Jan. 8 (Bloomberg) -- After one year as managing director of the International Monetary Fund, Dominique Strauss-Kahn is recasting the lender as a defender of the poor.

For the first time since its 1944 founding, the IMF is insisting that countries boost spending on social safety nets as a condition for aid. To secure a $7.6 billion loan, Pakistan in November agreed to triple funding for programs that include cash handouts and electricity subsidies. Deals with Belarus, Ukraine and Hungary included similar protections for the most vulnerable.

The changes are helping the fund avoid the public criticism that tarnished it during the Asian financial crisis a decade ago and the more recent bailouts for countries including Argentina. By focusing on people instead of big investors and multinational companies, Strauss-Kahn, France’s former Socialist Party finance minister, may also help maintain political stability in countries with large low-income and jobless populations.

“This is a historic make-over,” said Simon Johnson, the lender’s former chief economist and now a fellow at the Peterson Institute for International Economics in Washington. “It is clear that Strauss-Kahn has learned from the fund’s past mistakes and is determined that the IMF will not be painted as the villain this time round.”

The IMF has been lambasted for imposing loan conditions that deepened recessions in Asia and Latin America during the late 1990s and early in this decade.

Belt-Tightening Measures

In August 1997, the IMF loaned Thailand $3.9 billion in exchange for belt-tightening measures that included cuts in spending and an increase in interest rates. By February 1998, the fund conceded its conditions had been too austere, after a sharper-than-expected drop in the country’s growth and tax revenue.

Protests became a standard feature of fund meetings, and in 1998, riots broke out in Indonesia when the government eliminated fuel and food subsidies for the poor on the IMF’s advice.

A joint study by the University of Cambridge and Yale University published in July 2008 said IMF programs were “associated with significantly worsening tuberculosis and mortality rates” in Eastern Europe during the 1990s as countries cut back on health spending to qualify for loans.

The IMF disputed what it called the “dubious results” of the study, faulting it in an article on its Web site for “severe methodological shortcomings.”

Budget Deficits

Some critics have said Strauss-Kahn, who took office in November 2007, shouldn’t deviate too far from the IMF’s traditional demands for budget restraints.

“When countries come to the IMF, it is because they are already in crisis, often because of irresponsible spending and high deficits,” said Hung Tran, head of capital markets at the Institute of International Finance in Washington and a former deputy director at the IMF. “A good degree of belt-tightening is necessary and would be even more severe if the fund were not there to help.”

Strauss-Kahn has also drawn criticism for a relationship last year with a female employee. In October, the board of the fund faulted him for a “serious error of judgment,” while clearing him of any wrongdoing.

Strauss-Kahn, 59, speaks frequently about poverty and has urged nations to help relieve the impact on their citizens of rising food prices.

Income Support

The fund in November agreed to $41.8 billion in loans, more than in the past five years combined. Under the new plan for Pakistan, spending for the poor will rise to 0.9 percent of GDP from 0.3 percent. The $16.4 billion package for Ukraine requires that authorities be “prepared to expand” spending on the poor, and the fund endorsed higher funding for unemployment and income support.

“Social conditionality” is “something of a departure” for the fund, said Caroline Atkinson, director of external relations at the IMF. “In particular we want now to make sure that governments are aware of the importance of supporting, keeping in place or building social safety nets to help the very poor.”

Some economists said the new conditions don’t represent a significant change from the policies of the past, because IMF funding still comes with budget requirements.

Hungary’s Package

While Hungary’s $15.7 billion loan includes a condition protecting low-income pensioners from cuts in their benefits, it also prescribes a reduction in the country’s “large public debt,” which the fund estimates will be 67.4 percent of gross domestic product in 2008. Hungary’s GDP was 25.4 trillion forint ($134.5 billion) in 2007, according to the Budapest- based government statistics office.

“It doesn’t help very much if you are forcing governments to cut spending and raise interest rates -- both of which will hurt the poor and undermine economic growth,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington. “These new conditions seem to be a way of covering their tracks.”

The effort to build up the IMF’s poverty-fighting credentials is just one of a series of changes Strauss-Kahn has initiated. He overhauled the fund’s voting structure to give developing countries more power over decisions. He has also made it easier for struggling members to borrow larger amounts more quickly with fewer conditions.

Minimal Demand

Strauss-Kahn’s predecessor, Rodrigo de Rato, didn’t make any significant changes in the fund’s practices. Demand for loans was minimal between 2004 and October 2007 because buoyant capital markets and rising commodity prices allowed many developing nations to raise money on their own and build up currency reserves during his term.

“Strauss-Kahn is trying to seize a historic opportunity to put the IMF at the heart of solving the global financial crisis,” said Claudio Loser, a former director of the fund’s Western Hemisphere department and now a fellow at the Inter- American Dialogue, a policy institute in Washington.

“It is a good opportunity to overturn the IMF’s reputation as the bad guy.”

To contact the reporter on this story: Christopher Swann in Washington at cswann1@bloomberg.net

Last Updated: January 8, 2009 00:00 EST