's so called "adjustment loans," that is, loans given to developing countries under a number of conditions. These usually involve macroeconomic goals, such as lower budget deficits or devaluations, as well as structural reforms, such as reducing trade barriers and lifting price controls.

But have these loans achieved their alleged purpose of reducing poverty? This is the question raised by World Bank economist William Easterly.

Easterly researched the effects of adjustment lending on the reduction of poverty in recipient countries, arriving at the following conclusions:

  • Adjustment lending has had no direct effect on poverty reduction by increasing economic growth -- the median growth rate of 36 recipient countries studied by the author for the 1980 to 1998 period was zero.
  • Adjustment lending does have an indirect effect on poverty, by smoothing ups and downs in the income and consumption of the poor.
  • The poor benefit less during growth periods, but are also less hurt during recessions because they derive their income from the informal sector of a country's economy.
  • A country's income inequality also determines how much the poor will be affected during expansionary or recessionary periods -- with the effect less in countries with a very unequal income distribution because the poor represent a smaller share of income.
These insights could explain, for example, why the poor of a highly unequal country like Mexico, also the recipient of several adjustment loans, have not felt the impact of the country's 1989 to 1995 crisis.

William Easterly estimates that Word Bank and IMF loans have actually increased the number of poor in the world by 14 million, or 0.4 percent.

Source: "The World Bank, the IMF, and the Poor," Economic Intuition, Summer 2001; based on William Easterly, "IMF and World Bank Structural Adjustment Programs and Poverty," Working Paper; see also Policy Research Working Paper WPS2517, "The effect of International Monetary Fund and World Bank programs on poverty," January 31, 2001, World Bank.

For more Economic Intuition research summaries http://www.economicintuition.com

For World Bank text
http://www-wds.worldbank.org/servlet/WDSContentServer/
WDSP/IB/2001/02/17/000094946_01020208011011/
Rendered/PDF/multi_page.pdf

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