The international community last year adopted a new approach to poverty reduction. The key innovation is deriving programs from comprehensive strategies for poverty reduction drawn up by individual governments, with the involvement of a broad range of key stakeholders, including civil society and the donor community. The strategy for each country, which is to be laid out in its so-called poverty reduction strategy paper (PRSP), will provide a focused policy agenda and promote government accountability by fostering a national dialogue on economic and social policies.
This is a collaborative effort of the international community, with each partner playing a vital role. The World Bank, along with the regional development banks and UN agencies, takes the lead on discussions with authorities on the design of policies aimed at poverty reduction—including social safety nets to protect the poor and vulnerable. The IMF will do its part by supporting economic policies that provide a conducive environment for sustainable growth.
So what is new? Let me answer from the IMF’s perspective, focusing on five key elements.
First, we have changed the objectives of the IMF’s concessional lending facility to explicitly include poverty reduction. For that reason, we reshaped the facility, previously known as the Enhanced Structural Adjustment Facility, into the Poverty Reduction and Growth Facility [PRGF]. What this means in practice is that we will help countries ensure that economic policies are pro-poor. Under the PRGF, countries will devise medium-term budgetary frameworks that contain explicit and specific poverty-reducing policies. The IMF will rely on the World Bank and other multilateral regional development banks for an assessment of the priorities included in these budgets and their costing. We will then help to ensure that these outlays are consistent with the available financing and with macroeconomic stability and faster, sustainable growth. If available financing is insufficient to meet priority spending needs in countries where additional resources could be used effectively, we will actively support countries in seeking additional resources from the donor community.
Second, there will be a much wider participatory process in the design and monitoring of poverty reduction strategies. This should bring benefits such as broad-based agreement within the country on priority goals, public services that reflect the needs of the poor, and better government accountability. For some countries, like Bolivia, Tanzania, and Uganda, the new programs offer an opportunity to take these processes even further.
Third, the content of country programs should change in a number of ways.
• There should be better availability of key information, both qualitative and quantitative, in the design phase as countries are encouraged to improve their statistical base, with technical assistance from donors, if possible. In recent years, almost 60 percent of the PRSP program countries have already completed poverty assessments; but major data gaps still exist for the rest.
• There should be more systematic analysis of the social and distributional impact of macroeconomic and structural policies before these policies are put in place—here we count on the World Bank for guidance. This will help ensure the effective implementation of social safety nets.
• There will be a shift to more pro-poor spending and service delivery in public expenditure programs. This should translate into higher outlays on primary education and health or in the productive sectors and rural infrastructure. Of course, how well the funds are spent matters as much as their size. Indeed, as we have seen in Chile, well-targeted outlays can significantly improve income distribution.
• There will be greater variation across countries in the pace and sequencing of reforms. But here, a word of caution: donors—and the international financial institutions—have a responsibility to be explicit about the sorts of reforms they will continue to favor. They must also give countries greater discretion to experiment and, even, to fail: more room for ownership!
• There will be greater attention paid to monitorable results. This will require the selection and tracking of key outcome indicators and, thus, the institutional capacity to do so. The benefit should be more ex post evaluation of reforms, with the results thus fed into new policymaking.
• There will be greater emphasis on transparency, accountability, and good governance.
Fourth, the relationship between countries and external partners will change in a number of ways. This includes fully respecting country ownership by basing our programs on country strategies and showing more flexibility in balancing program quality and country ownership. Conditionality associated with donor support must therefore evolve—it should be in support of objectives that emerge from the government’s program; it should emphasize the results rather than the intermediate process; and it should be selective and focused on the key issues and constraints for poverty reduction. Let me say that I am comfortable with the notion of country ownership of national strategies coexisting with conditions set by development partners for their support of a country’s strategy. We should also see better donor collaboration, with all donors basing their operations on the PRSPs.
Finally, there is bound to be a change in the research agenda. We need to fill some important gaps in our knowledge—such as generating more evidence on the links between policy actions in different sectors and their antipoverty effect and the impact of economy-wide policies on individual sectors and families. The latter research is important for developing better assessments of the effects on the relative distribution of incomes. Again, in this area, we will rely on the World Bank.
Why should we expect better results?
Why should we expect better results this time around? There are several reasons, all of which stem from the holistic nature of the strategy.
One reason for optimism is that the PRSPs will be specifically designed to ensure that macroeconomic policies are consistent with social goals. Country programs will continue to place a high value on sound, stable macro-economic policies—low inflation, realistic and stable exchange rates, and reasonable fiscal burdens—which are critical for higher saving and investment and higher growth.
Another reason is that we have stronger evidence not only that growth is critical for poverty reduction but also that a focus on growth alone is not enough. Where poverty is endemic, it persists because the poor do not have adequate access to the benefits of growth, lacking access to basic social services, essential infrastructure, and income and employment opportunities. Poor governance also diminishes the potential impact of growth on poverty. Economic opportunities for the poor will expand only where there are improvements in empowerment and security of the poor, and the enhanced approach puts the emphasis on government actions to enable the poor to benefit from this growth more fully.
We should also see big gains from the stress on explicit and monitorable shifts toward pro-poor, pro-growth policies in public expenditures. This should include explicit emphasis on greater accountability of public resource use, reliance on outcome indicators as an additional way of tracking efficiency of spending, and greater involvement of the poor in the design stage.
Another reason for higher expectations is the likelihood that structural reforms will actually be implemented, thanks to greater efforts to explain and build consensus, improve their sequencing, and build up institutional capacity. These reforms are vital for increasing the efficiency of the economy and attracting private investment.
Another reason for optimism is that the PRSPs, if well designed and properly implemented, should give donors better assurances that the funds will be well used. We expect that this will help to reverse the downward trend in official development assistance—for let there be no mistake, the poorest countries will continue to depend on official donor financing for some time to come. That source of financing should continue to be kept active. Moreover, the PRSPs, by providing a consistent framework for donor intervention, will help to reduce duplication of efforts and hopefully encourage donors to provide financing for the overall strategy—in turn, helping countries to plan ahead better.
Finally, we should take heart from the fact that the stronger focus on poverty includes a stronger debt-relief initiative for the heavily indebted poor countries (HIPCs).
How do we help countries avoid macroeconomic problems, given the risks of large shocks? How do we weigh the trade-offs of speed versus ownership? How can we ensure donor financing is additional? Should donors finance PRSPs as a whole rather than favorite projects? How can we improve the patchy record of implementation?
These are just a few of the many questions that policymakers and donors must grapple with. For they must also contend with a host of other factors—ranging from armed conflict and environmental degradation to the devastating impact of AIDS. The challenge is almost overwhelming, but perhaps we can at least take one simple but decisive step that will truly make a difference—simulating a lightning rod to help protect the poorest and most vulnerable from major adverse external shocks.