Transcript of an IMF Economic Forum on ESAF in the New Millennium
September 24, 1999
Friday, September 24, 1999
Meeting Halls A&B
- Emmanuel Tumusiime-Mutebile , Permanent Secretary/Secretary to the Treasury, Ministry of Finance, Planning and Economic Development, Uganda.
- Kevin Watkins , Senior Policy Adviser, Oxfam, United Kingdom.
- Hugh Bredenkamp , Division Chief, ESAF Review, Policy Development and Review Department, IMF.
- Jack Boorman , Director, Policy Development and Review Department, IMF.
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MR. BOORMAN: Ladies and gentlemen, may I suggest we begin. There seems to be a natural law of forums like this where the first three or four rows are left empty, but we'll live with that until additional people come in to fill them. I see some friends in the audience that I would like to recognize. Sorry to begin a bit late. I understand there was a lunch involving a number of the participants which for good reasons about interesting discussion went on for some time.
We're here today to talk a little bit about the ESAF but the broader issues as well about our activities and the activities more generally of the IMF and the World Bank in the context of HIPC Initiative, ESAF programs, IDA programs, and so forth, and what's being produced by those operations. We had a forum of this sort about two years ago in the context of a pretty fundamental review which we conducted of ESAF operations.
The conclusions drawn at that time were that if you were really going to be able to accelerate growth in these countries, and I think all of us agree that a sharp increase in the rate of growth is the sine qua non of making major inroads into a reduction in poverty, there were going to have to be a number of things accomplished.
One was to raise higher savings levels and investment rates in these countries, a better consolidation of macroeconomic policies and performance in the countries, a deepening of many of the reforms which had already begun in some of these countries, but a need to press forward with them in those countries and, of course, to spread them to countries that had not yet begun such reforms, and critically everybody agrees more resources need to be devoted from within but also from without critically for social development.
It was also agreed at that time that there need to be different processes. There needed to be more openness on the part of the institutions, the IMF included, about what it was doing, what it was advising in these countries, but critically important as well, particularly as democratization spreads and takes foot in these countries, there was a need for greater openness and policy dialogue in the countries themselves including the involvement of various organizations of civil society.
I think we've made progress in these areas in the interim since that first of these forums. Growth rates have picked up in ESAF countries and they've outpaced those in other developing countries since 1996. There's been continued increases in real per capita spending on health and education in these countries and other indicators—literacy rates, infant mortality and so forth—have shown improvement.
And the process, and I stress this, has become more open. There's a status report on the follow-up to the ESAF reviews which is on our now well publicized web site whose address is lit up there behind me. There's lots of contact between this institution and outside agencies. Our missions typically do meet with all kinds of agencies that they did not meet with in the past. And the countries themselves, with encouragement from this institution, behave differently in terms of the way in which they make public their policy plans.
Memoranda of policy are put on our web site; letters of intent in the context of IMF programs are put on our web site and are released publicly in the countries. This is a major change in the way countries conduct business in the context of arrangements, lending programs with the IMF.
All of this said, we also, I think every one of us, suffer frustration from the lack of faster progress in all of these areas. And I think the impatience that the international community generally feels in this area is reflected in some of the things that have been done recently. Surely the establishment of more concrete goals under the U.N. and under the Development Assistance Committee, goals for 2015, regarding a 50 percent reduction rate in poverty, and you know the other ones, these are all stimulated by a desire to see, on the one hand, concrete goals established, but on the other, and here we still need to develop robust mechanisms to be able to do this, to make sure we don't wait till 2015 to see what happened, but that on an annual basis, we monitor what's going on to make sure that we're on track towards those goals that have been set.
Another manifestation of this frustration I think is the enhancement of the HIPC Initiative and the insistence in the context of the HIPC Initiative that the additional resources provided to countries to go to social programs, to poverty reduction programs, to health spending, to education spending, and to other spending that will have a direct impact on the poor in these countries.
We've been working here in the Fund over the last couple of months very actively with our colleagues across the street in the Bank and there are results coming out of that work. One is the formulation of the enhancement of the HIPC Initiative and—and I hope we will see the results of this this weekend—the funding, the critical part, the money, to pay for that enhancement of the HIPC Initiative.
Also, we've been developing proposals which have now been approved by the boards of both institutions to strengthen the focus of poverty/on poverty in our programs, not just in the HIPC context but in all of IMF programs with the poorer countries under our ESAF arrangements.
We have three speakers with us today who are going to address these and related issues: Hugh Bredenkamp, Emanuel Tumusiime-Mutebile, and Kevin Watkins. Let me allow Hugh Bredenkamp to kick this off. He is Division Chief for the ESAF Review Division in my department, the Policy Development and Review Department in PDR. He's formerly been with the UK Treasury, he's worked on Western Europe and on FSU, Soviet Union countries before coming to my department. He also led the staff team that did the internal review of ESAF in 1997. Hugh.
MR. BREDENKAMP: Thanks, Jack, and before I start, let me just compliment our External Relations Department for choosing the title of this forum, ESAF in the New Millennium, which given the struggles that Jack referred to that are going on as we speak to raise funding for not only for HIPC but also for the survival of ESAF, it's nice to think there is someone thinking in terms of another 1,000 years of ESAF supported programs.
MR. BREDENKAMP: In that same forward looking spirit, I'm going to focus my remarks on the Fund's ideas for the future of ESAF, what it is we want to achieve, and how we think we're going to put that into effect. And for those of you who are interested, the avid followers of the Fund's web site, we put up a lot of the relevant policy papers and statements on the web site, and I gather some of them at least are available in hard copy around the room or at the back of the room. And you'll no doubt be hearing more as the meetings progress also on these issues.
Basically, the proposal for the future of ESAF is to make poverty reduction a fundamental goal of the facility alongside economic growth and external viability, the two founding principles, if you like, of the ESAF when it was set up.
So I'm going to talk about, first of all, what motivates this proposal, what it consists of, and then lastly, briefly, the way that ESAF programs will change as a result of this new approach.
So, first of all, why make poverty reduction an explicit goal for the ESAF? I think the moral case is obvious and it's one that we share, but there's also a number of economic, good economic rationales for this new approach. First of all, I'd say, as Jack said, growth is now widely accepted as being a prerequisite for poverty reduction, it's a necessary condition, but there is the frustration that he referred to that the sense that we're not making enough progress—we're not making progress fast enough on poverty reduction, and we need to accelerate it.
And for this, the sense is that we need policies that are aimed directly at the poor, not only the ones that we have in recent years been emphasizing in terms of social safety nets to protect the poor from the fallout, transitional fallout of reforms, but I think more importantly to expand their economic opportunities to give the poor a role in the growth process itself.
And having poverty reduction, setting poverty reduction as a core objective of programs, ensures that these kinds of pro-poor policies become an integral part of the country's economic strategy. So that's one reason.
The second motivation is that having, creating this poverty focus in the economic strategy, in the policy framework, provides a useful check on whether the program and the strategy has sufficiently ambitious growth targets in the first place.
I think another point on which there is now an increasing consensus is that ESAF supported programs do provide the right core policies. There is some, there are NGOs, I think, who are being left behind a little in terms of this consensus, but it does, I think, now most importantly include many of the policymakers in ESAF countries who are actually charged with implementing the programs, and that's I think very encouraging.
And related to that, I think, is that the results from these programs are also increasingly encouraging. As Jack had said at the beginning, average growth rates in ESAF countries have risen sharply since the mid-'90s and now, in fact, almost double the rates in other developing countries in real per capita terms.
But we are still only talking about around two, two and a half percent, real per capita GDP growth each year, and I think we do believe that that is still not enough. It's not enough in particular for many countries to bring them to the international development goals, in particular the goal of halving poverty by 2015.
So we need a poverty focus in these countries that will shine a light on those countries that need either more aid or faster reforms or in most cases I would guess a combination of both.
And the third motivation is the synergy, if you like, between the two objectives of growth and poverty. We know that pro-growth policies will usually benefit the poor, but now it's also increasingly recognized, I think, that the reverse is true, i.e., pro-poor policies, by which I mean things like investment in health, education, rural infrastructure and so on, are a good way in themselves to boost the rate of economic growth. So there's a mutually reinforcing benefit from these kinds of policies. So those are the motivations I would say.
In practical terms, what we're advocating, the heart of the proposal, is—and this is very much a joint IMF/Bank proposal that was developed initially in the context of the enhanced HIPC Initiative to establish a link between poverty and debt relief, poverty reduction and debt relief, but which we are now advocating as a broader approach in ESAF operations. The heart of this proposal is a comprehensive poverty reduction strategy in each country developed by each country. And the idea is that this strategy would provide the framework for, an integrated framework for the macroeconomic structural and sectoral and social policies in each country.
And the crucial element is that the strategy would become the foundation for all ESAF supported programs starting initially in the HIPC countries and in the half dozen countries where we currently have pilots and enhanced Bank/Fund collaboration. And—and this is also crucial—it would be a basis for all World Bank operations in these same countries, basically the IDA countries.
One obvious question and one which we actually often heard when we first broached this proposal even within the institutions was how does the poverty reduction strategy differ from the policy framework paper, if you like, which has traditionally been the framework, integrating framework for ESAF operations?
It's a reasonable question. I think there are three key differences. The first one is that unlike the PFP, the process we envisage that the process by which the poverty reduction strategies are developed in each country would be a fully open and consultative process led by the national governments right from the outset, from the moment that the goals of the strategy are being formulated, through the choice of policies and the debate on which policies to choose, up to the point where the strategy is finally agreed and finalized.
And the Bank and the Fund's role in this process would be to advise, to provide expertise, and to facilitate. The governments would be expected to drive both the agenda and the consultative process. They would lead the dialogue with the civil society and with donors. I think this is a major advance on the PFP, policy framework paper process, even though PFP process has become more open in recent years. In fact, it's now the case that about 85 percent of policy framework papers are published, including on the Fund's web site and Fund missions, have increasingly also expanded their contacts in civil society in the countries that they are working in.
But it's still the case that for most outside of government at least in these countries, they don't see the policy framework paper until it's essentially a done deal. It's published, it's finalized, it's agreed. The poverty reduction strategy process, by contrast, would give them a voice, would give non-government organizations and civil society a voice right from the start.
Now this is going to be a complex and time consuming process and we have no illusions about that. We also are aware that some governments, to put it politely, have more experience in consulting widely on policies than others, but we do think that this sort of open process is a prerequisite for having programs that are truly owned and hence that are likely to be properly implemented.
Second intervention with poverty reduction strategies is that they would start from poverty. The PFPs have increasingly included poverty objectives, but I think it's fair to say more as an add on than as a really integral part or a driving force behind the other policy elements in the PFP. The poverty reduction strategies would begin with an analysis of poverty. What does it constitute? What are its causes? What is the scope for public policy to remedy it including assessing the impediments to economic growth importantly.
And from that analysis, we would then develop or the country would develop realistic and explicit poverty goals and from those the strategy would then tie in the relevant macroeconomic and structural policies to achieve them. We see the World Bank having a lead role here in terms of advising, but again this is a process in which we would see all voices having a chance to be heard and, in fact, in this process of developing the objectives and the poverty goals, this would be a key point in the process at which open consultation would be important.
Then third and final innovation is that the poverty reduction strategy paper, which would be the instrument, the document which would distill all of this, will be a foundation for, as I said earlier, for World Bank operations in these countries in a way that the PFP never was. The PFP was a tripartite document. The World Bank was involved in its preparation, but it never played an operational role in the Bank, it was not endorsed formally by the Bank, and it didn't play a central role in the Bank's own policy advice.
So we see this new instrument as providing potentially, and we hope the potential will be realized, for much more effective integration between the operations of the two Bretton Woods institutions. We'll be reading, as it were, from the same page and the style—this is something I think which both at the level of the staff and our shareholders, the people who have been hankering for for some years, and I think the countries will see the benefits from the new approach.
Finally, on the implications, what does this imply for ESAF programs? I think one of the main implications, one of the main changes from past practice, is that by developing these poverty reduction strategies, what we will do is obtain clear identification of the social programs that are needed to achieve poverty reduction and growth also and to have them fully costed, which is crucial if the strategies are to be realistic.
What that implies for ESAF programs then, given domestic resource constraints in the country and given the need to maintain macroeconomic sustainability, will be a much clearer idea of each country's ex ante financing needs. In a sense, the way I viewed the problem in the past is that in program design, we've typically treated external aid at least in large part as being supply constrained. We predict what donors might be willing to provide and then we design a macro framework that is more or less consistent with that, whereas this new approach I think will get a much better, give us a much better sense of what the demand side is for aid. What are the needs for aid in a particular country?
Obviously, in the end, the program that can finally be implemented will depend on the donor's willingness to come up with the necessary support. But the framework will be there.
And incidentally, I think there is a role here for donors to change their own practices in some ways, one of which, an important change improvement that many donors could make would be to move away from year by year aid commitments to multi-year, being able to make firm multi-year aid pledges which in many cases will require donors to change rules and legislation and so on, but would be important I think to allow countries to do much more effective medium-term expenditure planning.
Now, this emphasis on social programs obviously raises the stakes in terms of the need to ensure efficiency in government spending, particularly in social spending. And the way that we see this being addressed in ESAF programs is by putting a much more forceful, more direct emphasis on measures to improve transparency in the budget procedures, to develop proper accounting and auditing systems in the budget framework, and by tackling mismanagement and corruption in budget processes which is often a source of waste and misdirection of aid.
At the same time, in the framework, the Bank would be very much in the lead in developing, helping the countries to develop outcome-based indicators for government spending, particularly for social spending, as a way to check that budgeted spending, for example, in the education sector is actually translating into more children going to school or in the health sector in more people getting access to safe water and so on.
Finally, we do envisage that performance, country's performance in implementing their poverty reduction strategies will have a bearing on Fund decisions in whether to approve or continue disbursements under Fund arrangements and it hasn't been decided quite how this would be done, what forms it would take, but we do at a minimum envisage that programs, ESAF programs, would incorporate from the poverty reduction strategy a number of the key social policy measures or key policy measures that are necessary to achieve the country's social goals.
So these are the proposals. The Managing Director has referred to them, and especially this notion of basing future ESAF programs on comprehensive poverty reduction strategies as a transformation of the ESAF and I don't think that's an exaggeration. And, in fact, he is proposing to signal the new approach by changing the name of the Enhanced Structural Adjustment Facility to the Growth and Poverty Reduction Facility.
We still have an awful lot of work to do with the World Bank to flesh out how this approach will work in practice and in the meantime we're open to and we would welcome comments and suggestions on it starting today, I guess, at this forum. Thanks.
MR. BOORMAN: Thank you, Hugh. Mr. Bredenkamp has a quiet way of saying fairly dramatic things. I think what he's talking about is dramatic in terms of the challenge that it's going to present to countries to develop policies and the framework that he's talking about in a collaborative and a consultative way within the countries, but it's going to be a major challenge to the institutions as well.
What we're really trying to do here, and I think Mr. Bredenkamp used the phrase "reading from the same page," what we're trying to do is make sure that the two institutions sign on to a framework in the context of these poverty reduction strategy papers, endorsed by two boards of the institutions which they genuinely drive operations. So that they are operations on the two sides of the street that are tightly woven with each other in terms of addressing the needs of the countries concerned, the sequencing of reforms that need support in those countries, and so forth.
This I stress is a concept. It remains to be put in place and that's why I think Mr. Bredenkamp's last comment about reaching out and appreciating comments from others is a critical one.
Let me now, if I may, ask our first guest speaker, Emanuel Tumusiime-Mutebile, to speak. He is the Secretary of the Treasury of the Uganda Ministry of Finance and has been since 1992. He was educated in Kampala and at Durham—North Carolina. And Oxford in the UK. He joined the Ugandan civil service in 1979, has been Chief Planning Economist and Permanent Secretary. Most importantly, Mr. Tumusiime-Mutebile is surely recognized as one of the leading forces behind the progress that Uganda has been making under one of the most impressive reform programs steadily implemented with force over a number of years. So it's my honor to ask him to speak.
MR. TUMUSIIME-MUTEBILE: Thank you, Mr. Chairman. I don't know whether many people in Kampala would recognize the description you have just given, but I thank you nevertheless. An economist has been defined as an expert who will know tomorrow why the things he predicted yesterday would happen today did not happen today. And so being an economist, I don't know how to go into predicting about the future of ESAF in the new millennium and so I would be humble enough to concentrate on the record of ESAF in Uganda and only offer a few thoughts about new directions at the end.
I think it's important to concentrate on the record of ESAF because ESAFs are being criticized all over the place and I've seen the document out there. In my judgment, very unfairly criticized. These critics often argue that ESAFs have failed to stimulate economic growth, that they have worsened poverty, that they have failed to induce higher savings and investment rates, and that worse still fiscal restraint has led to severe cutbacks in public service delivery which has damaged the welfare of the poor.
I'm afraid the experience in Uganda gives cold comfort to these critics. Uganda's record of structural adjustment since 1987 demonstrates beyond reasonable doubt that ESAFs can indeed stimulate sustained increases in economic growth and can yield substantial benefits for the poor both in terms of actual reduction in poverty, but also in terms of improving the access of the poor to social services.
Uganda has sustained very rapid growth since it began implementing these policies in 1987. Since then, real GDP growth has averaged 6.5 percent per annum and per capita GDP has been 3.4 percent per annum for the 12 years. The size of the economy itself has doubled in the period and real per capita output has risen by nearly 50 percent. Of course, the critics say that this cannot be due to structural adjustment. One possible explanation for the economic revival in the country such as Uganda, which have implemented SAPs or ESAFs after long periods of economic perdition and civil war, is that the restoration of peace and security allows the country to bring back into production productive capacity that has been previously underutilized because of the collapse of the economy.
This explanation can account for the initial strong recovery of the Ugandan economy, but it cannot account for the sustained increases in GDP throughout the 1990s, long after the underutilized capacity was brought back into production.
It is true that GDP growth rates have fluctuated because of the sensitivity of rain fed agriculture to the vagaries of the weather. Nevertheless, there is no evidence whatsoever of a slowdown in the trend of growth of the economy during the 1990s.
These sustained high rates of growth can only be explained by increases in factor inputs and improvements in efficiency of resource allocation which have been occasioned by the structural adjustment reforms. Investment rates have risen consistently since Uganda began implementing these reforms. Although the initial increase in investment rates was attributable mainly to government funded projects, private investment has also increased, particularly during 1990s.
At the beginning of the reforms, private investments averaged only 5.4 percent of GDP. But, in fact, this has now doubled to 12 percent of GDP on average in the second half of the 1990s. These policy reforms which liberalized markets for factors and products and stabilized the economy have contributed to a large increase in private investment.
The consistency with which structural adjustment programs were implemented in Uganda obviously had a positive impact on private investment. When government credibility is low, private investors will be reluctant to commit resources to irreversible investments whose profitability is partially dependent on potentially reversible policy reforms.
The increase in private investment which occurred in mid-1990s suggests that by that time the government had begun to establish a degree of policy credibility with the private sector because of the time consistency of government policies. So I'll submit that where ESAFs have failed to develop these reforms, it's partially because the governments and the countries are implementing these reforms either halfheartedly or in a time inconsistent manner.
What has happened to living standards and poverty during this period? Of course, 12 years is too short a time to expect a dramatic transformation of an economy and society. Yet, I'm glad to report that data on household incomes and expenditures in Uganda show that mean per capita consumption, mean per capita consumption expenditures rose in real terms by 17 percent between 1992–93 and 1997–98.
Moreover, these surveys provide no evidence whatsoever to indicate that there has been any worsening of the distribution of income and expenditure during the 1990s. Indeed, the geni coefficients have hardly changed. At worst, structural adjustment produced a pattern of growth which was distributionally neutral. This was a result of two countervailing processes, one regressive, the other progressive.
On the one hand, wealthier sections of society with better education and access to physical and financial assets were better placed than the poor to take advantage of the expansion of income earning opportunities which were provided by the economic growth and market liberalization.
On the other hand, economic policy reforms such as exchange rate devaluation, external trade liberalization, the liberalization of coffee marketing and financial liberalization all shifted incentives towards sectors in which the poor primarily earn their livelihoods, notably agriculture and labor intensive productive activities.
The household monitoring surveys also indicate that the incidence of poverty at the national level fell by 11.5 percentage points between 1992–93 and 1997–98 from 55.5 percent to 44 percent, while the share of the population living below the hard core poverty line fell by 11 percentage points. This means that more than two million people were lifted out of poverty over the course of five years. And almost as many people were lifted out of hard core poverty. I submit to you that this is a very significant decrease in poverty in such a short time.
Moreover, there was a consistent fall in poverty throughout this period, both in rural areas where 90 percent of the poor people live and also in the urban areas.
What about funding for social services? Uganda's record during the 1990s supports the contention that fiscal restraint is critical to maintaining low inflation. But this record also demonstrates that fiscal restraint is not incompatible with increased real spending on basic social services. As the share of GDP, both recurrent education expenditures and recurrent health expenditures increased almost threefold between 1988 and '89 and 1998 and '99, largely reflecting the implementation of the poverty eradication action plan. Although there were increases in unit costs of education and health relative to GDP deflator in this period, real per capital recurrent expenditures on education and health increased by over 150 percent and 135 percent respectively.
Uganda was able to achieve the increases in government spending on basic social services for two main reasons. First, the budgetary resources that were available to the government grew rapidly because of tax reforms and the economic growth.
Secondly, government has accorded greater priority within the budget to spending on poverty eradication plan, shifting intersectoral budgetary allocation essentially towards health, education and the rural sector.
Now, let me hesitantly talk about the new directions for ESAF. I think the first challenge, as Hugh has already mentioned, is to make it more poverty focused. We need to make an explicit linkage between ESAF and the objectives of poverty eradication. In Uganda, this means that ESAF must be more attune to objectives and a strategy of poverty eradication action plan.
I think ESAFs and development strategy in general needs to take more, give more priority to the rural sector and in particular to agriculture modernization in order to increase the productivity of the peasants who are the majority of the poor. And also to ensure that peasants adopt high yielding disease and pest resistant crops and better management of water and the environment.
The reforms must also support development of rural markets because more holders require access to reliable markets for their produce and for agricultural inputs if they are to be persuaded to specialize in higher value commercial crops.
I think another key area on which ESAFs must focus is the increasing deficiency of public expenditure and improving the quality of public services. Again, Hugh touched on this point even if tangentially.
Efficiency could also be enhanced by devolving greater autonomy to individual spending ministries and senior managers in these units to determine their own budgets and hire and fire their own staffs. In addition, decentralization of government would help in increasing transparency as well as in bringing services closer to the people.
Finally, I want to return to a macroeconomic issue which is central to all ESAF programs which has been raised in these forums every year for the last three years. I believe we need to reevaluate the way in which we interpret fiscal deficits. The view of the Fund has always been that large fiscal deficits are a source of macroeconomic instability and that countries undertaking ESAFs should aim to reduce their fiscal deficits through time.
While I do not dispute that fiscal deficits often cause macroeconomic instability, what is crucial is not the size per se, but the manner in which the deficit is financed. I think even the first year undergraduate knows that. I don't know why the Fund is taking too long to know it.
For low income countries such as Uganda, it is possible to finance a relatively large deficit with concessional external funding in a manner which neither jeopardizes overinflation nor creates external balance of payments deficits. If we have a situation in which a government has a credible record of stable macroeconomic policies and we acknowledge that increased public investment in infrastructure and public spending on basic social services can yield very high rates of return, but that the tax basis is very narrow and that it is not possible to raise revenues rapidly without resorting to distortionary tax rates, then we should be able to recognize that larger donor funded deficits can be compatible with economic and social objectives of ESAF.
Many bilateral donors appear willing to provide larger volumes of aid to countries which can allocate the aid in an accountable manner to poverty focused programs. There is a genuine concern about the sustainability of large aid flows, but these concerns could be allayed if donors were prepared to make firmer medium-term commitments to provide budget support.
Firmer medium-term aid commitments would allow, would also facilitate longer-term budgetary planning by governments, allowing larger volumes of aid to be absorbed productively without risking macroeconomic instability as a result of anticipated shortfalls in aid disbursements.
When economic reforms are clearly focused on poverty eradication and the governments have established a track record for maintaining macroeconomic stability, it is important for ESAFs to allow for a temporary expansion in fiscal deficits provided these are financed by grants or highly concessionary external resources within the context of the fully viable fiscal medium-term situation. I thank you.
MR. BOORMAN: Thank you, Emanuel. You pose a question that we have been wrestling with for some time in terms of what are appropriate fiscal deficits in the context of these kinds of countries and these programs? I think to a large extent you also answered the question that you posed, but perhaps if there is a few minutes later, Mr. Bredenkamp would say a few additional words about it.
The picture that you portray of Uganda and its progress is obviously a very positive one and a promising one for the kinds of policies that a country like Uganda has followed. One thing that you didn't say for reasons I can understand, which I will say, is that this extraordinary progress has also occurred in a neighborhood, if I may use that phrase, where the developments in surrounding countries have been anything but conducive to contributing to that progress. And so it has truly been home-started and motivated within Uganda.
Let me turn to our second guest speaker, Kevin Watkins. Mr. Watkins is senior policy advisor at Oxfam and heads a team working on finance and social issues. Like Mr. Tumusiime-Mutebile he was educated at Durham, also in England, I presume, and Oxford. He's written extensively on debt issues, on poverty, the HIPC Initiative, and he's the author of Oxfam's recent Education Now report.
Before I give the floor to Mr. Watkins, I would just like to say a word about something. I was approached by my staff the other day with a picture that appeared in The Guardian, and shortly thereafter I was also confronted with the reality from that picture, which is this little box of pills. Some in this building, and I have checked, including in management, have been contributors to Oxfam. Needless to say, this gives one pause about the use of these contributions.
There are also many of us in this building who do not, as Mr. Fischer, our First Deputy Managing Director, said at one point, who do not park their souls with their cars in the garage in the morning. Believe it or not, we do carry them with us. And it hurts to be told that the work you're doing is not just destructive of human values but destructive of human beings, which is what this box says.
But more importantly, and the question I would really like Mr. Watkins to address, we have been reaching out to civil society, and I went to the dictionary to see what "civil" is all about and amongst other things it says "adequate in courtesy and politeness." Now that's not a very high standard just to be adequate. But I wonder if this is adequate for institutions who are supposedly reaching to each other, to learn from each other and to have a dialogue with each other?
I'm genuinely puzzled because it does seem to me from the contact I have had, from the contact others in the staff have had, we are sharing many of the same objectives. I just do not understand how something like this contributes either to the dialogue or to the achievement of those objectives. Mr. Watkins.
MR. WATKINS: Well, thank you very much for the introduction and also for the outstanding display of impartial chairmanship. I was going to say that I'm the third of the panel that has been invited to say something from a critical perspective on ESAF. I was going to ask if I could test the Fund's newfound commitment to equity in public policy by suggesting that since there were two speakers addressing it from one perspective and only one from the alternative perspective that I might get double the time allocation. After your intervention, I'm tempted to ask if I could have triple the time application since you now have three speakers from the same perspective.
But I want to start in a positive spirit and to say first of all that we welcome this opportunity to debate this important issue with the International Monetary Fund and we thank the External Relations Department of the Fund for inviting us to participate. Reform of ESAF is a very important issue for Oxfam. It's an issue which is going to have profound effects on many of the communities that we work with and we acknowledge that this is a time of change in the Fund. There is new thinking about poverty. There is new thinking about the design of macroeconomic reform and how to integrate macroeconomic reform into national poverty reduction strategies.
These are all welcome advances. I think too often in the past in this building the faces of poor people have been conspicuous by their absence from economic policy debates and I for one welcome the fact that they're now at least partially present.
Just to confirm your worst fears, I should say bluntly what our starting point is. Yes, we do believe the ESAF programs have fundamentally failed the poor. We feel that they have failed to generate the accelerated economic growth and equity on which sustained poverty reduction depends. We feel they fail to protect the access of poor people to the basic services which are vital to improving their lives. And you may wonder how Emanuel and I who were apparently educated in the same institutions and you may wonder how it is that we've arrived at such different conclusions about ESAF.
I'll attempt to present my side of the case now. Before I do that, just by way of preamble, I'd like so to say that it seems to me that we are at something of a watershed in ESAF and in economic policy debates for low income countries. There is one approach which I like to call the "ESAF plus" approach. It's the approach which says that basically ESAF is right. It's more or less the approach which is outlined in this document—the program design is really pretty good, but what we need to do is to add on additional social welfare safety net mechanisms on to fundamentally sound macroeconomic policy.
There's another approach, which I think is a more radical and far-reaching one, which is arguing that we need to have new premises, that we need to turn the existing paradigm on its head, that we need to start from poverty reduction strategies and to develop ESAF as a support mechanism for poverty reduction strategies. And I wonder—I mean perhaps this is part of the reason for the rather bellicose response to our advertisement—I wonder if there's a widening division within the Fund, and I don't want to draw painful analogies with the former Soviet Union, but whether there's a division between reformists on the one side and defenders of the status quo on the other side?
But it does seem to me that this is an important time in the Fund. I guess the other thing I have to do right at the outset is to put down a marker. I think there is always a problem critics of ESAF face which is that you are automatically written off as some sort of economic Luddites with an affinity for large fiscal deficits, rampant inflation, overvalued exchange rates and slow growth.
I'd like to say that despite the fact that I work for Oxfam, and I'm not sure if Hugh was referring to NGOs like Oxfam when he spoke about agencies who are becoming detached from the realities of economic reform, but as an organization we are not in favor of that approach. I recognize that trying to get across the alternative picture is a little bit like trying to explain the principles of cricket to an American audience, but I hope you'll bear with me on that, just to say that one of the reasons that we acknowledge the importance of macroeconomic stability for economic growth is we have a very large program in Uganda. We actually have, I think, two staff members in Emanuel's ministry, if I'm not mistaken, working on poverty reduction, and if I just compare our work in Uganda with other countries in Africa, Zambia, Zimbabwe, we can really see the benefits of working with governments who have a genuine sense of national ownership for poverty reduction strategies, who have really placed poverty reduction at the center of macroeconomic policy, and it does seem to me that there's an awful lot that can be learned here in Washington and in this building from the experience of Uganda.
And I think reverse flows of advice from sub-Saharan Africa to the International Monetary Fund may be institutionally painful, but I think it's also important and there are very significant potential benefits.
There are three themes that I want to address in this paper. The first is to address the question of whether ESAF programs are actually delivering the sort of effects that were described by you and which are outlined in the IMF paper "ESAF: Is it Working?"
Secondly, I want to address the question of what Oxfam believes is wrong with current design in ESAF programs. And I want to conclude by saying something about the ESAF reform process.
First, when this document appeared on my e-mail about three weeks ago, it came under the somewhat warlike title of "Counterattack." And a rather militarist ring to it. And it sets out to refute what are a range of what it terms "misunderstandings" about ESAF and the misunderstandings include the misunderstanding that ESAF does, in fact, generate very high growth or higher rates of growth, that it has contributed to significant improvements in human development, and that it has protected the access and enhanced the access of poor people to basic services.
Having opened the doctrine with some trepidation—and I read it—I must say I reached the conclusion that if this is a counterattack, that the generals are really taking the troops off in the wrong direction in pursuit of the great red herring because it doesn't address what we would regard as many of the most basic problems in the record of ESAF.
And I think more worrying than that is the fact that it doesn't address some of the fundamental problems that it ought to be addressing about the relationship between ESAF performance and progress towards the 2015 human development targets. Start with the claims that are made on economic growth. It's argued that over the past two to three years, we've seen a surge in growth under ESAF, that average growth rates have increased to 2.5 percent per capital. And so the implication is that after a 15 year warm-up period, the benefits of ESAF are finally kicking in.
One of the problems with the methodology using this sort of approach is the sort of huge aggregations that are made and the averaging out of data across different groups of countries. For me it reflects some of the problems of possibly having too many clever statisticians gathered under the same roof.
Now it might be argued about Oxfam that we don't have enough good statisticians gathered under our roof, and I think that may well be true, but we attempted to disaggregate some of the data and ask ourselves, well, how ESAF has performed in the countries which are furthest off track for the 2015 human development target sub-Saharan Africa. If you did it for those countries, the average growth rate goes down to about 1.9 percent.
Now, just to give you some indication of what that means in relation to 2015 targets, it's less than half of the required growth rate for halving world poverty. The issue that I would have really liked to have seen addressed in this paper is that one: what do we need to do to boost the growth rates to get us within range of achieving that target?
And if that issue had have been addressed, I think the question of equity in income distribution should have been addressed and it's hardly addressed at all in this document. If you look at some of the previously categorized five star success stories of ESAF, Ghana downgraded in recent years to a three or four star success story, there have been very serious problems documented both by the Fund and the Bank about the distribution of income. The poorest parts of the country, the northern Savannah region, have achieved negligible levels of growth and poverty reduction under ESAF. Clearly, this is not just about the design of ESAF programs, but it is about the integration of ESAF programs into the national macroeconomic framework.
Let me say that we recognize absolutely that the growth performance achieved under ESAF is not just about the design of ESAF programs. Issues of national ownership, of national commitment to policy reform, are clearly important. I think it's clearly the case in Uganda; you have a government which is strongly committed to macroeconomic reform, which has had the capacity, the institutional capacity to drive reforms forward and to integrate those reforms into poverty reduction framework.
But I think it's all too easy to write off the experience of countries which haven't achieved what Uganda has achieved. There is, it seems to me, a sort of iron law of ESAF which the Fund tries to get across. The iron law basically states countries which do well under ESAF do well because of our policy advice, countries which do badly under ESAF do badly because they don't follow our policy advice, and it's really a no-lose scenario.
I think the real picture is much more complicated than that. The fact that about three-quarters of ESAF programs are interrupted before completion to me reflects serious problems in the design and implementation of ESAF. Many of these problems were addressed in the external review which in some ways appears to have disappeared from the agenda all together.
Let me turn to the issue of social policy. Various claims are being made about the consistent record of ESAF in enhancing per capita spending on basic social services. And again, if you look at the document, which was produced last year by the Fiscal Affairs Department, it made this claim again. If you take the trouble to go and look at the data that the averages are based on, you get three or four countries in the case of education per capita spending. You get countries like Georgia and a couple of others that escape me which have per capita increases in education spending of 18 to 20 percent plus.
You then find that about 14 countries in sub-Saharan Africa have actually suffered per capita declines in education spending under ESAF and indeed that the overall level of per capita spending in sub-Saharan Africa under ESAF before and after ESAF programs has gone down about 0.2 percent a year.
Now this is a region with 150 million children out of school and we are working directly with communities who are at the sharp end of budget decisions to cut spending in basic education. To give you an example, we're working in the Shinyanga area of Tanzania with community education groups where you have classes of 50 children who are sitting in schools with only one or two books per classroom, with no pencils, with no blackboards.
Now the Fund had made a great deal of the fact that the education budget has been defended in Tanzania and that's right, it has been defended. It's been defended at a level of about 80 cents per pupil expenditure in primary education. That's not good enough. And I think our concern in this area is not just about underfinancing. It's not about blaming just the Fund, but it's about trying to integrate fiscal policy and public expenditure targets with sector strategies for education, and as in the recent public expenditure review in Tanzania, produced not by an NGO with leanings towards what Mr. Boorman may well describe as bolshevism, but actually produced by bilateral donors and the Tanzanian government. So the social sector financing issue is an important one for us.
And again we took the liberty of reworking some of the Fund's data on child mortality rates. This document sets out some of the achievements that have been made in four or five social indicators. Actually if you look behind the figures, you find that the trend for those indicators doesn't change one way or the other before, during or after ESAF programs, but for us the more serious issue is this one: that if you look at child mortality rate trends in ESAF countries, and we've charted these trends in a graph in the paper which you can collect over there, the sub-Saharan African countries with ESAF programs are going to miss the 2015 targets reducing child mortality rates by about 70 percent. That translates into millions of unnecessary child deaths.
So what do we think is wrong with IMF program design? First of all, in our view, the Fund remains an essentially "one club golfer." It has an overarching emphasis on one aspect of the development process and one aspect of macroeconomic reform which is the targeting of monetary aggregates and inflation. It has an approach which says let's have stabilization targets first and ensure that other aspects of government policies are geared towards the stabilization targets. We believe that approach to be turned on its head and I think that's the direction that some of the new thinking is moving in.
Secondly, our view is that insufficient efforts are being made so far to consider the implications of ESAF programs for poverty reduction. Where monetary aggregates are set, where public expenditure targets are set, are issues which have profound implications for poor communities, and if you look at policy framework papers, there is no serious analysis of what IMF targets and conditions mean for poor communities. There's no analysis of potential tradeoffs between perhaps inflation on the one side and children in school and higher rates of potential growth on the other side. These are important questions which have to be addressed.
Thirdly, the one area which Emanuel and I agreed with each other was on the treatment of aid flows under ESAF programs. There are many countries which are sitting on large amounts of foreign aid which is being insulated in reserve bank accounts on the grounds that allowing it to go into the domestic economy, into social sector financing, would have inflationary implications. It also has implications to have large numbers of children sitting out of school. And I believe it has to be fundamentally wrong that countries that have stabilized or are making progress towards stabilization, that have secure long-term commitments of aid flows, and I agree with Hugh that multi-year aid commitments are important in this respect, that a far more relaxed fiscal framework is viable.
Fourthly, we believe that ESAF programs have failed to accommodate human development goals. I've already referred to the Tanzania public expenditure review. I'm willing to take on the chin some of the criticisms that Mr. Boorman has made of our advertisements. I stand by it, but I accept the fact that he's upset by it. Perhaps he prefers the more detached way of saying precisely the same thing, which is in the external evaluation of ESAF by the independent experts, which says in black and white that in many cases reductions in budgetary provision for vital social services under ESAF have been unnecessarily deep.
We call that a policy choice which has resulted in children being out of school and we say it as we see it, but I believe the external evaluation says roughly the same, reaches roughly the same conclusion.
So looking to the future, what do we see as the important direction for ESAF reform? I think behind the differences on this table, at least in rhetoric there is a commitment to reverse the process of ESAF policy design and to start from the development of national poverty reduction strategies and to gear monetary policies towards the achievement of human development goals. That has to be the right starting point and that's certainly the starting point that we and I think other NGOs will be pressing for.
But I have to say there are some aspects of this sort of evolving reform agenda which worry me. One aspect of it is the sort of assumptions about the division of labor between the International Monetary Fund and the World Bank. What some of the documents before the board currently say is that poverty reduction happens on that side of the street; macroeconomic policy design happens on this side of the street.
Now I would like to believe that it's going to be possible to integrate these approaches. I don't think that sort of compartmentalization is the right approach. It's certainly not the sort of approach which is envisaged, as I understand it, under the Comprehensive Development Framework of the World Bank and I suspect it's not the approach which the new head of your Interim Committee advocates, the British Chancellor Gordon Brown, who has made a very strong case for the integration of macroeconomic policy into the design of poverty reduction strategies.
I think broad principles are one thing. Moving from principle to implementation is going to be difficult and I think that there are real and fundamental issues about the design of ESAF that have to be tackled and it's just a question of changing the name of the program. It's about changing the way that it works. And changing the way that it works I think demands that Fund staff contribute to the development process in a far more active way. One way I think is that different monetary policy alternatives for achieving human development goals have to be clearly spelled out.
The distributional implications of different monetary and public expenditure policies have to be spelled out with all of their implications for equity and poverty reduction and we have to have a far clearer understanding of what are the growth processes that are most effective in converting economic growth into human development.
And this isn't a question of saying give it to the World Bank. I mean frankly the World Bank has a pretty disastrous record in this area. This has recently been pointed out by the Operations Evaluation Department, which makes the point very strongly that the Bank is not particularly good at poverty reduction in its structural adjustment policies. I think above all we have to avoid the dangers of sort of bolt-on approach which says let's get the macroeconomics right on this side of the street and let them over there design a social welfare safety net that we can bolt on to it. We know that approach doesn't work and it's not good enough.
And let me conclude a positive note. We believe in Oxfam that, yes, there is still a large gap between the rhetoric of the Fund and the practice of policy change. We believe that closure of that gap is absolutely critical for our shared goals in achieving, for our shared commitment to the 2015 human development goals. In my view, there is a cause for optimism. I think there is a new mood of openness in the Fund. There is a new commitment to dialogue in the Fund and I think serious debates are going on in the Fund. I think as NGOs, we have responsibilities to engage with that debate and Oxfam will certainly be attempting to do that. Thank you very much.
MR. BOORMAN: Thank you, Kevin. I appreciate the positive and upbeat conclusion. I think there could be more of it, though. I mean there is more of a connection to what you're saying and I think what we're saying. Let me take just one example, if I may.
The purpose of the poverty reduction strategy paper and what I said about having an endorsement of the framework developed hopefully first and foremost by the authorities and then driving the operations of the two institutions was, in fact, and is, in fact, primarily and importantly aimed at avoiding what you call the bolt-on approach, so that you don't have a macroeconomic framework developed in isolation from the programs of the Bank, the program of organizations like your own, but that there is a bottom up development of a framework that takes account of the budgetary needs and the budgetary possibilities, as Mr. Bredenkamp said, from aid inflows that builds that up into a macroeconomic framework that is developed on an iterative basis.
So I hope that some of the ideas that lay behind the new proposals, in fact, help address some of the things that Mr. Watkins see as wrong in current operations.
We were scheduled to go until four. We started a bit late and perhaps, therefore, we can spill over a little bit. I'm a little bit uncertain about how best to proceed. There is so much in Mr. Watkins' statement, I think it would be a nice speech for the opening of a day-long seminar on many of those issues, and I mean that very positively. It's obviously full of research and full of critical points that everybody needs to take seriously.
Let me suggest, though, since we don't have a full day seminar ahead of us, why don't I open the floor to questions and then at the end give all the speakers perhaps a couple of minutes to react to each other or to conclude as they would like as well as answering questions that come up from the floor. Yes, sir.
QUESTION: I see that economic growth is something which is highly commended, but are we actually looking at genuine economic growth? Or are we forcing these countries to sell their assets, their natural assets, water, soil, minerals and we count this as growth? And this pervades the whole national accounting, the balance of payments, and the fiscal balance. Are we really genuinely measuring growth?
MR. BOORMAN: Would someone like to react? Emanuel, would you? Emanuel?
MR. TUMUSIIME-MUTEBILE: Well, even if you are selling minerals, the minerals are produced. That's growth. Unless you are saying that the minerals are being—if the minerals are being picked off the beaches, that would be value added in the wages, so I don't understand your question. I mean obviously the question about sustainability of natural resource use, I agree that we must make sure that the use of natural resources is on a sustainable basis, that we don't deny future generations of the benefits of these resource endowments, but I cannot see how you can deny that if we are exporting, we must be growing.
Certainly in the case of Uganda, most of this growth is in terms of agricultural output and this is food, this is coffee, this is cattle. It is economic growth.
MR. BOORMAN: I think the key is the two points on sustainability. You don't want to be just exporting the wealth of the country from the mines and from the fields of the country. It has to be on a sustainable basis. The other issue touched on also is the value added, that there is something other than mineral exploitation. There is also development of industry, industry at home, and certainly some of the reforms that Emanuel spoke about that are going on in Uganda are aimed precisely at that, development of private sector, investment incentives, for example.
Yes, ma'am, in the red sweater first. Sorry.
QUESTION: Thank you. I'm very positive. I think it's very positive, this move towards ownership and also linking in with development targets. I'd be interested to know whether this means that there will be a change in conditionalities applied and whether there will be a move towards more outcome types of conditionality rather than policy conditionality?
And also in terms of the external review, something that wasn't mentioned was the recommendation that there should be social impact assessments applied to programs before they are implemented. And there were six pilot case studies supposed to be running that started last year. So far there's only been one for Cameroon. I'd just like to have comments on that, please.
MR. BREDENKAMP: Okay. On the first question, I think it's often not appreciated that IMF conditionality is actually a fairly complex animal and it does consist partly of conditions on policies in the sense of what we refer to as performance criteria. Those are invariably defined solely with respect to policies, but we do also have the concept of program reviews, which focus not only on policies but also on outcomes and the extent to which the overall thrust of policies is achieving objectives and also the extent to which the objectives remain appropriate.
I think in this new approach, we will continue to use that combination of those two elements. We will not, I don't think, ever be in the business of putting performance criteria on poverty reduction. For example, just as we don't put performance criteria on inflation reduction or growth. What we do envisage doing and, as I said in my remarks, we haven't yet made any decisions on this, but what we envisage is that we would include in programs some conditions on key measures which the poverty reduction strategy has revealed to be key to the achievement of the government's goals.
For example, if the whole strategy depends on land reform to reduce poverty over the three year period or whatever, then we could well see land reform measures as being a condition for the program. But we might well envisage in program reviews taking broader account of the extent to which countries are implementing their poverty reduction strategies. That would have to be very much more judgmental process.
On the pilots, there is a short write-up on these in the status report on follow-up to the ESAF reviews which we put on the web and I think there may be hard copies available at the back there. I think you're right to say that progress there has been slower than we had hoped. I think that is partly due to the fact that we selected cases that were deliberately—we deliberately selected cases that were challenging to some extent and they have turned out for reasons that we didn't anticipate to be more challenging than envisaged even. We've had war in Ethiopia. We've had severe macroeconomic instability in Zimbabwe. We've had Hurricane Mitch in Nicaragua. We've had political obstacles on privatization which we've been grappling with in Vietnam. So for a number of reasons, this work has not gone as far as we would have liked.
But we hope that the new approach in any case which we do, as I said, we do envisage beginning to try and apply the poverty reduction strategy approach in these pilot countries, this will give a new impetus to that work.
MR. BOORMAN: In the blue jacket over here.
QUESTION: Jessica Woodruff. Having read the joint paper on the poverty reduction strategy, I was prepared to come to this with quite an open mind as to what the Fund might be doing. I therefore found Mr. Bredenkamp's presentation a little disappointing because obviously the key point here is what are going to be the real implications of such a strategy?
And we heard from you that the donors will need to provide more and we heard you outline a variety of increasing demands on governments, but then when it came to what the IMF was actually going to do, the only thing that you said was that the core principles of ESAF would remain intact. Can you perhaps enlighten us a little more about what the implications will be?
Your Managing Director yesterday said that this was no time for complacency, yet that does seem to be what is still there when it comes to ESAF. Perhaps you could tell us what the specifics are in terms of the kind of ground-breaking new analysis that we can expect from the Fund on what kind of macroeconomic policies are needed if we're really going to achieve pro-poor growth?
MR. BREDENKAMP: Okay. I thought I did address this point, but let me try and do so again. I think that including from the point of view of Kevin's analysis that the most important implication of this approach for the way that we put together ESAF's supported programs is the potential that it provides. In fact, the potential that it will insist on realizing, given the way the approach is formulated, on starting from an analysis, if you like, a bottom up approach to government spending needs rather than the approach that we have typically followed in the past which is to make an assessment, our best estimate of likely financing, likely resources available to a country, put in an element of ambition which we usually do in the form of financing gaps, which we then go out and try to fill, but then design a macro framework that's basically consistent with that.
I think what this approach will provide for is a more bottom up analysis of the country's public spending needs and because both Bank and Fund programs will be linked to the strategy and the strategy will develop the social programs and the poverty goals, the macroeconomic framework will be consistent with that strategy. Then it seems to me that it is an important innovation, that this framework will provide for consistency between macroeconomic framework and, if you like, needs based public expenditure approach.
MR. BOORMAN: Emanuel.
MR. TUMUSIIME-MUTEBILE: Did you expect a new macroeconomics for poverty eradication?
MS. WOODRUFF: I was hoping that we might go beyond protecting social spending and what I'm not hearing from you is anything other than looking at the budgetary constraints. What I'm trying to get at is you've said the core ESAF principles would stay the same. Do you think that there is any kind of reevaluation of the core macroeconomic analysis other than budgetary constraints which is needed in order to achieve pro-poor growth?
MR. BREDENKAMP: If you're asking me do we continue to believe that macroeconomic stabilization, that market liberalization, that investment friendly reforms, that openness to foreign markets are important if not prerequisites for growth, then the answer is we still believe that to be the case. And that is when I say that core elements will remain, that is what I mean.
I don't think frankly that there is any reason if you look at the accumulated evidence on experience of countries with economic growth and adjustment policies, there is no reason why people should still be questioning the importance of these policies and it was that that motivated my remark that many NGOs, I think, are being left out of the loop or are falling behind here because there is in most, among most commentators, this is now becoming common ground. And we continue to believe that's the case.
For example, to take a specific example that Kevin raised, I don't think that it's ever going to be good policy to finance social spending by higher inflation. We know that inflation, to the extent that it raises resources at all, it's as an inflation tax and inflation tax falls mainly on the poor. That doesn't seem to me to make any sense at all and, in fact, I think the Oxfam report is inconsistent on that point.
If we're going to have more, devote more resources to poverty reduction, they have to be real resources and that's why I put the emphasis on donor financing because those are the only resources that a country can obtain from outside of its own—from outside.
MR. TUMUSIIME-MUTEBILE: I think this is very important to make this very clear. There is no new macroeconomics out there that relates to poverty eradication that was not in ESAF before. This is not a matter for the Fund. It's a matter of economics. Now, what you can ask is that the programs should be more verbally based. The programs should remove bias against rural areas where most of the poor live. The programs should make sure that the growth is broadly based. The programs should make sure that the regime, the trade regime, is more open to enable, more open and less distortionary to enable the allocation of resources to move to their best use in the economy. These are all sensible economic policies.
They are not owned by the Fund. I think all governments, all sensible governments, should be pursuing those policies and, you know, we're beginning to be a little excited about the Comprehensive Development Framework of the Bank. To the extent that we are talking about considering options, let's be comprehensive. Let's consider all the things on the table.
But to the extent that the investments are government funded, those investments can't escape the hard budget constraints. Of course, if you can find some money from Oxfam which is not part of the government budget and which we will go to eradicate poverty in some part of Uganda, well and good. But if you are talking about government expenditures, it is actually being very anti-poor to give them the impression that you can go ahead and ignore budgetary constraints because the results will be inflation and inflation is the biggest enemy of the poor.
MR. BOORMAN: Thank you, Emanuel. In the back.
QUESTION: I have two questions. Ted Van Hees is my name. First, following up on the question of the ESAF pilots. I thought given the recommendations of the external review, this was an opportunity for the Fund to show that it should reach out as was recommended in the external review towards the government, broad layers of the government, and also society and start in these pilots a real consultative process with inclusion of civil society and other stakeholders.
As far as I have seen or heard about it, maybe I'm wrong, but it's my question, then are these just desk studies made in Washington? I asked about this in Nicaragua and other countries and even the ministers, for instance, the Minister of External Relations didn't know about this pilot in his country, and then he referred to me Central Bank and Finance Ministry to find out. And there I became not much wiser either. So how does this impact your view on future ownership?
Second, Mr. Bredenkamp said that the reform process of ESAF, and I think that's right, is a very complex and time consuming process. Isn't it the right moment now to acknowledge that you shouldn't link up to such complex processes as the debt relief and the HIPC reform process and the ESAF process to each other? Also, given that all ESAF programs derailed already for three-quarter of them. So I'm quite skeptical about the new ESAF programs, how countries can comply with that and that will delay debt relief. So this may be the moment to acknowledge that or not. Thanks.
MR. BREDENKAMP: Okay. Quickly on the outreach point, I don't think that was meant, that we intended to make that a specific focus of the pilots. It was more our intention to respond to that point in the evaluation in all ESAF operations to try and make those more consultative. And that we do again report on in the status report that I referred to earlier, available at the back and on the web site there's a whole section on that. And, in fact, a large table on all the various counterparts that missions have had in recent months.
On the HIPC link, it is our view that, and continues to be our view, that a crucial element in the HIPC Initiative is that debt relief should be provided in support of strong sustainable policies and that we should have strong assurances that those policies are in place, including poverty reduction policies, which is part of the, as I said earlier, of the motivation for this new approach, should be in place before the debt relief is finally and irrevocably given.
Now we do not take decisions to interrupt ESAF programs lightly. It's only—it happens only in cases where policies have gone seriously off track and where we have at least for the time being been unable to come to agreement with the authorities on any viable solution to those policy problems. Those are not circumstances in which it would make sense to be delivering final and irrevocable debt relief in our view.
MR. BOORMAN: In light of the time, may I say just two more questions and then a few words for each of our panel members. On this side, this lady.
QUESTION: Yes, thank you. I just wanted to follow up on your comment about how to fund the increase or the protection of the social expenditure. I thought that the ESAF were including some clauses that would exempt the expenditures in social sectors like health and education of the limits that you have in a rather tight fiscal policy. By no means I would think that we should fund these expenditures by inflation. That's something that nobody in this room or anybody else would actually propose. However, I thought that when we talk about real poverty reduction programs and when we mean about giving priority to social development, it means give a natural priority to social expenditure within the resources in the country as well.
And so my concern is that when you say it has to be donor funds, it's been proven that that is very, it poses problems for the sustainability of the human development that you can actually get if you pose as a condition that it has to be donor's money, not to mention the problem that each donor comes with a different kind of a program, and so it poses an additional problem in these poor countries of leadership in the social sectors.
MR. BREDENKAMP: I actually said that there were three elements to this. One is domestic resource availability, which at any point in time there's a limit to how much a country can raise in additional resources from its own sources. It is typically an aim of ESAF programs, though, to raise domestic revenue as a share of GDP over time. These ratios are invariably in these countries still too low to support an adequate supply of public goods.
But it's not reasonable given income levels, given the stage of development and so on, to expect countries to fulfil their development needs entirely through domestic resource mobilization. At the time same time, we have to have programs that maintain macro stability. So the residual is donor financing. That's, I think, inevitable, but it is the case that as you suggest that programs do provide for protection of social spending and that's not only in cases where expenditures are being compressed, which by the way is a minority of cases now. And I will come back to that point in the end.
But also, in general, priority is given to social spending in these programs and we generally provide for it, in fact, for a shift in composition towards these priority programs.
MR. BOORMAN: Last, please.
QUESTION: First, let me say that I think this new approach around the poverty reduction strategy offers a historic opportunity to both institutions, and I think we need to do everything we can to make it work. I have a couple of questions. The first question could go to any speaker and the second is for the Fund.
On the first one, I think there's a real issue around government capacity and ownership for developing these poverty reduction strategies. Obviously, there are many exceptions like Uganda which is, you know, far along on the curve. But there are many low income countries where there is not much in terms of locus, capacity or real ownership. I mean putting the question bluntly, if Bank and Fund missions go out, who are they going to talk to, and with what capacity would there be among our counterparts to have a dialogue?
And I don't mean that in the least bit in a patronizing fashion, but just that it does reflect the very real capacity constraints in many low income countries. So the question would be how best do you think that the Bank and the Fund can assist countries in developing such capacity and the broad-based ownership that we've talked about?
The second question is for the Fund. How would you see the tradeoff between such ownership which is going to take time to build up and timing in terms of the short-run objective of delivering a program of assistance? I mean I've heard sort of skeptical comments about, well, the Fund has got its own time, it's got its own deadlines and time frame and, you know, these things have to march on regardless of the capacity of the country to respond. I mean I'm putting that in an extreme form.
MR. BOORMAN: Sure.
MS. ROBBINS: I think the real tradeoff is that I think we all share the objective in wanting to help countries develop this capacity to put in place a good poverty reduction strategy, but if that's not already in place, what then happens to the short-run objectives of delivering programs of assistance whether they're linked with HIPC or whatever? Thank you.
MR. BOORMAN: I wonder if maybe both Emanuel and Kevin could address the first question. Emanuel because the way you put it was Uganda now has in a sense this capacity, which is true, but Uganda also started from ground zero, I believe, as far as this is concerned. I wonder if in that experience, Emanuel, there are lessons that you can convey to others who are now unfortunately similarly situated?
MR. TUMUSIIME-MUTEBILE: Reluctantly because I'm not in the habit of providing advice to countries on how to begin reforming, but seriously capacity can be built up. I think people tend to forget that in 1986, Uganda had little capacity in all fields, in most fields. But certainly we have been able to build up the capacity of the Ministry of Finance and Planning very fast. But it requires openness. It requires, you know, being willing to accept that you don't have the capacity and that you need to build it up and therefore being willing to accept that you have to use foreigners to build up that capacity. And being lucky in your choice of foreigners so that it can be those who want to come and build the capacity and go back or build the capacity and join the fun like a number of people can share the buck. So it's a bit a mixture of luck and good relationship and a pot of money.
MR. BOORMAN: We keep coming back to the same point. Kevin.
MR. WATKINS: Well, I suppose that ownership is really the core. Ownership and capacity is really the key to development of successful national poverty reduction strategies and I guess one of the problems which is emerging in relation to ESAF is that many countries or the few countries that have the capacity often don't see eye to eye with the Fund and this causes problems of ownership. And I think Vietnam would be a very strong case in point there. And I think that raises a whole set of fundamental issues about how the Fund and the wider donor community design policy alternatives that governments can develop a sense of ownership.
And I think the strategy of setting out one set of policy options, which is the current policy framework paper approach, is the wrong one, and the external review recommendations that the Fund should be setting out a range of policy options which should be elaborated through general dialogue with government and line ministries is the right one.
On the broader question, I think there is —the Uganda factor always weighs very heavily in these. There's a sense of which everybody loves Uganda. I mean the Fund loves working with Uganda, the Bank loves working with Uganda, and I can well remember that when Oxfam started working on debt, it wasn't entirely coincidental that we chose Uganda as the first country that we worked on. And this was in the days when the Fund, for example, was saying that Uganda didn't have a debt problem, and it was a pleasure for us to work closely with the Ugandan government because you had a government where you could argue very strongly that if this government got debt relief, it could actually use it for genuine poverty reduction purposes. If you're trying to argue that for Kenya, it doesn't go down particularly well with the public unfortunately and since none of us want to buy another set of gold taps for Arap Moi, sort of developing advocacy strategies in other areas were very difficult.
And I guess in a sense here we have to ask why is it that Uganda has been a success story and to do a sort of serious analysis of that and look at some of the lessons and as I said, we've been involved in a small way in this process in Uganda, really from, I suppose from 1995–1996, when the Ugandan government itself became increasingly concerned that the sort of growth that was happening under ESAF wasn't being distributed in a pattern that was generating optimal rates of poverty reduction, and out of that process evolved the poverty eradication action plan.
I have to say I think in one sense the key to success in Uganda is, first of all, you know, there's a tension in a lot of countries that poverty issues, that poverty is an issue dealt within social sector ministries, and I think in Uganda the fact that you now have the sort of participatory poverty assessment work being carried out under the auspices of the Ministry of Finance, you know, reflects something very, very important because it underlies the way in which it's really being brought into the heart of financial policy.
And, you know, and I think the point about the pot of money is an important one because one of the first things that happened in Uganda is these five or six working groups were established, you know, looking at poverty and rural infrastructure, poverty and health, poverty and education, and it was developed over a long time and it was well supported by the donor community.
And I guess on the donor side, there's sometimes a problem where you get this response, well, we'd like to give more money, but there's no absorptive capacity. The capacity actually requires investment and, you know, there's a chicken and egg scenario there. But, you know, I genuinely think there's an awful lot to be said for sort of shared analyses of why it is that Uganda has worked well and to look at what we can learn from it.
MR. BOORMAN: Hugh, on the last point?
MR. BREDENKAMP: A quick point on the timing question, which is a good one, and it's one that we'll have to think more about working with the Bank. But I think the one element that we're going to have to introduce which will be a bit of change in culture is de-linking, at least in a scheduling sense, our work on ESAF programs and our work on advising and being part of this poverty reduction strategy approach.
I think one of the reasons why the PFP process has not worked as well as we would have liked, I think, is because it is being driven by the ESAF time table. If we're serious about the poverty reduction strategy being homegrown and government-led, which we are, then clearly that link has to be broken in some way.
And how do we reconcile that with the requirement that one of these things be in place and be a framework for an ESAF supported program is something we're going to have to work out.
MR. BOORMAN: Thank you, Hugh. Let me give each of the speakers, if they wish, a chance to make some final remarks, and I will give Kevin Watkins the last word to rebalance the perceptions a little bit. Emanuel.
MR. TUMUSIIME-MUTEBILE: Thank you, Mr. Chairman. I guess I should say that part of the problem that Kevin is trying to deal with is a problem caused by the Bank and the Fund by wanting to claim that these policies are theirs. Maybe if we didn't have the word ESAF and we didn't have the word structural adjustment program and simply asked the Fund in the case of Uganda provide money for the poverty eradication action plan, I guess there would be less of a quarrel because why should the Fund have a policy on Uganda? Why shouldn't Uganda itself design its own policies and ask the Fund to fund it?
So I guess if we want to move ahead into the new millennium, let's embrace President Wolfensohn's idea of the Comprehensive Development Framework. Now this framework needs, I think, to be more sensitive to the need for macroeconomic balances to be, the need for macroeconomic stability, but this Comprehensive Development Framework is important because of the possibility of raising to the same pedestal as macroeconomic stability the concerns about poverty, the concerns about society, concerns about human development, the concerns about transformation of the economy.
If we can go that way, then the Fund should avoid having an ESAF and the Bank should avoid having a structural adjustment program, and should just support the policies of our governments, and then this quarrel would end. I thank you.
MR. BOORMAN: Thank you, Emanuel. Hugh.
MR. BREDENKAMP: Thanks. I guess I would, the general point I would make is that the approach that is now being proposed ought to be seen as a part of an evolution. I think it's a major step in that evolution, but it is part of an evolution in the way the Fund has worked in these countries and the way it's designed programs over at least the last ten years if not more.
And I think if there is a bit of a frustration that I feel with some of what is said about the ESAF, it is a failure to recognize and acknowledge that that evolution has taken place, and I think one of the most important examples of that is the point that we keep hearing about the Fund austerity and programs squeezing public expenditure. I would argue that this criticism is simply out of date and where it applies at all, it applies to crisis situations and I think it was a feature and will continue to be a feature of Fund programs when countries are in crisis.
But that in ESAF countries, I think if you look—and don't take my word for it; go and look at the programs that are published on the Fund's web site—if you look at the programs over the last—that we have approved, support that we have approved for programs over the last two years—you will find that on average those programs planned for an increase in public spending as a share of GDP, which means an even faster increase in real per capita terms.
So I think this notion of the Fund being wedded and dogmatic on austerity is outdated and I think it should be. I think the progress that we have made should be acknowledged and I hope this new approach will actually help to bring about more of a convergence of views between the Fund and the outside world. Thanks.
MR. BOORMAN: Thank you, Hugh. Kevin.
MR. WATKINS: Thank you. I have to say in some respects this has left me feeling very confused because Mr. Boorman started by suggesting that Oxfam was sort of veering towards an extremist stance on the Fund. And outside of this building, Oxfam is often regarded by other non-government organizations as being in the reformist camp. So it's confusing to start with. And I now find Emanuel is arguing for the abolition of ESAF and I'm arguing for the reform of ESAF.
MR. WATKINS: And, anyway, I think there are just two or three brief points I'd like to make which is the first one, I think a lot of us are genuinely encouraged by some of the new thinking which is reflected, especially in the paper on HIPC and poverty reduction, which has gone to the board, and the new thinking about the poverty reduction strategies as a starting point for the implementation of Bank-Fund and other programs. I suppose the really important question to take this debate forward, we need to start seeing some operational details on what this might mean in practice because I think the issues raised are very, very complicated. There's all sorts of potential for overlapping mandates between the Bank and the Fund.
I think there are serious problems with the sort of assumptions that are being made about the role of the Bank as the primary actor in a sense with responsibility for social policy and poverty reduction. We need to think about the role of the specialized U.N. agencies, about interaction with bilateral donors, and civil society and the NGO community.
I think important questions have to be asked about the Fund's own mandate in this. There are a number of assumptions that are being made about the Fund monitoring social policy outcomes. Is it appropriate for the Fund to be playing this role? I have very grave reservations about that, not least because exactly the same sort of work is going on in ESAF and in the World Bank, and I think this is one of the operational details that has to be looked at. So the first plea is really, you know, let's see some details on what this means in practice because I think we need that at a very early stage to start taking this debate forward.
I suppose a second set of barriers are the ones that Jessica referred to in her questions. You know what does this mean in terms of substantive policy design changes in ESAF programs? And you know when you responded to that question, you basically said we're not in favor of high inflation caused by deficit financing. Well, you know, I think we're all in favor of fiscal prudence, but behind that starting point, there are often a range of complex tradeoffs which have to be looked at, and these are issues which are being raised by Joe Stiglitz amongst others.
And I think they have to be addressed in a more serious way. You know we have to look at issues of time horizon, we have to look at the potential for supply response in relation to widening of the fiscal deficit. We have to look at issues around the social costs of adopting particular budgetary targets.
One of the areas that we're particularly concerned about—we've been doing a lot of work in Oxfam in recent years on cost recovery in primary health and primary education. And, you know, if you look at country like Tanzania in primary education, poor households are now spending about three times as much per child as government and these are things which clearly relate to levels of public investment and I think the relationship between public spending targets and cost recovery have to be looked at.
I suppose the third area which we haven't really discussed very much today is the issue of second generation reforms. And I think in Oxfam, we have a strong bias towards saying that the Fund does have an enforcement role to play in this process in setting out monetary policy options for the pursuit of poverty reduction and human development goals. But I'm not convinced that the role—that the Fund has an important role to play in areas like privatization and trade liberalization because I think in many cases trade liberalization does play an important role in correcting distortions and adverse distributional biases.
In other cases, there may be a case for more phased and slower approaches to trade liberalization. In other cases, still for not abandoning protection. I mean I can think of cases in West Africa where protection of basic foodstuffs has been withdrawn which has resulted in subsidized foreign food coming into the market and causing grave distortions in price structures. And I'm not completely convinced that the Fund is the agency that ought to be taking the lead in these areas.
Again, I think the external review made the point very strongly that in many cases the outcome of privatization programs which have been linked to IMF conditionality have been very unsuccessful. And so we would like to see the Fund, as it were, retreating more towards its original idea to focusing on monetary and exchange rate policy and advice in relation to human development and poverty reduction goals.
MR. BOORMAN: Thank you, Kevin. So as not to breach my commitment to give you the last word, let me just thank the speakers for their contribution today and thank all of you for coming. Thanks.
[Whereupon, at 4:37 p.m., the meeting was adjourned.]