Journal Issue
IMF Survey Vol.30, No.9 May 2001

Workshop proceedings: Participants discuss IMF role in poverty reduction; links between macroeconomic policies and poverty

International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Poverty reduction workshop

How can the IMF best assist in the global war on poverty? An open panel discussion, chaired by IMF First Deputy Managing Director Stanley Fischer, elicited a variety of answers to this question. The panel discussion was the concluding event of an April 12–13 workshop entitled “Macroeconomic Policies and Poverty Reduction,” organized by the IMF’s Research Department. The workshop gave IMF economists an opportunity to present research papers on poverty issues in an informal setting before a group of experts drawn from academia and other international financial institutions.

Academics face off on IMF’s role

In the panel session, T.N. Srinivasan, Angus Deaton, Nicholas Stern, and Robert Townsend debated what the IMF’s role should be vis-à-vis other international financial institutions in the war on poverty. Yale’s T.N. Srinivasan called for a clear separation of powers between the World Bank and the IMF, arguing that “comparative advantage, a great concept in economics,” applied also to the activities of the international institutions. The IMF can best help alleviate poverty, Srinivasan suggested, by focusing on its responsibility to keep the international financial system on an even keel. Sustained growth and poverty alleviation will not come about, he said, if the world financial system lurches from one crisis to another.

While expressing some sympathy for Srinivasan’s views, Princeton’s Angus Deaton noted that it is not easy to separate the activities of the IMF from those of other international financial institutions. Citing the case of Africa, Deaton said that health outcomes and macro-economic prospects are now so intertwined in most of Africa that the IMF cannot focus only on the macro-economy and leave analysis of health outcomes solely to other institutions. Instead, he said, “there is going to have to be some integration and some outreach across the institutions to make progress with difficult and interdisciplinary issues” such as poverty alleviation and appropriate policies on health and education. Illustrating Deaton’s point, a paper presented at the workshop by the IMF’s Markus Haacker documented the strong macroeconomic impact of the HIV/AIDS epidemic on the countries of southern Africa.

Several other papers highlighted the dependence of growth on the choice of health and education policies, particularly in the context of the appropriate use of debt relief provided by the Heavily Indebted Poor Countries (HIPC) Initiative of the IMF and the World Bank. The IMF’s Hong-Sang Jung (in work with Erik Thorbecke of Cornell) studied the dependence of Tanzanian and Zambian growth on the expected boost to education and health spending arising from debt relief. Likewise, analysis by Era Dabla-Norris, John Matovu, and Paul Wade of the IMF suggested that growth could be raised and poverty lowered in Zambia by using debt relief to increase primary education expenditures. Zuzana Brixiova and Ales Bulir of the IMF (presenting work done with the University of Florida’s Joshua Comenetz) suggested that the gender gap in education in Eritrea was complicating the task of raising the country’s economic growth and reducing its poverty. In a model presented by the IMF’s Paul Masson, expenditures on the rural education system could be the appropriate policy response in countries with a wide income differential between urban and rural areas to keep migration from further worsening that differential. Domenico Fanizza and Craig Burnside of the IMF and the Bank, respectively, developed a general macroeconomic model to consider the consequences of HIPC debt relief for desirable fiscal and monetary policies.

IMF and Bank view

Speaking at the panel discussion, Fischer noted that there were compelling reasons for the IMF to continue to play a central role in poverty alleviation efforts. The IMF chiefly lends to low-income countries, where the problems of poverty alleviation loom large. Poor countries will not be able to sustain policies that are not equitable; and countries that provide the bulk of the IMF’s financing will not support policies that recipient countries view as anti-poor. You could argue as well that this is the moral thing to do, he said, but people seem to be more comfortable with arguments grounded in realpolitik than in morality.

The links between growth and poverty are very complicated and very policy-dependent, Fischer observed. Growth is good for the poor, as illustrated by studies of India (by the IMF’s Jahangir Aziz) and of sub-Saharan Africa (by the IMF’s Gary Moser in work with Toshihiro Ichida of Columbia University) presented at the workshop. But we need to go a step further, Fischer said, and investigate which pro-growth policies are most effective in reducing poverty.

Nicholas Stern, the World Bank’s Chief Economist, suggested that the twin tracks of a pro-poor growth policy are, first, getting the investment climate right and, second, empowering poor people to participate in the growth process. The international financial institutions can help developing countries achieve pro-poor growth by providing aid to countries with strong track records of reform, supporting projects with strong “demonstration effects” for the rest of the economy, supplying ideas and serious analysis, and using the lever of conditionality to foster change. On the latter point, Stern said that the World Bank welcomed “strongly the progress the IMF has made on simplifying conditionality,” but added that while conditionality “has to be simple, it also has to be serious.”

In a paper presented at the workshop, Ales Bulír and Javier Hamann of the IMF suggested there may be room to reduce the volatility of foreign aid flows through improved design of IMF and Bank programs. Stronger ownership of programs and streamlined conditionality may lead to higher compliance on the part of recipient countries, thereby reducing the occurrence of stop-and-go cycles in aid flows and enhancing the prospects of sustained growth.

Faulty signals from poor poverty data

The poor quality of poverty data often distorts people’s views about the impact of growth and financial crises on poverty, according to many participants at the workshop. For instance, it was noted that a lack of reliable data led, initially, to vastly overblown estimates of the adverse impact of the Asian financial crisis on poverty. Concerns were also expressed about the quality of survey data on poverty for India and China—the two countries that together account for a sizable chunk of the world’s poor.

Deaton provided a telling example of how data discrepancies are providing the wrong signals about the impact of the recent sustained growth in India on poverty reduction. Since the reforms of the early 1990s, India has had a rapid increase in average incomes and consumption, as measured by its national income accounts. But the official statistics on poverty come from a separate data source, a survey of household consumption. Deaton suggested that this survey is quite likely flawed: despite the growth in average incomes in India during the 1990s, average consumption as measured in the survey has shown no growth. Consequently, there has been very little poverty reduction, according to the official poverty statistics. Deaton said that this is being used as a rod for beating reforms in general, and the World Bank and the IMF in particular. However, the apparent lack of poverty reduction accompanying sustained economic growth, Deaton said, “is not a fact at all … but a statistical discrepancy” between the national income accounts and the survey used to measure poverty.

Basing macropolicies on micro evidence

The University of Chicago’s Robert Townsend—renowned for painstaking studies of village economies in India and Thailand—presented new work on Thailand done jointly with the IMF’s Kenichi Ueda. Townsend’s studies are based on the use of micro data sets—that is, data assembled from surveys and observation of individuals and households.

At the panel discussion, Townsend urged the IMF to play a role in helping collect and analyze micro data, just as it had moved “very rigorously and quickly” to improve the macro data disseminated by developing countries. Micro data, combined with theory, can help the IMF do “hard-nosed assessments” of policies intended to be pro-poor. Without such assessments, Townsend warned, the IMF’s commitment to poverty alleviation risked becoming a shallow one in which the goal of reducing poverty is simply tacked onto the institution’s standard operating procedures.

Townsend also suggested that results obtained from micro data sets can help in the formulation of macroeco-nomic policies, for instance by identifying segments of the population that may be particularly vulnerable to macroeconomic changes. The workshop offered several illustrations of this point. The IMF’s Stephanie Eble and Petya Koeva studied how Russian households adapted their consumption to the 1998 economic crisis; not surprisingly, those with access to land were able to substitute homegrown food for bought food and hence adapted much better than the landless. Work by Luiz de Mello, Emanuele Baldacci, and Gabriela Inchauste of the IMF suggested that the 1995 Mexican crisis had a much more adverse impact on urban than on rural households. The IMF’s Eswar Prasad (in work with New York University’s Michael Keene) found that the economic transition in Poland lowered the wage premium for experienced workers, while raising it for educated workers.

There’s more. . .

A transcript of the panel discussion is available on the IMF’s website. A more technical description of the workshop paper—including a full listing of the papers and the presenters and discussants—is forthcoming in the June issue of the IMF Research Bulletin. As the workshop papers are revised, they will be posted on the IMF’s website. The June issue of Finance & Development will also feature an article by Paul Cashin, Paolo Mauro, and Ratna Sahay of the IMF, which provides an overview of research on the links between macroeconomic policies and poverty reduction.

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