International Conference on National Poverty Reduction Strategies

Summary by Gita Bhatt

The IMF and World Bank organized and held an international conference on poverty reduction strategies in Washington, DC, on January 14–17, 2002. The conference was part of a joint review of the poverty reduction strategy papers (PRSPs) approach and brought together country officials from almost all eligible low-income countries, representatives from donor organizations, and civil society representatives to discuss experiences and lessons learned in the PRSP process. A half-day session was also devoted to reviewing the IMF’s concessional lending window for low-income countries—the Poverty Reduction and Growth Facility (PRGF).

Ideas and proposals were the purpose and the product of the conference. Reflecting the extensive consultation (including four regional events) that had already taken place, the international conference refined and reinforced the main messages that had been emerging from stakeholders and partners. Chief among these messages was a strong endorsement of the PRSP approach, which all agreed had made important progress in a relatively short time. The PRSP gave central focus to poverty reduction, strengthened participation in policy making, and provided a single strategy around which development partners could align their development assistance.

The conference simultaneously highlighted many areas where improvements were needed, with greater efforts required on moving beyond refining the participatory process to focusing on content and effective implementation of countries’ strategies. In his opening remarks, IMF Managing Director, Horst Köhler, noted that poverty reduction takes time and sustained effort, and he cautioned that while we need to be “ambitious” in our objectives, we must be “realistic” in our methods. Recurring themes during the conference included the importance of building the capacities of governments and civil society; the need to set realistic goals and targets, especially growth targets, and manage expectations; the need to factor external shocks into country strategies, and for the international community to revisit the availability and flexibility of instruments to deal with the shocks; the desirability of considering alternative policy choices in the PRSP process; and the importance of flexibility to allow for different country starting points.

The various discussions centered around several key aspects of the PRSP, notably its call for broad participation and country ownership, comprehensive policy actions rooted in an analysis of country needs, and supportive actions, such as better alignment of donor assistance with the PRSP goals and effective monitoring that would allow everyone to gauge the progress being made. The following points raised the most interest and debate among participants.

• Participation. The PRSP approach was acknowledged as contributing to more open dialogue within governments and with, at least, some parts of civil society than had previously existed. As the same time, the need to strengthen and institutionalize participatory processes, with respect to a broad range of domestic stakeholders as well as development partners, was stressed. The importance of involving parliamentarians in the preparation, approval, and monitoring of country strategies was also noted.

• Content. Many participants focused on the enormous challenge of deciding how best to prioritize among sectors and design policies to achieve growth beneficial to the poor. There was recognition that the international community’s knowledge of what policies can best reduce poverty is incomplete—and that improving knowledge in this area would be critical to improving the well-being of the poor. In this regard, better understanding of the sources of sustainable growth and strengthening the linkages between policies and poverty outcomes were critical. Finally, there was strong emphasis on the need for development partners, including the World Bank and the IMF, to assist countries in their efforts to improve their public expenditure management systems so that poverty reducing spending could be effectively delivered and monitored, to undertake systematic poverty and social impact analyses of major policy choices, and design offsetting compensatory measures. In each of these areas, conference participants called for further research and the development of better analytical tools.

• Alignment. Nearly all bilateral and multilateral donors have agreed to the principle of aligning their assistance programs with PRSPs. However, participants noted that much remains to be done to achieve this objective. There is a pressing need for donors to reduce the cost to low-income countries of mobilizing and utilizing aid so that both aid resources and limited country capacity can be used more effectively. This includes harmonizing and simplifying reporting requirements and aligning assistance with national cycles of government decision making, including the budget. More information on medium-term aid commitments and greater predictability of aid flows, especially to those countries implementing sound policies, would help low-income countries better plan and implement their strategies.

• The PRGF. Has the design of PRGF-supported programs been faithful to the objective of poverty reduction and growth? Participants noted that efforts to streamline structural conditionality, to increase budget allocations for spending that is beneficial to the poor, and to provide more flexible fiscal frameworks were proceeding well. In other areas, however, more progress and more rapid actions were needed. In particular, many civil society participants wanted more evidence that the PRGF-supported programs were, in fact, drawn from and consistent with countries’ PRSPs. They also suggested that the openness and transparency of PRGF-supported programs could be bolstered through discussions of alternative policy scenarios, greater analysis of their poverty and social impact, and more elaboration in IMF staff reports about the policy dialogue and policy choices considered in program design.

What is the PRSP Approach?

In September 1999, the IMF and World Bank adopted a new approach to help developing countries better position themselves to speed up growth and eradicate poverty. An important element of this approach has been a refocusing of development assistance—beyond the operations of the IMF and the World Bank—around national poverty reduction strategy papers (PRSPs), which more than 60 countries are now developing and implementing. The objectives of the PRSP approach—all of which are directed toward the fundamental goal of poverty reduction—are to ensure country ownership of poverty reduction strategies; develop strategies that take a comprehensive, long-term perspective; strengthen participation in policy making, including by tapping the views of a broad cross section of society, especially the poor; focus on results that matter for the poor; and foster domestic and external partnerships that improve the effectiveness of development assistance.

Details about the conference proceedings and the resulting staff papers on the PRSP and PRGF reviews can be found on the IMF website at http://www.imf.org/External/NP/prgf/2002/list.htm.

Visiting Scholars at the IMF, January–March 2002

Philippe Bacchetta; Study Center Gerzensee, Switzerland

Michael Bordo; Rutgers University

Giancarlo Corsetti; University of Rome III, Italy

Morris Goldstein; Institute for International Economics

Pierre-Olivier Gourinchas; Princeton University

David Hummels; Purdue University

Graciela Kaminsky; The George Washington University

Michael Keane; Yale University

Ari Kuncoro; University of Indonesia, Indonesia

Philip Lane; Trinity College Dublin, Ireland

Ronald MacDonald; University of Strathclyde, U.K.

Dalia Marin; University of Munich, Germany

Stephen Morris; Yale University

Anthony Musonda; Bank of Zambia, Zambia

Zafar Nasar; Pakistan Institute of Development Economics, Pakistan

A.F. Odusola; NCEMA, Nigeria

Arvind Panagariya; University of Maryland

William Perraudin; Birbeck College, U.K.

Raghuram Rajan; University of Chicago

Assaf Razin; Tel Aviv University, Israel

Andrew Rose; University of California at Berkeley

Nouriel Roubini; New York University

Kenneth Singleton; Stanford Graduate School of Business

Robert Townsend; University of Chicago

Elias Udeaja; University of Ibadan, Nigeria

George von Furstenberg; Fordham University

Beatrice Weder; University of Mainz, Germany

Conference on Macroeconomic Policies and Poverty Reduction

Summary by Catherine Pattillo

The IMF Research Department organized and held a Conference on Macroeconomic Polices and Poverty Reduction in Washington, DC, on March 14–15, 2002.^* Key themes included: aid effectiveness and the debt burden in low-income countries, trade reform and inequality, the role of financial institutions in poverty reduction, poverty and distributional consequences of financial crises and large shocks, and the politics of fiscal expenditures for the poor. The conference agenda and brief descriptions of the papers follow.

Aid and Debt

Odious Debt

Michael Kremer and Seema Jayachandran (Harvard University)

Discussant: Raquel Fernandez (New York University)

Aid and Fiscal Management

Aleš Bulíř and Timothy Lane (IMF)

Discussant: Alberto Alesina (Harvard University)

Trade and Inequality

Trade Reforms and Income Inequality in Colombia

Orazio Attanasio (University College London), Pinelopi Goldberg (Yale University), and Nina Pavcnik (Dartmouth College)

Discussant: T.N. Srinivasan (Yale University)

Finance and Poverty

Safety Nets and Financial Institutions in the Asian Crisis: The Allocation of Within-Country Risk

Robert Townsend (University of Chicago)

Discussant: Abhijit Banerjee (MIT)

Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment

Robin Burgess (London School of Economics) and Rohini Pande (Columbia University)

Discussant: Jonathan Morduch (New York University)

Poverty and Distributional Effects of Crises and Large Shocks

Financial Crises, Poverty, and Income Distribution

Emanuele Baldacci, Luiz de Mello, and Gabriela Inchauste (IMF)

Discussant: Ceclia Garćia-Peñalosa (GREQAM)

Growth, Shocks, and Poverty During Economic Reform: Evidence from Rural Ethiopia

Stefan Dercon (Oxford University)

Discussant: Angus Deaton (Princeton University)

Crises and Political Economy of Safety Nets

Economic Shocks, Wealth, and Welfare

Elizabeth Frankenberg (UCLA), James P. Smith (RAND), and Duncan Thomas (UCLA)

Discussant: François Bourguignon (World Bank)

Who Is Protected? Theory and Evidence on the Incidence of Fiscal Expansions and Contractions

Martin Ravallion (World Bank)

Discussants: Michael Keen (IMF) and Lant Pritchett (Harvard University—JFK School of Government)

Kremer and Jayachandran argue that sovereign debt, incurred without the consent of the people and to benefit the elite, should be considered odious and that successor governments should not be responsible for repayment. In a sovereign debt model, they show how an international institution, in denouncing a regime as odious, could create an equilibrium whereby creditors would stop odious lending because successor governments would not be held responsible or suffer a reputational penalty by refusing to repay the debt. If the institution declared debt odious ex ante of the debt being incurred, and by a supermajority, potential problems of alleged favoritism to debtors by the institution and possible drying up of the loan market for other countries could be avoided.

Bulir and Lane show that foreign aid is more volatile than domestic fiscal revenue, particularly for countries heavily dependent on aid. Aid is also procyclical, so that, rather than smoothing out cyclical shocks, it tends to exacerbate them. In addition, official aid commitments are more likely to be in excess of aid disbursements rather than less, even for countries with ‘on-track’ programs. The authors then discuss the implications of these findings for short-term fiscal policy management.

Attanasio, Goldberg and Pavcnik find that trade liberalization in Colombia was associated with greater wage inequality and an increase in the relative wages of skilled workers. Tariff reductions work their way through the economy and contribute to the following: increased returns for the college educated, lower industry premiums for sectors with higher shares of unskilled workers, and a shift of the labor force toward the informal sector. However, trade liberalization explains only a small share of the worsening wage inequality.

Using panel data for the crisis period in Thailand, Townsend finds that regional and idiosyncratic shocks are even more important than macro shocks in explaining consumption and investment changes. The author uses the theory of optimal allocation of risk bearing as a benchmark against which to evaluate the role of the financial system, financial sector reforms, and safety net policies. The limited risk-reallocation role played by financial institutions, including commercial banks and the primary agricultural development bank, was partly a function of financial sector policies which contributed to distortions. Money lenders and the informal sector were also not able to help smooth investment during this period.

Burgess and Pande challenge the conventional view that large-scale government intervention in credit markets is ineffective and ends up benefiting elites. They study the Indian “social banking experiment,” 1969–92, when government policies favored the expansion of bank branches into previously “unbanked” locations, and find that the policy helped reduce rural poverty and inequality. After observing a trend break, where states with more banking locations in 1961 saw faster growth in bank locations before 1977 (the turning point in social banking policy), but slower growth after 1977, they ask whether diversification, poverty and inequality also exhibit a similar trend break. The authors also use an instrumental variables approach to try and control for factors, such as income growth, which affect both potential bank profitability in “unbanked” locations and the diversification and welfare outcomes.

Baldacci, de Mello, and Inchauste use both cross-country macro data and micro data, from before and after the 1994–95 Mexican crisis, to ask how poverty and income distribution is affected by financial crises. The cross-country analysis compares precrisis and postcrisis average changes in welfare indicators in countries which experienced crises, relative to a control sample of countries which did not experience crises. They find an increase in poverty and a worsening of income distribution after crises, transmitted through inflation, unemployment, lower growth and reduced government spending. The Mexican data also show increases in poverty postcrisis, although inequality did not increase because of a disproportionate decline in the income of the wealthiest.

Dercon analyzes the determinants of consumption growth and poverty changes in Ethiopia during the 1990s, a period of economic reform. The theoretical framework is a farm income-generation model used to analyze the links among changes in fixed endowments, relative prices, and shocks and the effects on consumption. Dercon finds that reforms, including the liberalization of agricultural prices, helped some households grow out of poverty. Among the poor, those with better endowments of land, labor, and access to roads were better able to take advantage of the opportunities that reforms provided. Common and idiosyncratic shocks matter greatly for consumption, suggesting imperfect risk-sharing, credit, and savings opportunities.

The 1998 Indonesian crisis marked a dramatic and unexpected reversal of economic growth—real GDP fell by about 15 percent in one year. Brandenburg, Smith, and Thomas provide evidence of how households attempted to smooth out the effects of large, unanticipated shocks, and evaluate the consequences of those strategies for welfare indicators. They find that households adopted many mechanisms by which they adjusted to the crisis and maintained consumption, or exploited the new opportunities that arose for some. Households reorganized living arrangements, increased labor supply, and deferred expenditure on some goods. Rural households sold gold to smooth consumption—one of the only assets whose value did not decline with the collapse of the rupiah and spiraling inflation.

Ravallion asks who is protected when crises or reforms result in large budget cuts. He shows that the answer is theoretically ambiguous, depending on a “utility effect,” that is, how quickly the marginal utility of the non-poor’s spending on the poor declines relative to spending on themselves as compared with a “power effect.” The paper then draws on micro-based empirical studies of social programs in India, Bangladesh, and Argentina, which study how the incidence of spending varies with the aggregate level of spending. Ravallion finds that spending on the non-poor is protected from budget cuts and targeting worsens during fiscal contraction. The paper also discusses the policy implications for designing effective safety net policies.

The conference concluded with a panel discussion on “Poverty Reduction: What Are the New Ideas?” featuring Anne Krueger (IMF), Nicholas Stern (World Bank), Montek Ahluwalia (IMF), Santiago Levy (Instituto Méxicano des Seguro Social), and Nancy Birdsall (Center for Global Development).