Journal Issue

Letters to the editor

International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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Financial crises hit poor harder

“Financial Crises, Poverty, and Income Distribution” (June 2002) shows how, in times of crises, the poor are hit hard while the income share of the richest increases. But the authors do not speculate why the rich get richer. One reason is that the rich move their assets abroad ahead of crises and are thus able to maintain the assets’ predevaluation foreign-currency value; they repatriate some of them after devaluation has made assets denominated in local currency cheap in dollar terms. The rich have better advance information and a much greater ability to shift assets than do the poor. Evidence about private flows of this kind, albeit sketchy, suggests that the data are consistent with such asset shifts. Asset shifts might also help explain why income inequality is so pronounced in Latin America, which has suffered far more financial crises than other regions. My argument should not be interpreted as supporting capital controls, a subject that goes far beyond the confines of this topic.

Guy Pfeffermann

Directory, Economics Department

International Finance Corporation

Developing country debt

I read “External Debt and Growth” and “Odious Debt” (June 2002) and am glad to see that the IMF is still concerned about developing country debt, despite the apparent demise of Anne Krueger’s proposal for a sovereign debt reduction mechanism. Along with the questions posed in “External Debt and Growth,” I would ask another: What is the psychological effect of the debt overhang on the debtor country? The article raises this question with regard to potential donors or investors but not for debtors. I would argue that, for the debtor, the debt burden is both a psychological and an economic obstacle to growth and development. I find it difficult to expect a debtor country to have the will to mobilize domestic resources if it anticipates that most of these resources will go toward servicing debt.

It seems to me that further thought should be given to proposals for bankruptcy and other administrative proceedings whose purpose is to eliminate debt that everybody knows is unpayable and to allow debtors to move on with a clean slate. Most unpayable debt has been written off, except by the international financial institutions, which maintain that their charters or bond ratings will not tolerate a write-off. But if we genuinely want progress for poor countries and poor people, wouldn’t it be reasonable to get down to business—as we do for insolvent debtors in our own countries?

Martin M. McLaughlin

Consultant, Food and Policy Development

Catherine Pattillo, Hélène Poirson, and Luca Ricci reply

We agree that indebtedness has an impact on a debtor country’s behavior. Although we do not label this effect “psychological,” in our article we describe how countries’ excessive debt alters their investment and policy incentives and might lead to inefficient investment and suboptimal economic policies. (For more details, see “External Debt and Growth,” IMF Working Paper 02/69 (Washington, 2002).)

Poverty reduction

“Taking Stock of Poverty Reduction Efforts” (June 2002) stimulated us to discuss the PRSP [poverty reduction strategy paper] process. Together, we have at least 120 years of experience in development economics.

First, PRSPs emphasize the role of government more than that of the private sector as the engine to drive poverty reduction through employment creation. Lack of formal sector employment is at the root of poverty in developing countries. Only enhanced private sector activity can efficiently reduce unemployment. It also enlarges tax bases, providing domestic financing for public health, education, and social programs aimed at the poor.

Second, it appears that all “good” economic, political, and social programs are thought to alleviate poverty, leading to an excessively broad agenda and a “flavor of the month” approach to poverty reduction. Poverty must first be defined in the context of full formal sector employment. The PRSPs should focus on the few social, political, and economic programs known to be effective.

Finally, we are concerned that the assumed involvement of civil society in the preparation of PRSPs is just that—an assumption. Too little attention is focused on enabling private individuals and civil society groups to contribute meaningfully to the PRSP process.

Mohamed Cassam, Vita C. Nwaneri, Robert Myers, and Donald R. Sherk

Brian Ames, Gita Bhatt, and Mark Plant reply

We broadly concur. First, the role of the private sector as the engine of growth, employment creation, and, in turn, poverty reduction is a core aspect of the PRSP approach. While the degree to which the first PRSPs articulated policies aimed at improving the business and investment climate varies, such policies are critical to poverty reduction and should be an integral part of national strategies. Second, while several of the early PRSPs lacked clear priorities, others attempted to focus on the key measures to be taken. But costing and prioritization remain a challenge. Third, while employment creation must be an integral part of antipoverty strategies, one needs to look beyond the formal sector because many of the poor operate in the informal sector. Rather than being an end in itself, employment creation should flow from pro-poor growth and poverty reduction policies. Finally, we agree that the institutional capacity of civil society groups needs to be enhanced if they are to participate effectively in the PRSP process.

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