A quarterly magazine of the IMF

December 2000, Volume 37, Number 4

Despite developing countries' improved economic growth rates during the 1990s, poverty has remained firmly entrenched. How can developing countries, international financial institutions, and developed countries work together more effectively to reduce the incidence of poverty?

Although economic growth rates in many developing countries improved during the 1990s, many of their people continue to live in extreme poverty. Progress is being made—for example, in increasing life expectancy, school enrollment, and rates of adult literacy and in reducing infant mortality—but it has been painfully slow, and the gap between the industrial and developing worlds remains enormous. In Africa, setbacks in efforts to combat poverty have occurred in countries suffering from armed conflicts and the ravages of the AIDS crisis. More needs to be done if the international development goals proposed in 1996 by the United Nations (see article by Sanjeev Gupta and others in this issue) are to be met.

Focusing development cooperation on accelerated poverty reduction is today's central development challenge. The extent of the challenge is such that efforts will need to be made simultaneously on a variety of fronts:

• National development programs must become more responsive to the needs of the poor.
• The programs and procedures of international development agencies and other lenders need to reinforce country-led efforts to reduce poverty.
• Countries' own efforts need to be complemented by global action to increase aid flows, remove industrial countries' trade barriers, more effectively combat AIDS and other pandemics, and ease cross-border conflicts.

Supporting integrated strategies

There is now a broad consensus in developing countries and among aid agencies that development assistance should support integrated strategies that are formulated by the recipient countries themselves. For low-income countries, these strategies should aim primarily at reducing poverty, by achieving faster growth to benefit the poor. Years of practical experience gained by countries and aid agencies alike have made it clear that any policy strategy will fail, in either design or implementation, unless the country truly "owns" it, with governments leading and civil society participating and contributing.

This important lesson and a broader focus on poverty are now reflected in national aid agencies' frameworks for development assistance, in the World Bank's Comprehensive Development Framework, in the institutional goals adopted by regional development banks, and in the strategy of the United Nations Development Program and other agencies of the United Nations system. And, most recently, they have become the foundation of a new approach to supporting national poverty reduction strategies proposed by the IMF and the World Bank and endorsed by ministers at the Annual Meetings of these two institutions in September 1999.

Poverty reduction strategy papers

The essence of the new approach, on which work is under way in some 30 low-income countries, is to link concessional assistance (grants and subsidized loans) from the IMF and the World Bank, as well as debt relief provided under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, directly to the development and implementation of national poverty reduction strategies. These strategies will be prepared by country authorities, in broad consultation with civil society, and laid out in poverty reduction strategy papers (PRSPs). The strategies should be sufficiently comprehensive—integrating prioritized antipoverty and other social programs, institutional and structural reforms, and macroeconomic policies into a coherent framework—to provide the basis for the assistance programs of not only the IMF and the World Bank (whose Executive Boards must judge whether a country's strategy is adequate for this purpose) but also other development partners, including the UN agencies, other international financial institutions, and bilateral donors.

A number of key features of this approach are worth highlighting:

• Policy formulation is to be more open, transparent, and—above all—country-driven, with the international financial institutions and other donors playing an active but supporting role.
• Each strategy is expected to be grounded in a country-specific understanding of the nature and causes of poverty and of the links between public actions and the many dimensions of poverty (income, opportunity, access to markets and public services, security, vulnerability to shocks, and so on). Because the poor themselves are often best placed to identify priorities for action, poor communities need to be consulted (see the articles by Deepa Narayan and Caroline Robb in this issue).
• As well as bringing an additional perspective to policy design, public consultation is a way to improve monitoring and accountability in implementation. Are the promised results materializing, and if not, why not? Broad consultation should help build a broader and stronger sense of ownership of the country's strategy.
• Monitoring and accountability are nowhere more important than in the management of public resources. Waste, corruption, and ineffective control of public expenditure have been major factors behind the generally dismal state of public services in low-income developing countries. Measures to address these problems are needed, not only in their own right but also to sustain essential political support for aid and debt relief among taxpayers in donor countries.
• Faster economic growth is essential to achieving sustained poverty reduction in poor countries. The strategies are expected to reflect this fact and to target institutional and policy changes that will enable the poor to participate more fully in achieving, and benefiting from, their country's economic growth. As argued elsewhere (see, for example, the article by Dani Rodrik in this issue), entrenched poverty and slow growth are likely to have many common causes—including inadequate public services and infrastructure, lack of access by the poor to assets or markets, and poorly protected property rights—and to be mutually reinforcing.
• Finally, the PRSP approach stresses that a well-designed poverty reduction strategy should establish indicators that can be used to track economic and social progress. Outcome indicators can signal where corrections in policy design or external support are needed and provide benchmarks that citizens can use to hold governments accountable for their policy implementation.

The PRSP approach also requires changes in how the IMF and the development agencies provide countries with the necessary support. In short, development partners must cede the leadership role to the country's authorities. The former need to be more willing, for instance, to provide advice and technical assistance in ways that reinforce the national dialogue and support the government's development vision. This, in turn, means that development agencies should be prepared to lay out the policy options available to the country but should recognize that assessing and acting upon the trade-offs among these options are the responsibilities of the country's authorities. It also means a shift in the form of assistance, away from "flagship projects" and toward integrated donor support, either for the country's strategy as a whole or at least for the sectoral agendas that make up the strategy. Ideally, that support should be committed several years ahead, so that recipient governments can estimate resource flows with reasonable confidence. And it should be administered in ways that build local capacity to manage budgets. Existing procedures and donor reporting requirements are an enormous drain on local capacity—for example, donor projects in Tanzania are said to require preparation of about 9,600 reports each year.

The IMF and the World Bank have been working over the past year to align their operations with the new PRSP approach. In particular, their staffs are working together to ensure that their diagnostic work and the resulting policy advice they give to member countries are consistent and integrated in their respective areas of expertise (for the IMF, macroeconomic policy and reforms of fiscal, monetary, and financial systems; for the World Bank, structural and social policies).

At the IMF, we have introduced a new lending window for low-income countries, the Poverty Reduction and Growth Facility (PRGF), to succeed the Enhanced Structural Adjustment Facility (ESAF). The new facility is geared directly to the support of countries' poverty reduction strategies. It adds poverty reduction as an explicit objective of programs supported under the facility and, hence, as a criterion for evaluating the success of those programs. Some of the key features we expect to see in programs supported by this new facility are described in the box.

What's new in the Poverty Reduction and Growth Facility? The transformation of the Enhanced Structural Adjustment Facility (ESAF) into the Poverty Reduction and Growth Facility (PRGF) has important implications for the design of programs supported by the IMF in low-income countries. The emphasis on growth and poverty reduction will directly influence policy choices as well as the pace and sequencing of implementation. The government will take the lead in setting the agenda. And the basic building blocks of the program—from diagnosis through the design of monitoring indicators—will be subject to broad public consultation as a country's poverty reduction strategy is put together. As a result, the specific policy measures supported under a PRGF program will be derived from the country's own poverty reduction strategy. The concrete changes expected as we move from the ESAF to the PRGF include the following: Budgets that are more pro-poor and pro-growth. IMF and World Bank advice to countries will emphasize further reorientation of government spending toward the social sectors, basic infrastructure, or other activities that help the poor to participate more fully in, and benefit more from, their country's achievement of economic growth. Improvements in the efficiency and targeting of public expenditure will be highlighted, as will opportunities for tax reforms that can simultaneously improve efficiency and equity. Greater flexibility in fiscal targets. The IMF will more actively seek additional financial assistance for countries that need more money to implement well-designed and well- executed poverty reduction strategies. The assistance must be provided on highly concessional terms so as not to add to countries' debt burdens. Limits on budget deficits under PRGF-supported programs will accommodate these extra resources. More emphasis on improving public resource management. Carefully designed and targeted antipoverty programs will not work unless the countries' governments have systems in place to ensure that money is not misspent. The development of effective mechanisms to monitor and control government spending at all levels, and with greater public account- ability, is therefore expected to feature prominently in PRGF-supported programs. Protecting the poor during adjustment and reform. Promoting growth and long-term poverty reduction sometimes requires macroeconomic adjustments or structural reforms that can have a negative impact on some groups of poor people in the short run. Programs need to address the likely social impacts of reform programs and include measures to mitigate any adverse ones. The IMF and World Bank staffs will help governments to identify situations where such measures are needed and to incorporate them into countries' programs. More selective conditionality. ESAF-supported programs have typically made loan disbursements conditional on a wide array of structural reforms. Conditionality under the PRGF will focus more specifically on those monetary, fiscal, and institutional measures identified in the country's PRSP as being central to the maintenance of macroeconomic stability and growth and the effective management of public resources.

Challenges of implementation

Early progress in implementing the PRSP approach has been encouraging and momentum is building. (See the PRSP page on the IMF's website (at http://www.imf.org) for a recent World Bank-IMF status report.) In May 2000, Uganda became the first country to produce and publish its PRSP, followed by Burkina Faso in June. A number of other countries (including Benin, Guyana, Honduras, Kenya, Mali, Mauritania, Nicaragua, and Tanzania) are at an advanced stage of formulating their strategy papers. These initial efforts, however, have also highlighted a number of emerging challenges.

Many observers have noted the inherent tension between having countries take full ownership of their strategies and the requirement that the IMF and the World Bank assess whether a particular strategy provides an adequate basis for the institutions' concessional lending and debt relief to the country. On the one hand, the international institutions have a fiduciary responsibility to ensure that their scarce resources are used effectively. Clearly, they cannot commit money to a seriously flawed strategy simply because it is "owned" by the country. The institutions must therefore make a judgment, based on international and country-specific experience on what has been found to be effective in generating growth and lowering poverty, giving due account to the perspectives of others engaged in the PRSP process. On the other hand, ownership implies there can be no single blueprint for country strategies and requires greater flexibility on the part of the international community. In practice, striking a balance between these competing needs will mean being ready to support "home-grown" approaches to poverty reduction that may include some policies and priorities that differ from the advice given by the international institutions and donor agencies, as long as the overall framework is conducive to economic growth and poverty reduction.

A second challenge arises from the international community's strong desire to accelerate the provision of debt relief under the HIPC Initiative and to maintain the flow of IMF and World Bank concessional assistance while ensuring that such assistance is used effectively to support genuine, country-owned poverty reduction strategies, produced with the broad participation of civil society. The introduction of "interim" PRSPs (which need not be comprehensive and can be prepared without extensive consultations) and the provision of interim debt relief under the HIPC Initiative are proving helpful in managing this tension. Even so, the development community and countries alike face a dilemma: on the one hand, faster delivery of debt relief and concessional assistance brings with it increased risks that the funds provided will not be used effectively; on the other hand, holding out for stronger assurances on effective use risks delaying assistance and weakening country ownership. These trade-offs will become even more relevant as we move from "interim" to "full" PRSPs. Ultimately, there will be no alternative to making judgments case by case as transparently and evenhandedly as possible.

Another key issue for the PRSP process is the need to promote and support broad-based participation in ways that do not undermine the role of national parliaments and existing democratic processes. The challenge here is to help countries devise mechanisms that do not infringe on the prerogatives of elected representatives to make the final choices on policies but that do strengthen their accountability for the results.

Addressing the limited institutional and analytical capacity of governments and civil societies in many countries to prepare full PRSPs is also a major challenge for the international community. Development partners, including the IMF and the World Bank, have a crucial role to play by providing technical assistance and guidance in areas such as building systems to compile poverty data, strengthening local capacity to analyze and formulate policies, and disseminating cross-country experience in running effective participatory processes. The existing constraints also suggest that expectations of what can be achieved in the near term should be realistic. The design of truly country-owned strategies will take time, and it is appropriate that they build on existing processes and institutions. Indeed, although PRSPs will improve through successive cycles, the quality of the first ones may vary widely.

Of course, the development obstacles facing many poor countries go well beyond the challenges of implementing the PRSP approach. Just recently, the combination of lower commodity prices and higher oil prices has resulted in terms of trade losses of more than 15 percent in one-half of HIPC countries. Environmental problems and conflicts are major obstacles to poverty reduction in some developing countries. And natural disasters are prevalent: recent floods in Mozambique, hurricane damage in Honduras and Nicaragua, and drought in Kenya—to name but a few—have cost the countries concerned dearly, in economic as well as human terms.

Against this background, even a well-designed and well-implemented poverty strategy is not a silver bullet that will deliver rapid prosperity. But formulating such strategies should ensure that, over time, the collective efforts of the international community become more effective in improving the lives of the poor. The initial response from countries and donors alike has been very positive and provides grounds for optimism that the undeniably difficult challenges ahead can be met.