Where extreme poverty is as pervasive and persistent as it is in most LDCs, poverty reduction strategies should not target the bottom 20% of the population but rather seek to raise living standards for the majority through development, argues UNCTAD´s Least Developed Countries Report 2002 (1), released today. Poverty reduction strategies that are simply extensions of past adjustment programmes will not deliver sufficient and sustained economic growth to do this. The Report proposes an alternative approach to improve the design of poverty reduction strategies in which the central task is to double average household living standards as quickly as possible through building productive capacities and generating livelihoods.
Over a billion people, including at least two thirds of those in the 49 least developed countries (LDCs), are currently taking part in a massive social experiment. Their governments are preparing and implementing Poverty Reduction Strategy Papers (PRSPs) as a condition for aid and debt relief. The PRSP is the centrepiece of the approach to international development cooperation for low-income countries introduced in the late 1990s by the IMF and World Bank.
Through the PRSP, governments are taking responsibility for poverty within their borders and formulating their own strategies to reduce it. But knowledge of what policies work best is incomplete. How this experiment works in practice will be critical for the quality of life of at least a billion people and also for achieving the global poverty reduction goals agreed by the international community.
The UNCTAD report argues that the central insight of the PRSP approach - that more effective poverty reduction will come not from national policies imposed by donors but from allowing countries to formulate and implement their own policies - is the right one. It also agrees with the key judgement underlying the shift in international development cooperation, which is that the structural adjustment programmes of the 1980s and 1990s were not doing enough to reduce poverty in poor countries. Using a new set of poverty estimates (see TAD/INF/PR44), the Report shows that on average the incidence of extreme poverty did not fall in LDCs undertaking structural adjustment programmes, even in the group of countries where they were well-implemented. Where productive capacities, markets and an entrepreneurial class investing in production are all underdeveloped, structural adjustment programmes do not deliver accelerated and sustained economic growth at rates sufficient to make a significant dent in poverty.
However, the initial experience with PRSPs in the LDCs shows that the creative potential of the new approach is not being realized. Like the old adjustment programmes, the emerging PRSPs still give priority to short-term stabilization over long-term development, with tight credit ceilings and restrictive fiscal policies. They continue to broaden and deepen past structural reforms in the belief that an economy where four out of five people are living on $1 a day will behave like a perfectly competitive market, and economic activities will automatically spring up if the government gets out of the way and the national "market" opens up to the rest of the world. Although there is one new anti-poverty component - more closely tracked public expenditure being channelled into basic health, education and local infrastructure projects - the overall approach is still not the best way to combat poverty in the LDCs, says the UNCTAD report.
Indeed, there is a possibility that with these new strategies countries will end up with the worst of all worlds. The new policies will increase exposure to intensely competitive global markets but without facilitating the development of the productive and supply capacities necessary to compete. At the same time, there will be increased aid dependence through arm´s-length international guidance of social welfare.
Genuine national ownership and policy autonomy is essential
UNCTAD contends that it should be possible through the PRSP approach to promote more effective poverty reduction in the LDCs than in the past. But this is not happening now, as governments are reluctant to move beyond adjustment.
Their dilemma is that their PRSPs still have to be endorsed as satisfactory by the IMF and World Bank to be eligible for concessional aid and debt relief. They know from past experience that if there are interruptions in aid flows and delays in debt relief the incidence of poverty is bound to rise. Adopting structural adjustment programmes augmented by pro-poor elements minimizes the risk that this could occur. Such programmes do not contain the right policies to promote sustained economic growth and thereby reduce poverty; but they will not provoke interruptions and delays in external finance that would, most surely, increase poverty.
To realize the full potential of the PRSP approach will require less, and more flexible, conditionalities; greater open-mindedness on the part of international financial institutions to alternative poverty reduction strategies, with donors firmly aligned behind those strategies; and more technical assistance to familiarize LDCs with their rights and obligations under the WTO. The Report advocates the introduction of donor performance-monitoring indicators at the recipient country level to provide incentives for, and monitor progress towards, increased ownership and partnership, and thereby aid effectiveness. Rebuilding key State capacities, particularly in such areas as financial auditing and accounting, economic forecasting and debt management, is also essential.
An alternative does exist
With genuine national ownership and policy autonomy, a greater variety of poverty reduction strategies can emerge. But a key question is whether there is a credible alternative.
UNCTAD argues that the best way to move beyond adjustment now is by anchoring poverty reduction strategies in long-term development strategies. Priority policy actions over a three-year time horizon in the PRSP would be derived from the overall development strategy, representing the steps taken in the short term in support of the realization of the strategy. The overall goal should be to promote sustained economic growth in order to double average household living standards; if this happens, the incidence of extreme poverty will then fall sharply (see TAD/INF/PR44). This doubling will be best achieved through mutually interacting investment and export growth that expands productive capacities and generates sustainable livelihoods.
UNCTAD´s alternative approach builds on earlier research on the policies that facilitated sustained economic growth over a long period in East Asia and how these policies can be applied in sub-Saharan Africa. The approach is based on establishing a dynamic investment-export nexus through the creation of profitable investment opportunities, reducing the risks and uncertainty of investment activity, and ensuring the availability of finance so that entrepreneurs are able to invest in expanding production. Key elements of the approach are more growth-oriented macroeconomic policies, sectorally focused productive development policies, export promotion policies and policies to ensure that marginalization within LDCs does not occur as economic growth takes place.
Private enterprise should play the leading role in development-oriented poverty reduction strategies. But the development process should be catalyzed and guided by a State that, through good governance of markets, harnesses the profit motive for the purposes of national development and poverty reduction. Creating effective States, and also a dynamic domestic entrepreneurial class willing to commit its resources to domestic investment rather than to luxury consumption or holding wealth abroad, remains a central institutional issue.
Supportive international policies are crucial
An implicit assumption of the PRSP approach is that global poverty reduction goals can be achieved with national poverty reduction means. It is certainly true that without the right national policies and responsible government, effective poverty reduction in LDCs is impossible. But responsibility without the freedom to act independently and without the resources to achieve agreed targets will prove ineffective in reducing poverty, the Report says, and will ultimately lead to crises of legitimacy. No matter how well designed domestic policies may be, in the current era of globalization they will be ineffective without a supportive international environment.
External indebtedness and commodity dependence are integral elements of the international poverty trap. As well as a new international commodity policy (see TAD/INF/PR45), there is a need for increased and accelerated debt relief delivered through a simpler mechanism. Under the enhanced HIPC (Highly Indebted Poor Countries) Initiative, the annual debt service relief in 2003-2005 for the 20 LDCs that have qualified for debt relief will be only 5.5% of net ODA disbursements to those countries in the year 2000. The forecasts of a sustainable exit from the debt problem through the Initiative are systematically and simplistically overoptimistic, UNCTAD contends. With falling commodity prices, the enhanced HIPC Initiative is on a knife-edge, and the fledgling PRSPs will be derailed if debts and arrears accumulate again.
Finally, there is an urgent need for increased and more effective aid. It is a positive sign that the sharp decline in aid flows to the LDCs that began at the start of the 1990s was halted during 1998-2000. But in real per capita terms, net ODA disbursements to the LDCs were still 46% lower in 2000 than they were in 1990. The poverty-reducing impact of relaxing, to different degrees, the financial constraint within which PRSPs are framed should be jointly explored by governments and donor countries. Productive sectors, notably agriculture, and economic infrastructure, which have both been relatively neglected in the context of declining aid flows, are likely to receive greater attention in the type of poverty reduction strategy advocated by UNCTAD. Aid effectiveness will be greatly increased if aid inflows are geared to government priorities, delivered through government systems unless there are compelling reasons to the contrary, and provided on a more stable, long-term basis.