Working Paper
Social Funds in Stabilization and Adjustment Programmes

Well before the introduction of adjustment-related Social Funds (SFs), many developing countries had developed a variety of safety nets comprising food subsidies, nutrition interventions, employment-based schemes and targeted transfers. Middle-income and a few low-income countries had also achieved extensive coverage in the field of social insurance. In countries committed to fighting poverty, these programmes absorbed considerable resources (2-5 per cent of GDP, excluding social insurance) and had a large impact on job creation, income support and nutrition: for instance, in 1983, Chile's public works programme absorbed 13 per cent of the labour force. Their ability to expand quickly depended on a permanent structure of experienced staff, good portfolios of projects, clear management rules, adequate allocation of domestic resources, supply-driven execution and, with the exception of food subsidies, fairly good targeting. SFs is a broad term which refers to a variety of programmes–Social Emergency Funds (SEFs), Social Investment Funds (SIFs) and Social Action Programmes (SAPs)–that evolved during the last ten years at the initiative of the Bretton Woods Institutions (BWI) to offset the increase in poverty by adjustment. SFs distinguished themselves from traditional programmes because: they had a strong short term anticyclical character; were mostly multisectoral; emphasized employment generation and human capital formation and not so much food subsidies and social insurance; relied mostly on demand-driven schemes; were run by temporary autonomous bodies; had fairly high costs per capita for both wage and non-wage items; focused mainly on the social groups affected by adjustment; and counter on greater visibility and external support than normal government programmes. As of late, SIFs increasingly started shifting towards permanent community-based programmes often supported by local and foreign NGOs focusing on the creation of social infrastructure in regions where state services were absent of deficient. SFs have been introduced in more than 70 countries. They have been extremely common in Latin America, very common in Africa, and rare but becoming more common in South Asia, the low-income economies in transition and, recently, South East Asia and East Asia. SFs counter on limited resources: 0.1-0.3 per cent of GDP (per programme year) in Africa, and 0.4-1.0 in Latin America. In 1997, the World Bank, the staunchest advocate of SFs, had a SF portfolio of only 1.3 US$ billion out of total commitments of 120 US$ billion. Preliminary 1998 data on South East Asia suggest higher amounts (between 2.5 and 7.5 per cent of GDP), though it is unclear over how many years these will be disbursed. In addition, SFs did not have an effect on the total social expenditure/GDP ratio, as in most cases the rise of the latter during the years of execution of the SFs was less than the drop that occurred during the years of crisis and adjustment. Notwithstanding the visibility they enjoyed, but not surprising given their low resourcing, SFs played a minor role in reducing the number of adjustment- and chronic-poor, and in reversing adverse shifts in income distribution. In most cases, the number of jobs added to the economy was less than 1.0 per cent of total employment. This was due partly to their limited funding, poor targeting and inadequate sequencing, as SFs were generally introduced after years of crisis and adjustment. While SFs were implemented more rapidly than government programmes, their unit costs were higher, making their replication at the national level impossible. Their sustainability improved with the introduction of SIFs which fostered low cost approaches to health and education with the help of village organizations, local governments, the private sector and foreign donors. Yet, while this approach has advantages in weak states and emergency situations, its effectiveness remains doubtful in countries where cost-effective social programmes exist or can be developed. Despite years of social expenditure cuts, even moderate size SFs could have brought about important welfare gains had their expenditure been allocated to the poorest groups and to high-efficiency programmes. However, SFs rarely focused on activities with the highest social rates of return but rather on activities that required little programme preparation and had large demonstration effects. Indeed, the targeting precision of SFs has been lower than that of most pre-adjustment safety nets which, as noted, also covered a greater share of the poor. While SFs targeted by objective criteria (low-income areas, female-headed households, etc.) more effectively reached the poor, targeting imbalances by region and social class were frequent. One of the causes of this phenomenon was their 'demand-driven' nature, as many projects were selected among the proposals submitted by municipalities and NGOs. While this may lead to the selection of project better responding to the needs of the populations affected, it often tends to short-circuit the very poor who have a limited capacity to articulate their demands and mobilize counterpart funds. All in all, SFs have proven to be no panacea. Many of them were formulated with the political objective to reduce domestic opposition to the adjustment process, and in particular of mollifying the influential groups affected by adjustment. Greater impact on poverty would have required much larger resources, more permanent relief structures, improved planning and targeting and, especially, better coordination and sequencing with the fiscal cuts entailed by macroeconomic adjustment, a fact underscored once more by the recent Indonesian experience. Always, ex ante macro policy decisions have had a greater impact on employment, incomes and poverty than ex post SFs. The key question then is whether alternative macro policies with a less marked social impact can be followed. Among others, a recent external evaluation of IMF-sponsored ESAFs concluded that there is some room for manoeuvre in the area.