Austerity Measures in Developing Countries

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Austerity Measures in

Developing Countries: Public

Expenditure Trends and theRisks to Children and WomenIsabel Ortiz

a& Matthew Cummins

b

aUNICEF Division of Policy and Practice , 3 UN Plaza,

#420, New York , NY , 10017 , USA E-mail:b

UNICEF Division of Policy and Practice , 3 UN Plaza,

#446, New York , NY , 10017 , USA

Published online: 10 May 2013.

To cite this article: Isabel Ortiz & Matthew Cummins (2013) Austerity Measures inDeveloping Countries: Public Expenditure Trends and the Risks to Children and Women,

Feminist Economics, 19:3, 55-81, DOI: 10.1080/13545701.2013.791027

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Feminist Economics, 2013Vol. 19, No. 3, 5581, http://dx.doi.org/10.1080/13545701.2013.791027

Austerity Measures in Developing Countries:

Public Expenditure Trends and the Risks to Children

and Women

Isabel Ortiz and Matthew Cummins

A B ST R A C T

This study examines howausteritymeasures mayhave adversely affected childrenand women in a sample of 128 developing countries in 2012. It relies onInternational Monetary Fund (IMF) fiscal projections and IMF country reportsto gauge how social assistance and other public spending decisions haveevolved since the start of the global economic crisis. The study finds thatmost developing countries boosted total expenditures during the first phaseof the crisis (200809); but beginning in 2010, budget contraction became

widespread, with ninety-one governments cutting overall spending in 2012.Moreover, the data suggest that nearly one-quarter of developing countriesunderwent excessive fiscal contraction, defined as cutting expenditures belowpre-crisis levels. Governments considered four main options to achieve fiscalconsolidation wage bill cuts/caps, phasing out subsidies, further targetingsocial safety nets, and reforming old-age pensions each of which would belikely to have a disproportionately negative impact on children and women.

K EYWOR DS

Fiscal consolidation, austerity measures, public expenditures, social spending,crisis recovery

JEL Codes: H5, O23, I3

INT R ODUC T ION

Fiscal austerity has blanketed European and North American headlinessince 2010. However, little attention has been paid to the experience ofpublic finances among developing countries during the global economiccrisis,1 and even less to how macroeconomic decisions may have affected

vulnerable populations. Not only has the developing world been dealingwith heightened vulnerabilities due to the earlier and cumulative effectsof the food, fuel, and financial shocks starting in 2008, but in many places,

public assistance can be the difference between life and death, meaning that

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severe budget cuts could have grave implications for millions of the worldspoorest and most deprived populations.

This study aims to fill the void in current global discussions by offeringa framework to understand how austerity measures may be adverselyimpacting vulnerable groups in developing countries, with a focus on

children and women. Such an analysis would ideally be carried out usingreal-time expenditure data based on ministerial, sectoral, and economicclassifications as well as across different levels of government, in order tomeasure actual changes in pro-poor spending allocations, both nationallyand locally, during the global economic crisis. However, comparable, cross-national, and disaggregated social expenditure data were not available atthe time of writing (2012) for a large sample of developing countries overthe 200812 period.

To overcome the data limitations, we examine all existing information

sources that allow us to gauge how social assistance and other expendituredecisions may have evolved for a sample of 128 developing countries since2008. Our examination includes (1) a review of historical evidence from the1980s and 1990s, to see how social expenditures have fared in environmentsof general budget contraction; (2) examination of available surveys along

with health and education spending estimates from the World Bank, to seewhether developing countries were able to boost social assistance to buffertheir populations from the initial effects of the crisis during 200809; (3)analysis of total government expenditure projections by the International

Monetary Fund (IMF), in order to infer how aggregate spending trends mayhave influenced social sector allocations in 2012; and (4) a review of policydiscussions and other information contained in IMF country reports, toidentify the most common adjustment measures that developing countriesconsidered in 201012. The study concludes by discussing the potentiallyadverse effects of reduced social assistance and specific austerity measureson vulnerable populations, with particular attention to children and women.

A GGR EGAT E BUDGET CUT S A ND SOCIA L EXPE NDIT UR ES:

HIST OR IC A L EVIDENC E

Evaluation of historical experiences suggests that social spending is typicallyunprotected during environments of overall expenditure contraction.Research on the 1980s debt crisis shows that many developing countriesexperienced disproportionately large cuts in social spending areas (forexample health, education, and social security) when compared toaggregate budget contractions (Giovanni Andrea Cornia, Richard Jolly, andFrances Stewart 1987). Even more importantly, vulnerable populations werefound to have suffered the largest cutbacks, both within social and other

spending categories, such as economic services and defense. Norman L.Hicks (1991) also finds that, during the period 197084 when a sample

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A U ST E RI T Y M E AS UR E S IN D EVE L OP ING CO U NT R IE S

of twenty-four developing countries reduced expenditures, social sectorsexperienced smaller cuts, on average, than the total expenditure but stillreceived the third highest cuts; defense budgets, in contrast, were found tobe the most protected.

Country-level analyses further support the findings of these larger studies.

For example, Martin Ravallion (2002) shows that general budget cuts inArgentina during the 1980s and 1990s typically resulted in proportionatelygreater reductions in social spending. He further shows that spending ontargeted social assistance and employment programs was more vulnerableto aggregate spending cuts than spending on more universal social services.Research by Christina Paxson and Norbert Schady (2007) on Peru alsoindicates that public spending on health contracted sharply during the crisisin the late 1980s, which partly explains the rise in infant mortality.

Historical evidence thus highlights the urgent need to protect pro-

poor spending at times of aggregate fiscal contraction. While the globaleconomic crisis that began in 2008 differs in nature and magnitude fromprevious crises, it has caused revenue shortfalls among governments inmany developing countries. In the current context, what has been therecent experience in social spending essential to the well-being of vulnerablepopulations?

Social expenditure trends during the global economic crisis

Crisis phase I, 200809: Increased public support

In terms of social spending, a growing body of evidence indicates thatdeveloping countries, on the whole, safeguarded or increased socialspending and other priority areas during 200809, despite falling revenues.For example, Isabel Ortiz, Jingqing Chai, Matthew Cummins, and Gabriel

Vergara (2010) find that, on average, nearly one-quarter of the totalannounced fiscal stimulus amount was directed at social protection/socialsupport programs in a sample of sixteen developing countries. Whenlooking at a group of nineteen low-income countries, Yongzheng Yang, PaoloDudine, Nkunke Mwase, Sibabrata Das, Eteri Kvintradze, and Pritha Mitra(2010) show that sixteen governments budgeted higher social spendingin 2009 compared to the previous year. Available spending outturn datafrom the IMF (2010a) indicate that the median value of social spendingincreased by 0.5 percent of gross domestic product (GDP) between 2008and 2009 among developing countries in Sub-Saharan Africa, with real socialexpenditure growth accelerating from 4.8 to 6.8 percent.

Our analysis of the latest available health and education spendingestimates from the World Banks (2012) World Development Indicators

further supports the findings that governments protected and/or increasedsocial expenditures. When comparing the average expenditure trends

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during the first phase of the crisis (200809) with those during the pre-crisis phase (200507), we find that, on average, spending in the health andeducation sectors increased by approximately 0.2 and 0.1 percent of GDPamong developing countries with available data. In terms of real growth (or,in other words, the value of nominal expenditure adjusted by the consumer

price index), health and education spending grew by an average of 21 and15 percent, respectively, over the two periods.

Available data, however, present limitations to understanding actual socialspending trends during the first phase of the crisis. While there is evidence ofmoderate upticks in resources allocated to two key social sectors in 200809,the data do not cover all social expenditure categories, such as social security.For example, if social protection spending increased, these allocations maynot be captured in health and education estimates due to classification andreporting differences at the national level. The relatively small sample size

of developing countries with education spending estimates through 2009also falls short of offering a full picture of actual investment trends (thirty-nine countries versus 133 with health expenditure data). Lastly, additionalresearch hints that fiscal stimulus packages may not have benefited certainsocial sectors to the degree that earlier studies have suggested.2

On the whole, the available evidence suggests that developing countriesdid, on the aggregate, protect or increase levels of support to the healthand education sectors during 200809. Investments in these social sectors

were largely facilitated by an overall expansionary fiscal stance and likely

reflected a greater policy emphasis on protecting vulnerable populationsfrom the negative shocks of the crisis.

Crisis phase II, 201012: Reduced public support?

At the time of writing, data shortcomings made it impossible to assessactual levels of social spending during 201012. Although the IMF publishescurrent and projected fiscal data in the World Economic Outlook, there areno near real-time data series on social expenditures. Similarly, the WorldBank compiles expenditures by health and education sectors in the WorldDevelopment Indicators, but there is a time lag of at least two years beforethe data become available. While such numbers do offer a picture althoughimperfect of these social spending categories for the earlier phase of thecrisis, there is no such information to appraise trends during the later period.

Looking at available cross-national budget studies, recent surveys suggesta bleak outlook for social expenditures during the second phase of the crisis.For example, Katerina Kyrili and Matthew Martin (2010) find that two-thirdsof fifty-six low-income countries surveyed were cutting budget allocationsin 2010 to one or more pro-poor sectors, which included education,

health, agriculture, and social protection. They further confirmed thatwhile expenditures on infrastructure, health, and agriculture rose in 2009,

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they fell in 2010, with social protection allocations contracting in 2010 andending the period more than 0.2 percent of GDP lower than in 2008, onaverage. Dirk Willem te Velde, Charles Ackah, Olu Ajakaiye, Ernest Aryeetey,Debapriya Bhattacharya, Massimiliano Cal, Tayo Fakiyesi, et al. (2009)also observed important reductions in planned social spending allocations

for the 2010 budgets among many of the ten developing countries intheir sample. Moreover, Alexander Chubrik, Marek Dabrowski, RomanMogilevsky, and Irina Sinitsina (2011) conclude that four of six former SovietUnion countries studied were expected to decrease education expenditurein terms of GDP between 2009 and 2010, with Kyrgyzstan and the RussianFederation undergoing real declines in spending.

In contrast to these findings, policy discussions described in recentIMF country reports indicate a greater emphasis on safeguarding pro-poor or priority spending than in the past, most notably in low-income

countries supported under the IMFs new lending framework. However,there are numerous problems associated with definitions of so-calledpriority expenditures.3When additionally combined with data limitations,it is impossible to estimate the evolution of social spending over the 201012period. Given the current lack of evidence on actual social expenditures indeveloping countries since 2010, we turn to total government expendituresin order to gauge how overall trends may be affecting social sectorallocations.

Data and methodology

Our analysis of public expenditure trends in developing countries is basedon IMF projections contained in the World Economic Outlook (2011a), whichis the only source of comparable, cross-national fiscal data. Several datacaveats are worth mentioning. First, the scope of expenditure data variesacross countries. While in most instances the data refer to central and localgovernments, for some countries, the data refer to the public sector, whichincludes public enterprises. Second, total government spending projectionsmay differ from the estimates used in this study as more economic and fiscalindicators become available. Third, expenditure data from IMF sources may

vary from those reported in national budgets due to alternative projectionassumptions and methods.

In terms of methodology, we analyze changes in total governmentspending using two unique measures: (1) public expenditure as apercentage of GDP, and (2) the real value of public expenditure. Regardingthe former, this is the most commonly used metric for cross-nationalcomparisons of public expenditures, and the most useful for assessing agovernments fiscal position. For the latter, absolute spending changes offer

a better indication of the possible impact on the real welfare of populations.We apply both of these measures to the 128 developing countries that have

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fiscal estimates across the three unique periods of the crisis: 200507 (pre-crisis), 200809 (crisis phase I: fiscal expansion), and 201012 (crisis phaseII: fiscal contraction).

ResultsAnalysis of fiscal projection data verifies two distinct phases of governmentspending patterns since the onset of the global economic crisis. Duringthe first phase, most developing countries moved swiftly to introduce fiscalstimulus packages and boost spending, which largely characterizes 200809. Beginning in 2010, however, most governments started to scale backstimulus programs and slash budgets, a trend that appears to have gainedmomentum in 2012. We present the detailed results for each of these phases,after which we examine whether some countries may have experienced

excessive contraction during 201012.

Crisis phase I, 200809: Fiscal expansion

The vast majority of governments boosted public expenditures to buffer theimpact of the different global shocks on their populations in what could bedescribed as the expansionary phase of the global economic crisis. Whencomparing pre-crisis spending levels to this first phase, nearly three-fourthsof our sample of developing countries (ninety-four out of 128) ramped up

public expenditures, with average expansion amounting to 3.7 percent ofGDP. Developing countries in Sub-Saharan Africa undertook the largestspending increases, with twenty-six of the forty-one countries expandingby 4.4 percent of GDP, on average. Also noteworthy, nearly all countries inEastern Europe and Central Asia (twenty out of twenty-two) raised spendingby more than 4 percent of GDP, on average.

Positive trends are also evidenced in terms of real government spending.More than 90 percent of developing countries increased real expenditures,

with the average growth equaling nearly 25 percent when comparing 200809 and 200507 average spending levels. Expansions were largest in EasternEurope and Central Asia, along with East Asia and the Pacific, with realexpenditure growth amounting to roughly 30 percent, on average, inboth of these regions. As described above, overall increases in aggregateexpenditures appear to have positively impacted the spending allocationsto several social sectors.

Crisis phase II, 201012: Fiscal contraction

Beginning in 2010, in a second phase of the crisis, most governments

started to withdraw fiscal stimulus programs and scale back public spending.Overall, an estimated seventy developing-country governments (55 percent

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of the sample) reduced total expenditures by 2.6 percent of GDP, on average,between 2009 and 2010 (see Table 1). This shift was most acute in countriesin the Middle East and North Africa, both in terms of breadth (more than 80percent of countries in the region contracted), as well as depth (4 percentof GDP, on average).

At the time of writing, the outlook for 2011 and 2012 was equally troubling.In 2011, sixty-two developing countries (roughly half of the sample) werecontracting government expenditures by an average of 2.2 percent of GDP,

while ninety-one (more than 70 percent of the sample) were forecasted toadopt further austerity measures during 2012 to around 1.5 percent of GDP,on average. For both years, Eastern Europe and Central Asia had the largestpercentage of countries expected to reduce aggregate spending thirteenof twenty-two countries (59 percent) in 2011 and nineteen of twenty-twocountries (86 percent) in 2012. Sub-Saharan Africa, on the other hand,

was the region with the biggest anticipated expenditure contractions 3.4 percent, on average, for nineteen of the forty-one countries in 2011,and 2 percent, on average, for twenty-seven of the forty-one countriesin 2012.

Of the fiscal changes anticipated between 2011 and 2012, the mostalarming is the growing number of countries that were projected tocut spending in 2012. Overall, an additional twenty-nine countries wereforecasted to undergo expenditure reductions between 2011 and 2012,

with the biggest changes occurring in Latin America and the Caribbean

(from fourteen to twenty-two countries), the Middle East and North Africa(from three to nine countries), and Sub-Saharan Africa (from nineteen totwenty-seven countries). It is also worth mentioning that the number ofhigh-income countries that were expected to undergo fiscal contractionreached forty-one of forty-nine countries in 2012, up from thirty-eightcountries in 2011.

Although less severe, fiscal contraction is also evidenced in terms ofchanges in real spending. At the time of writing, an average of 30 percentof all developing countries were anticipated to experience negative growthin real government expenditures during 201012, a number that remainsconstant throughout the period. While spending growth was forecastedto remain positive for the sample as a whole, on average, there was adownward trend from around 5.5 percent during 201011 to 2.8 percentin 2012. For those countries that were projected to experience negativegrowth, real declines amounted to 5.5 percent annually, on average, over thethree-year period. Regionally, Sub-Saharan Africa appears to be the hardesthit, as approximately one-third of countries were expected to decreasereal spending by 8.2 percent in 2011, which only slightly tapers off in2012. Estimates also suggest that the Middle East and North Africa were

increasingly tightening real expenditures, with declining spending growthaffecting just a single country in 2011 but jumping to five in 2012.

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Table 1 Projected total government spending trends, 201012

(A) Chang

(year on ye

Region (n=) Indicator 2010 2

East Asia and Pacific (17) Overall average change 0.0

Average contraction 1.5

Percent of countries contracting 58.8 4

Eastern Europe and Central Asia (22) Overall average change 1.2



Latin America and Caribbean (29) Overall average change 0.7


Percent of countries contracting 55.2 4Middle East and North Africa (11) Overall average change 3.3



South Asia (8) Overall average change 0.1



Sub-Saharan Africa (41) Overall average change 0.1



All developing countries (128) Overall average change 0.6



Source: Authors calculations based on IMF (2011a).

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Table 2 Changes in total government spending, 201012 average versus 200809average (in percentage of GDP)

Total sample Expanded Contracted

Number of Avg. Percent of Avg. Percent of Avg.

countries spending countries spending countries spendingRegion

East Asia and Pacific 17 1.2 64.7 2.2 35.3 0.8

Eastern Europe andCentral Asia

22 0.6 36.4 2.5 63.6 2.3

Latin America andCaribbean

29 0.4 69.0 2.3 31.0 3.7

Middle East and NorthAfrica

11 2.7 18.2 2.2 81.8 3.8

South Asia 8 0.8 50.0 3.4 50.0 1.8

Sub-Saharan Africa 41 0.4 68.3 2.2 31.7 3.6

All developing countries 128 0.1 57.0 2.3 43.0 2.9


Contrasting the phases

To better appraise the breadth and depth of contractions in governmentspending among the cohort of developing countries, it is also useful to

compare the expansionary and contractionary phases of the crisis. Whentaking the average spending values of the stimulus phase (200809) andcontrasting them against the forecast expenditures of the austerity phase(201012), fifty-five of 128 developing countries (or 43 percent of thesample) were expected to contract total government expenditure by anaverage of 2.9 percent of GDP (see Table 2). In real terms, just over20 percent of developing countries were projected to undergo negativespending growth when comparing the unique periods. This finding,particularly that of the important cuts already undertaken in 2010, raisesconcerns about premature fiscal tightening, especially given the risinglikelihood of a double-dip recession in many developing countries at thetime of writing. Furthermore, expenditure contraction at the aggregate levelappears to support evidence that priority social spending has been adverselyimpacted since 2010.

At the country level, a number of governments were projected to undergolarge spending cuts in terms of GDP when comparing the expansionaryand contractionary phases of the crisis (see Figure 1A). In particular, largecontractions (412 percent of GDP) were expected in thirteen countries,including Angola, Antigua and Barbuda, Azerbaijan, Belarus, Botswana,

Burundi, Djibouti, Georgia, Grenada, Iraq, Jamaica, Swaziland, and Yemen.In terms of real spending growth, Antigua and Barbuda, Botswana, Georgia,

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Figure 1 Projected change in government spending, 201012 average versus200809 average: (A) Total spending (percentage of GDP); (B) Growth of realspending (as a percentage)Source: Authors calculations based on IMF (2011a).

Grenada, Iran, Jamaica, Madagascar, Montenegro, Romania, and Swazilandwere projected to reduce total expenditure by more than 5 percent when

comparing the average spending values over the two periods (see Figure 1B).Given that this picture reflects the combined effects of reduced spending

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along with an eroding real value of expenditures due to higher local prices,Georgia and Iran stand out as having dangerous levels of inflation during201112.

What induced these change in fiscal policy stances between the first andsecond phase of the crisis? In February 2010, two IMF Board papers (2010b,

2010c) called for large-scale fiscal adjustment (meaning a reduction ingovernment budget deficits) where the recovery is securely underwayas well as for structural reforms in public finance to be initiated even incountries where the recovery is not yet securely underway (IMF 2010b: 3,2010c: 1). While these papers focused on higher income economies, they

were the first signs of a worldwide policy reversal, which had the support ofthe G-20.

The sovereign debt crises in Europe raised concerns about publicdebt levels in governments worldwide. It is less clear, however, why the

drive to slash budgets in developing countries was as quick, intense,and prolonged as our analysis of spending data has revealed. One ofthe principal criticisms is the role of policy influence/pressure frominternational financial institutions. During the first stage of the crisis, theIMF raised expectations about reforming its fundamental policy approachto crisis response, seemingly abandoning neoliberal prescriptions. As thecrisis evolved, however, it became clear that, in practice, there were fewchanges to its standard recommendations to developing countries regardingmonetary and fiscal policies (Terry McKinley 2010; Elisa Van Waeyenberge,

Hannah Bargawi, and Terry McKinley 2010). Moreover, according tocritical voices, the IMF failed to revise its rigid and orthodox approachto macroeconomic policy guidelines and based much of its policy designon low fiscal deficits, low inflation rates, flexible exchange rates, and tradeand financial liberalization (Nria Molina-Gallart 2010). While influenceand pressure from international financial institutions may partly explainthe breadth and scope of expenditure contraction observed in developingcountries since 2010, few governments have IMF programs, and there isa clear need for more research to better understand why governmentsfollowed the trend of contractionary policies at a time of global recession.

There are also many questions behind the logic of austerity. Defendersof fiscal consolidation often reference a dated IMF study of seventy-fourepisodes of spending contractions in twenty industrialized countries during197095, which found that sharp budget cuts can lower interest rates andencourage consumption and investment (John C. Dermott and Robert F.

Wescott 1996). There is, however, limited support to validate that fiscalausterity can stimulate economic activity, especially among developingcountries and in the context of a global crisis. In low-income countriesin Sub-Saharan Africa, for example, an effective socioeconomic recovery

strategy should be based on an expansionary fiscal policy that fosters publicinvestment and increases domestic revenues, a managed exchange-rate

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Table 3 Changes in total government spending, 201012 average versus 200507average (in percentage of GDP)

Total sample Expanded Contracted

Number of Avg. Percent of Avg. Percent of Avg.

countries spending countries spending countries spendingRegion

East Asia and Pacific 17 3.7 94.1 4.0 5.9 1.4

Eastern Europe andCentral Asia

22 3.1 86.4 3.9 13.6 2.3

Latin America andCaribbean

29 2.5 82.8 3.8 17.2 4.0

Middle East and NorthAfrica

11 1.4 27.3 4.7 72.7 3.6

South Asia 8 2.9 87.5 3.6 12.5

1.9Sub-Saharan Africa 41 2.1 73.2 4.4 26.8 4.2

All developing countries 128 2.3 77.3 4.0 22.7 3.6


regime that promotes export competitiveness and currency stability, anda monetary policy that supports fiscal expansion and export promotionby achieving low real interest rates to encourage private investment andalleviate public sector debts (John Weeks and Terry McKinley 2007; Robert

Pollin, Gerald Epstein, and James Heintz 2008).

Excessive contraction?

There are risks associated with premature as well as excessive consolidation.We define excessive fiscal austerity as reducing government expenditurebelow pre-crisis levels (the average spending values during 200507).Comparing the 201012 and 200507 periods suggests that the majority ofdeveloping countries have maintained total expenditures far above pre-crisislevels. Overall, average spending levels in the contractionary phase of thecrisis were about 4 percent higher in GDP terms than those in the pre-crisisphase in more than three-fourths of developing countries (see Table 3);in real terms, public expenditures were 43 percent above earlier levels inmore than 90 percent of the sample. These findings indicate that mostgovernments have maintained considerably higher levels of publicassistancesince the start of the global economic crisis.

Although these spending trends were, indeed, positive signs on theaggregate, there were many countries that appeared to experience excessivecontraction. In terms of GDP, analysis of fiscal data reveals that twenty-

nine developing countries can be characterized as having adopted excessivereductions in government spending. Eleven of those countries were

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projected to be spending, on average, more than 5 percent less during thesecond phase of the crisis when compared to the pre-crisis period (Antiguaand Barbuda, Belarus, Eritrea, Grenada, Iraq, Jordan, Madagascar, Republicof Congo, Seychelles, Sudan, and Yemen). In terms of real spending, eightcountries were estimated to be spending less in 201012 than during 2005

07 (Antigua and Barbuda, Eritrea, Fiji, Grenada, Iran, Jamaica, Madagascar,and Seychelles).

Some argue that limiting government spending to below pre-crisis levelsmay well be justified in those instances where public finances were previously

viewed as unsustainable. While this may be true, the rapid and deep reversalin public expenditures exhibited by many developing countries during201012 poses serious threats to the well-being of vulnerable populations,especially those who depend on public assistance to meet basic needs. In

what follows, we assess the policy choices that governments are undertaking

to achieve reduced fiscal targets and then discuss the possible impact of suchdecisions including lower social spending allocations and other austeritymeasures on vulnerable households.

MA IN A DJUST MENT MEA SUR ES DUR ING 201012

Methodology

How were developing countries achieving fiscal adjustment? To answerthis question, we review policy discussions and other information

contained in IMF country reports, which cover Article IV consultations,reviews conducted under lending arrangements (for example, Stand-by

Arrangements and Extended Credit Facility), and consultations under non-lending arrangements (for example, Staff Monitored Programs). Overall, welook at 124 country reports published between January 2010 and September2011 and identify the different policy options that governments consideredor implemented to achieve fiscal tightening (see Annex 2 of Isabel Ortiz,

Jingqing Chai, and Matthew Cummins [2011a] for complete details). Twocaveats warrant mentioning. First, the findings are solely based on the

authors interpretations of IMF country reports. Second, to the extent thatmeasures eventually adopted by governments may differ from those underconsideration at the time of writing, this analysis is only indicative, and actualoutcomes require verification.

Results

We find that developing countries considered four main adjustment policiesto achieve planned budget cuts (see Appendix Table 1). The most popularausterity measures were cutting or capping the wage bill of public sector

employees. As recurrent expenditures, such as salaries, tend to be the largestcomponent of national budgets, an estimated fifty-six developing countries

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were looking to reduce the wage bill, which is often carried out or plannedas a part of civil service reforms. This policy stance emerges, more or less,equally across all developing regions.

A second widespread policy option to reduce government spending isto phase out or remove subsidies. Overall, fifty-six developing countries

appeared to be cutting subsidies, predominately on fuel, but also onelectricity and food items. This measure appeared particularly common ingovernments in Sub-Saharan Africa.

Further targeting of social safety nets emerges as a third common policychannel to contain overall expenditures and achieve cost savings. Ourreview indicates that thirty-four developing countries were consideringrationalizing and further targeting their spending in social protectionsystems. This includes some developing countries that were under tightfiscal pressures, such as the Philippines, as well as those that have a legacy

of extensive social welfare systems, such as Mongolia.Lastly, many governments appeared to be reforming old-age pensions

to scale back public spending. Approximately twenty-eight developingcountries were discussing different changes to pension systems, such asraising contribution rates, increasing eligibility periods, increasing theretirement age, and lowering benefits. This adjustment measure frequentlyappeared in policy discussions in middle-income countries, especially inEastern Europe and Latin America, which had already reformed theirpension systems in recent years. Many of the different pension options under

consideration were also linked to reforms of the public health sector.Overall, at least one policy option was being discussed in 106 developingcountries, with two or more options considered in sixty-nine countriesand all four options in ten countries (Antigua and Barbuda, Belarus,Egypt, Fiji, India, Jordan, Nicaragua, Romania, St. Kitts and Nevis, andTunisia). A small number of countries were also contemplating or planningalternative options by expanding wages, subsidies, social transfers or pensionbenefits, and/or lowering taxes on basic goods, despite fiscal constraints (see

Appendix Table 1).

BUDGET C UT S A ND T HE R ISK S T O VULNER A BLEPOPULATIONS

General reductions in social spending

As mentioned, data shortcomings preclude our ability to measure actualsocial spending trendsduring 201012. However, aggregate budget cuts havebeen intensifying across most developing countries since 2010, which mayhave a direct impact on the overall level and quality of public assistance and,

hence, threaten vulnerable populations, especially those whose well-beingand survival depends on such support.

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The lack of child and gender disaggregated data, along with child- andgender-sensitive budgeting in developing countries, makes it difficult tocarry out a comprehensive analysis of how current social spending cutsare affecting children and women. Stephanie Seguino (2010), however,summarizes some of the likely impact of health spending cuts in some

developing countries. In particular, given that more than half of publichealth budgets in Sub-Saharan Africa depend on foreign aid, fundingshortfalls in the Global Fund to Fight HIV/AIDs, Tuberculosis, and Malaria,for example, signify increasing stress on women who are the predominantcaretakers of sick persons (Seguino 2010). As further highlighted by thecase of Tanzania, which was the first country in Sub-Saharan Africa to cut itsannual HIV/AIDS budget by a staggering 25 percent, there are also healthsector risks in terms of human resources, service delivery, and long-termplanning (Kristin Palitza 2009).

Evidence from high-income countries further indicates that children andwomen were disproportionately affected by reduced social expenditures.For instance, a gender audit of the June 2010 budget in the UK shows that

women were bearing 72 percent of the burden of national cuts (UK WomensBudget Group 2010). Fewer housing benefits, lower pensions, and decreasedchild-related support including pregnancy health services, maternitygrants, and child benefits are among the principal threats resulting fromsocial spending cuts, which highly impact children. Anna Mapson (2011)highlights additional risks to British children and women. Higher fees and

reduced assistance make it more difficult for women to pursue education,thus reducing their job prospects and earning potential and furtheringgender inequities. Budget cuts to primary schools also disproportionatelyimpact both children and their mothers, who tend to be the primarycaregivers. Increased violence and abuse against children and women wasanother serious risk identified with funding cuts to social protection servicesand legal aid. When combined with the historical evidence of the negativeimpact of structural adjustment on children and women in developingcountries in the 1980s, these experiences from the UK suggest some ofthe potential dangers that could be replicated in developing countries thatscaled back social spending as part of fiscal consolidation efforts (Cornia,

Jolly, and Stewart 1987; Mary Chinery-Hesse, Bina Agarwal, Tendai Bare,and Marjorie Lamont Henriques 1989; Franois Bourguignon, Jaime deMelo, and Christian Morrisson 1991). We now look at the potential dangersassociated with the main austerity measures being discussed in developingcountries.

Wage bill cuts or caps

Well designed and executed fiscal savings can be used for raising lowwages for essential public service providers and/or for expanding essential

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posts required to meet the Millennium Development Goals (MDGs).4 Forinstance, wage and employment reforms in Gabon, which in 2011 includedfreezing public sector salaries and cutting annual hiring by half, were beingcomplemented by increasing health and education personnel (IMF 2011b).Similarly, Burundi is expected to maintain a hiring freeze, which was enacted

on civil servants in 2010, but will expand recruitment for priority sectors,including health, education, and justice (IMF 2011c).

However, at least in the short term, there are risks that wage bill cuts or capsmay translate into salaries being reduced or eroded in real value, paymentsin arrears, hiring freezes, or employment retrenchment. Such measures canadversely impact the delivery of basic social services, particularly in high-poverty areas. United Nations Childrens Funds (UNICEF) analysis of salaryinformation for primary teachers and nurses shows that their pay in realterms was diminished by increases in local prices during 2009 (Jingqing

Chai, Isabel Ortiz, and Xavier R. Sire 2010), a finding echoed in severalcountries in the former Soviet Union (Chubrik et al. 2011). The data furthersuggest that teachers and nurses are not adequately compensated in manydeveloping countries when comparing their pay with at least one income orcost-of-living benchmark. There is also an important gender impact, as thepublic sector is a main source of formal employment for women in manydeveloping countries. Thus, wage cuts, freezes, or arrears in certain sectors,such as health and education, will disproportionately affect women.

As low pay is a key factor behind absenteeism, informal fees, and brain

drain, it is imperative to protect the number of positions and level ofcompensation of essential public sector employees, including teachers,medical staff, and social welfare and child protection workers. Decisions on

wage bills must therefore safeguard and enhance, when fiscal situationsimprove the pay, employment, and retention of priority social sector staff toprotect child and family-related services in order to support human capitaldevelopment for long-term growth and the achievement of the MDGs. Wagebill decisions must also be based on gender analysis, since women cansuffer disproportionately from job cuts and public sector pay freezes, ashighlighted by recent evidence from the UK presented earlier (Mapson2011).

Phasing out subsidies

The development of more targeted social safety nets as a way to compensatethe poor often accompanies the removal or reduction of subsidies. Thispolicy approach is largely driven by the logic that generalized subsidies canbe ineffective, costly, and inequitable, while replacing them with targetedtransfers can remove market distortions and more effectively support

vulnerable groups (David Coady, Robert Gillingham, Rolando Ossowski,John Piotrowski, Shamsuddin Tareq, and Justin Tyson 2010). However,

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governments must carefully assess the human development and economicimpact of lowering or altogether removing food or fuel subsidies andensure that measures that adequately safeguard the access and well-being of

vulnerable populations and overall recovery prospects accompany any suchpolicy change.

Some countries have removed food subsidies at a time when there is stilla high level of need for public nutrition assistance. Isabel Ortiz, JingqingChai, and Matthew Cummins (2011b) find that domestic food prices rosesteadily during the second half of 2010 in a sample of fifty-eight developingcountries, a trend that likely persisted through 201112 given that globalfood prices remained at record levels (Food and Agricultural Organizationof the United Nations [FAO] 2013). Until a well-functioning social safety netis in place, there is a strong case for extending general consumer subsidies,

which can be possibly modified to encourage pro-poor self-selection (for

example, providing subsidies on food items that the poor tend to consumedisproportionately more) as a short-term measure to protect children andpoor households from unaffordable food costs. Moreover, while subsidiesare often withdrawn quickly, a functioning social protection system takesa considerable amount of time to design and implement. This means thatany timing mismatch immediately threatens the most vulnerable groups,especially infants and young children who can experience irreversible, long-term adverse effects from nutritional shortfalls.

Our review of the latest IMF country reports (see Appendix Table 1 for

details) also shows that many countries were contemplating reducing fueland energy subsidies in order to cut public expenditures. Indeed, the widefluctuations in international oil prices can make fuel and energy subsidiescostly and, therefore, an obvious target during fiscal austerity. However, thenegative ripple effects of reversing this policy should be carefully examined.First, cutting fuel subsidies can have a disproportionate negative impacton vulnerable groups, whose already limited incomes are further erodedby any of the resulting inflationary effects on basic goods and services.Second, removing fuel subsidies can hinder overall economic growth, sincehigher costs of goods and services drag down aggregate demand. Third,any slowdown in economic growth will lower tax receipts and create newbudgetary pressures which is, ironically, the original impetus of the subsidypolicy reversal.

Further targeting of social safety nets

To reconcile poverty reduction with fiscal austerity, economists often advisegovernments to better target their spending when cuts are called for(Martin Ravallion 1999). Indeed, further targeting can deliver more cost-

effective social assistance and yield fiscal savings over the medium term. Inthe short term, however, there are limitations inherent to designing and

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implementing new targeting schemes, which can result in the unintendedeffects of further excluding marginalized children and their families,especially where poverty is widespread.

One major constraint is that means-tested targeting is often costly andrequires a high level of civil service capacity. Many studies document the high

administrative costs of accurately identifying the poor (for example, DavidCoady, Margaret Grosh, and Josh Hoddinott [2004]; Pradeep Srivastava[2004]). While self-selection and community-based mechanisms can loweroverhead, in many cases, targeting schemes end up being more expensivethan universal ones. Weak public institutions that are unable to manage thedetailed administrative requirements of selective policies further complicatecost concerns (Thandika Mkandawire 2005).

Another serious danger is that targeting reforms can result in largeundercoverage. Due to a confluence of budgetary and political economy

considerations, the scope of the target often falls short of adequatelycovering vulnerable populations and, instead, tends to focus only on theextreme poor, such as in Moldova (Ortiz et al. 2010). This approach leavesmany vulnerable persons, especially poor children and women, excludedfrom receiving cash benefits at a time when their need for public assistanceis high. Thus, a strong case may be made for extending universal transfers(for example, to families with children or to households headed by women)or for carrying out some form of geographic targeting to provide immediatesupport to vulnerable groups facing unexpected and prolonged shocks

until administrative capacity is developed to effectively implement moresophisticated systems.Furthermore, current practices of targeting by income or consumption

poverty do not adequately take into account other dimensions of poverty such as lack of ready access to schools, clean water, health facilities,or sanitation systems. As a result, those children whose families meet theminimum consumption criteria but remain vulnerable to dropping out ofschool, malnutrition, and/or mortality due to the deprivations of a safeand enabling environment are at risk of being left out. Several studiesindicate that this exclusion risk could be statistically significant (for example,Sabina Alkire and Suman Seth [2008]; Harold Coulombe and JingqingChai [2010]), which indicates the need for setting targeting criteria beyondconsumption or income poverty measures, including gender dimensions.

Old-age pension reform

Pension reforms in developing countries mirror cost-saving pension andhealthcare policies adopted in many high-income countries. The mainrisk of this policy choice is straightforward: vulnerable groups are either

excluded from receiving benefits or critical assistance is diminished at a timewhen these groups are most in need. For poor households, having an older

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person at who receives a pension is an asset, since it is a source of income tosustain the basic needs for the whole family, including children and women(Mark Gorman 2004). Moreover, because women are more dependent onpublic support and more likely to face pensioner poverty than men, pensioncuts are likely to have a disproportionate negative impact on women and

further gender disparities, as demonstrated by the UK Womens BudgetGroups (2010) recent analysis. As a result, it is imperative that policymakerscomplement any systematic pension reforms with specific measures thatsafeguard income support and the delivery of essential services, especiallyhealth, to older persons and their families.

C ONC LUSIONS

Most developing countries moved swiftly to counter the effects of the global

economic crisis by introducing fiscal stimulus packages during 200809,which protected or increased assistance to social sectors. In a second phaseof the crisis (2010 onward), however, many governments began to cutdeficits and reduce overall expenditures. At the time of writing, our analysisconfirms that the scope of austerity had widened quickly, with seventydeveloping countries reducing total expenditures by nearly three percent ofGDP, on average, in 2010, and ninety-one developing countries expected toreduce annual expenditures in 2012. Moreover, comparing the 201012 and200507 periods suggests that nearly one-quarter of developing countries

were undergoing excessive contraction. Even more worrisome, the scopeof expenditure consolidation widened considerably among developingcountries since a previous analysis was carried out in October 2010 (Ortizet al. 2010).

Budget cuts pose clear risks to children and women in terms of theirimpact on the level and quality of essential public assistance. Despite datagaps, aggregate fiscal contraction during 201012 likely affected socialsector spending allocations and jeopardized the ability of social protectionsystems to provide adequate support to vulnerable children and women,even in countries with a policy intention of safeguarding so-called priorityspending. The adverse effects of the main austerity measures being adopted

were also likely to be disproportionately felt by children and women: wagebill reductions can hamper the delivery and quality of essential health,nutrition, and education goods and services, especially in rural areas; subsidyreversals can make food, transport, and other basic goods unaffordable; andrationalizing social protection schemes, including pension benefits, runs ahigh risk of exclusion at a time when children and women are most in need.

And there are other risks in the current policy environment. Whilethis article has exclusively focused on expenditure-side measures, many

governments were also altering consumption taxes on basic goods, suchas food items and fuel and energy products, by increasing or expanding

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value-added tax (VAT) rates or sales taxes. In the absence of exemptions,such revenue-side policies can further erode the already limited incomes of

vulnerable households and stifle general economic activity; they can also beregressive, placing a disproportionate burden on poorer households (Ortiz,Chai, and Cummins 2011a). As a result, tax reforms pose further dangers to

children and women.Protecting vulnerable populations is critical to equitably sharing the

adjustment costs and avoiding detrimental or even irreversible effectson children and women. However, macroeconomic and fiscal decisionsare often taken without comprehensive assessment of their potentialimpact on employment, human development, and inclusive and sustainablegrowth. It is therefore imperative that decision makers carefully reviewthe distributional impact, as well as possible alternative policy options, foreconomic and social recovery.

To mitigate the risk of social spending being adversely impacted duringexpenditure contraction in the short term, it is important to focus policieson preserving and expanding pro-poor expenditures within a frameworkof medium-term fiscal sustainability. It is also imperative that policymakersrecognize that spending cuts are not inevitable. In fact, there are a number ofalternative options to boost social investments, even in the poorest countries,

which include reallocating current expenditures, increasing tax revenue,lobbying for increased aid and transfers, tapping into fiscal savings andforeign exchange reserves, borrowing or restructuring existing debt, and

adopting a more accommodating macroeconomic framework (Isabel Ortiz,Jingqing Chai, and Matthew Cummins 2011c). Not only can these viableoptions counter the intensifying drive toward austerity, but they can alsoprovide essential support to vulnerable households when they are most inneed and ensure that economic recovery is inclusive of all persons, includingchildren and women.

Isabel OrtizUNICEF Division of Policy and Practice

3 UN Plaza, #420, New York, NY 10017, USAe-mail: [email protected]

Matthew CumminsUNICEF Division of Policy and Practice

3 UN Plaza, #446, New York, NY 10017, USAe-mail: [email protected]

NOT ES

1 Developing countries are defined as non-high income countries according to WorldBank classifications, or, in other words, all low- and middle-income countries.

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2 See, for example, Jim Brumby and Marijn Verhoeven (2010), who conclude that growthin health and education spending fell below 2 percent during 2009 after averagingnearly 10 percent between 2005 and 2008 in a sample of 108 developing countries.

3 National strategies and policy discussions commonly identify the need to protectpriority pro-poor social expenditures, indicating some consideration of distributionalimpacts. However, there is no universally accepted definition of priority expenditures,

and the definition changes from country to country. In practice, primary educationand basic health are common elements of priority pro-poor social spending; butgovernments may not view as priority and therefore may exclude other investmentswith positive distributional impacts on vulnerable groups, such as social protection,water supply and sanitation, or public housing. Our reading of recent IMF countryreports suggests that a wide variety of spending categories such as electricity, judiciary,and, in some cases, defense-related were included as priority and therefore protectedunder country programs. These approaches raise questions about the effectiveness ofpriority setting in safeguarding social spending areas that are most essential to directlysupporting vulnerable populations.

4 For example, according to United Nations Educational, Scientific and Cultural

Organization (UNESCO; 2010), the rate at which teaching posts are created will needto increase if universal primary education is to be achieved by 2015.

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NOTES ON CONTRIBUTORS

Isabel Ortiz is Associate Director of Policy and Practice at UNICEF. Shehas over twenty years of experience working in more than thirty countriesin various areas of social and economic development. From 2005 to 2009she was Senior Advisor at the United Nations Department of Economic andSocial Affairs (UNDESA), and from 1995 to 2003, at the Asian DevelopmentBank, where she was founding member of its Poverty Reduction Unit. Earliershe worked in academia in Spain. With a PhD from the London School ofEconomics, Dr Ortiz has written over forty-five publications translated inseveral languages.

Matthew Cummins is Social Policy and Economic Specialist at UNICEF.He leads research and advises country offices on designing policies

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to protect children and poor households from the adverse impacts ofmacroeconomic shocks as well as on real-time monitoring, fiscal spaceand social budgeting issues. He has worked on social policy issues formore than ten years with the Inter-American Development Bank, UnitedNations Development Programme, US Peace Corps, and the World Bank.

He holds an MA in International Economics from Johns Hopkins School ofAdvanced International Studies and has published widely in internationaldevelopment books and journals.

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Appendix Table 1 Selected adjustment measures commonly considered, 201011

Wage bill cuts Reduce or Further target Old-age pension

or caps (n= 56) eliminate subsidies social protection reform (n = 28)

(n= 56) (n= 34)

Algeria Algeria Algeria Albania

Antigua and Angola Antigua and Antigua and

Barbuda Belarus Barbuda Barbuda

Belarus Bolivia Belarus Belarus

Belize Burkina Faso Bolivia Belize

Benin Burundi Bosnia and Benin

Bosnia and Cameroon Herzegovina Bosnia and

Herzegovina Cape Verde Bulgaria Herzegovina

Botswana Central African Rep. Cambodia Bulgaria

Bulgaria Congo, Dem. Rep. Dominica Egypt

Burkina Faso Dominican Rep. Egypt Guyana

Burundi Egypt El Salvador Honduras

Cambodia El Salvador Fiji India

Chad Fiji Grenada Jamaica

Chile Gabon India Jordan

Costa Rica Ghana Indonesia Lebanon

Cte dIvoire Grenada Jordan Lithuania

Djibouti Guinea-Bissau Kazakhstan Mali

Fiji Haiti Lebanon Mexico

Gabon Honduras Malaysia MicronesiaGrenada India Mauritania Montenegro

Guinea-Bissau Indonesia Mauritius Nicaragua

Haiti Iran Moldova Romania

Honduras Iraq Mongolia Russia

India Jordan Mozambique Serbia

Jamaica Kiribati Nepal St. Kitts and Nevis

Jordan Kosovo Nicaragua St. Lucia

Kazakhstan Lesotho Paraguay Tunisia

Kiribati Liberia Peru Turkey

Lebanon Macedonia Philippines UkraineLithuania Malaysia Romania

Macedonia Maldives Russia

Maldives Mali St. Kitts and Nevis

Marshall Islands Mauritius Sudan

Micronesia Mexico Timor-Leste

Moldova Mozambique Tunisia

Montenegro

Mozambique

Nicaragua

(Continued)

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Appendix Table 1 Continued

Wage bill cuts Reduce or Further target Old-age pension

or caps (n= 56) eliminate subsidies social protection reform (n = 28)

(n= 56) (n= 34)

Nigeria Nepal

Palau Nicaragua

Romania Nigeria

Samoa Pakistan

Serbia Palau

Solomon Islands Philippines

South Africa Romania

St. Kitts and Nevis Serbia

St. Lucia Sierra Leone

Swaziland St. Kitts and Nevis

Tajikistan Sudan

Tanzania Suriname

Timor-Leste Tanzania

Tonga Thailand

Tunisia Timor-Leste

Tuvalu Togo

Ukraine Tunisia

Vanuatu Tuvalu

Yemen Ukraine

Yemen

Increase wage bill Increase or Expand social Introduce/expand

(n= 23) introduce protection old-age pensions

subsidies (n= 10) (n= 22) (n= 16)

Benin Bangladesh Antigua and Bolivia

Bhutan Georgia Barbuda China

Bolivia Liberia Armenia El Salvador

Cameroon Mali Bolivia Georgia

Central African Rep. Mauritania Burundi Guyana

China Mozambique China KosovoDominican Rep. Nicaragua Dominican Rep. Kyrgyz Republic

El Salvador South Africa Fiji Macedonia

Equatorial Guinea Togo Guyana Mongolia

Haiti Zambia Haiti Mozambique

Indonesia Panama

Seychelles

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Appendix Table 1 Continued

Increase wage bill Increase or Expand social Introduce/expand

(n= 23) introduce protection old-age pensions

subsidies (n= 10) (n= 22) (n= 16)

Kosovo Iran Sudan

Kyrgyz Republic Iraq Tajikistan

Lao PDR Kenya Turkey

Lesotho Kyrgyz Republic Zimbabwe

Mongolia Mauritania

Namibia Mozambique

Niger Panama

Panama Philippines

Philippines Senegal

Russia St. Kitts and NevisSuriname Sudan

Uruguay Ukraine

Zimbabwe

Source: Authors analysis of 124 IMF country reports published from January 2010 to

September 2011 (for details, see Ortiz et al. [2011a]).

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Austerity Measures in Developing Countries