Brazil and the IMF
Heavily Indebted Poor Countries -- A Factsheet
The IMF's Poverty Reduction and Growth Facility (PRGF) -- A Factsheet
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Transcript of a Press Conference by Masood Ahmed on
The IMF's Role in Poverty Reduction
Thursday, September 21, 2000
Prague, Czech Republic Masood Ahmed, Policy Development and Review Department
Lucie Mboto Fouda, Press Officer
Ms. Mboto Fouda: We would like to welcome you to this press briefing by Mr. Masood Ahmed. Masood Ahmed is Deputy Director of the Policy Development and Review Department of the IMF. PDR is a strategic department that has a central role in coordinating the Fund's activities on poverty reduction and debt reduction.
Before Mr. Ahmed offers a few opening remarks, I would like to remind you that we are hosting next Saturday, September 23, in the Small Hall, a press conference with six African Ministers of Finance. Now, Mr. Ahmed, you have the floor. Thank you.
Mr. Ahmed: Thank you very much, Lucie, and thank you all. You have had a day when a number of people have spoken to you about the work that the World Bank, and in many cases jointly, the World Bank and the IMF are doing to help countries deal with poverty issues. So what I thought I would do now is focus on how the Fund is working to support poverty reduction in conjunction with the World Bank and other agencies. And I want to focus within that on two areas, and of course, if any of you have questions on any other areas, please feel free to raise those as well.
One is the question of supporting debt relief in poor countries, the issue of HIPC; and second is how the Fund's programs, the programs of economic reform that the Fund supports in poor countries, are themselves changing. On HIPC, I'll simply say that, as you have heard, we have now done 10 countries that account for about $17 billion of the debt relief. We are confident that we are doing everything we can to bring as many countries as possible to the point where they can begin to receive debt relief by the end of next year, and the number that people are aiming for is about 20, and we are working very hard to achieve that.
There are a whole set of questions about HIPC that, if you would like to raise further, I am happy to talk to, but what I'd like to say a few words on at the beginning is how the Fund's programs not just in HIPC but in all poor countries, are beginning to change.
As you know, until last year, the main way in which the Fund supported economic reform in poor countries was through a facility called ESAF, the Enhanced Structural Adjustment Facility. As you also know, ESAF was reviewed internally and externally, and there were some lessons that we drew from those reviews. Last year, as part of the move toward the Fund and the Bank working together to support countries in their nationally driven poverty strategies, the Fund replaced ESAF with a new facility called the Poverty Reduction and Growth Facility, or PRGF. Now this new facility has been under way for eight or nine months, and the question that many people have been asking is how is the Fund's work under the PRGF different from what we used to do under ESAF. Is it simply a change in name, or is it a change in the way in which we approach the reform process?
In the packages you have in front of you I would recommend to you the last paper, which is a note that we have just produced for our Boards and for the Ministers who will be coming to the meetings, which sets out exactly how the PRGF will differ from the Fund's previous programs in ESAF.
I am not going to walk through the whole note, but I will make three points about it. First, the PRGF is going to differ from the ESAF in the much greater focus on placing the PRGF within a nationally developed and nationally led economic development strategy that is itself focused on poverty reduction.
So what we are going to be supporting under these programs will have to link much more explicitly into the nationally-driven process, and that means that the process of ownership of those reforms hopefully will be enhanced through that. It also means that under the programs the Fund supports, there will be more flexibility in terms of looking at the sequence of reforms, in terms of looking at the pace of reforms, and in terms of looking at the way in which countries feel they can best move toward the objectives of growth and poverty reduction.
The second way in which the PRGF programs are going to be different is a greater focus on the way in which countries use and manage their budget resources, public resources. It is partly a question of looking more carefully at the money being spent in the budget that it is targeted more directly toward poverty reduction.
It is partly a question of making sure that if there are cuts in the budget because you have to adjust, or if there are increases in the budget, these are done in a way that focuses on their impact on the poor and on supporting poverty reduction.
It is also partly a question, however, of much greater emphasis on public expenditure management systems to better track resources, to make sure that the money that is supposed to go to schools actually goes to schools, and in fact, in many countries today, to develop the government's database so that they can say how much of the money that was allocated to primary education in fact made it to primary education. This database is of pretty poor quality in a number of countries, and it takes a long time for those data to feed back. So, there has to be much greater emphasis on tracking public expenditures, both to make sure that the money is actually going to the right place and also to make sure that it is not getting stolen along the way, because sometimes there are problems about the way in which the money flows through the system.
And the third change that I think the PRGF is going to lead to in the way we work is a much more systematic assessment of the impact on the poor of important economic or other reforms like privatization or trade liberalization before those reforms are undertaken. So that if a country decides that it needs to go through a process of liberalizing trade because that's the way it is going to get more efficient growth in the industrial sector, that's certainly a very important thing to do: we would very much support it. We were just having a conversation with one of the media colleagues present here on that issue. It is not that trade liberalization is no longer important, but rather that when embarking on trade liberalization, it is important to look at what is the impact likely to be on the poor, and then to help put into place measures that will better protect the poor during the transition.
So those are three important ways in which these programs are beginning to change. Now, these change are already happening. They are happening in a number of the country programs that are coming forward. But it is a gradual process, because the programs are coming forward at the pace at which the countries-since they are now very much driving the pace-feel they want these programs to come forward. I expect that over the course of the next year, we will see more and more of these features being incorporated into the design of Fund programs in poor countries.
Let me stop with that and invite you to ask any questions or offer any other observations.
Questioner: You mentioned the changes in the way the IMF would approach the structural reforms. Can you give me an example, in the case of Brazil, for instance, of what would have been done differently if this new approach were already in place two years ago when the Brazil started its agreement with the IMF.
Mr. Ahmed: I can't give you an example for Brazil, because Brazil isn't a country that is eligible for the PRGF. But I can give you an example that will help you to see what kind of thing I'm talking about, just to make it more concrete.
Let's suppose that in a particular country, you have a program to privatize a company that produces sugar. Let's assume there is a publicly owned sugar-producing company, and you need to privatize it, cut it back, and maybe in the process you recognize that you will have to slim down the work force, reduce the number of people working there, because the private owners want to make it more efficient and feel that they can do so only if they cut back on the work force. The government may decide that that's an important thing that it wants to do, because at the moment, that company is costing the budget money that could be spent on primary schools or primary health care. So clearly, it is not necessarily a good idea to keep supporting a company producing sugar and employing maybe 3,000 people if that is taking up a large chunk of money that could be used better for primary schools or primary health care.
But what I think would be the difference is that now, systematically, as you embark on that process, you want to look and see what is the likely impact of this going to be on the people who are going to be made redundant in that process, who are going to lose their jobs, and see how you can put into place a safety net that will help to protect them and help them through that process of transition.
In many, many cases, the design of the safety net is not something the IMF is going to do, because we are not particularly or necessarily the right agency for doing that, but the World Bank is frequently going to be involved in these projects, and it is very much a partnership with the Bank in the PRGF countries, so the World Bank staff might be the people helping the country to develop a safety net, or other people might do it-the country itself might have its own design of a safety net. So the kind of change I'm talking about is that kind of ex ante review of the impact of the structural reform measure as part of the process of deciding on the timing and pace of reform.
Questioner: I was just wondering if these are changes to the way the IMF operates. Are there examples where the IMF did not do this, or if it did not do these, are there examples maybe, if not in Brazil, where the IMF now thinks it would if it could do it again do it differently?
Mr. Ahmed: I think these are examples of how one would systematically try to do things that the IMF has been doing in many, many countries but may not have been doing systematically in every country. So we haven't done an ex post review of every program to see if you were to do this now, how would you do it differently. What we are drawing on is not new rocket science, but rather, applying good practice systematically across countries, which was done in many, but maybe not all, cases.
Questioner: I was just wondering-are the PRGFs about to start? How much have you lent out under this program already? I don't see any in this list of countries that have actually received funds under this program.
And, second, the fact of the matter is if a country has to adjust by force of circumstances, it has got to adjust, and you can look at how certain measures, such as cutbacks in public spending, are likely to affect the poor. But there has to be some adjustment made. So what is the net difference between this and what you did in the past? Ultimately, they have to adjust, and people are going to suffer and get hurt.
Mr. Ahmed: Let me take your second point, and then I'll come to the first one.
The second point is an important substantive point: given that countries have to adjust in the end, is any of this stuff going to make much difference, to put that question in a nutshell.
I think there are two ways in which it does make a difference. Let's say there is an exogenous shock to a country-maybe the terms of trade worsen-and it has to cut back on public expenditure. In this particular case, rather than saying it doesn't matter how you cut back as long as the macro cutback is the same, you would look at the impact on the poor of different ways of cutting back the same amount from your public expenditure. And therefore, you may choose to in fact cut back more by, for example, accelerating your program of privatization, to stick to the example we had earlier, but protecting primary health care and primary education because you believe that in that particular instance, in that country's circumstances, that would minimize the impact on the poor.
So while it's true that countries still have to adjust-the reality of adjustment hasn't changed-the programs will have more of a focus on how different ways of adjusting have a different impact on the poor.
The second way in which the PRGF might differ is that as you're going forward to make your economy more efficient-let's say you want to liberalize markets because that's what you believe is going to accelerate the pace of growth-you do have a little bit of choice on the sequence in which you do it and the pace at which you do it. You may be making some tradeoff in some cases as a result, but countries do have that choice, and it's a choice they can exercise.
On your first question on how many countries have had PRGF programs, in a technical sense, after last year, since we moved over to the PRGF and stopped ESAF, all the programs have been called PRGF programs, but the process of shifting the approach, if you like, the emphasis that I am talking about now, is one that is being phased in, and I think you'll begin to see more of that in some of the more recent programs and going forward.
Questioner: You have identified about five nuanced dimensions to your new strategy. Evidently, this means that the old one did not work, or you would not have changed it.
Number one, you said that you were going to give a greater focus in placing it within national development strategy. Does that mean that the IMF will now participate with the governments in formulating a national strategy?
Number two, you said that there would be more sequence in timing in terms of adjustments. What does that really mean-six months, a year? Who determines that, and what are the criteria?
Thirdly, you said that there is a problem of allocation of budgetary resources. What does that mean-that you will now have the Minister of Finance annually allocate resources within the country?
The other point you raised was if there was trade liberalization. You said that what you would do in such a situation is to see how it will affect the poor and establish the proper safety nets or whatever. What does that mean? Are you going to freeze the [inaudible] model of liberalization out, and how is that timing going to work? What kind of criteria are you going to use to decide whether in three months, six months, eight months, or nine, that you will liberalize? It seems to me that this new strategy is full of a lot of problems.
Mr. Ahmed: Let me try to deal with or respond to some of those concerns about what this means in practice and how much leeway there is in terms of both the content and the pace at which countries to liberalize, and what this means for the role of the Fund.
First of all, let me just be very clear about one thing. If you have a chance to look at some of the work on how the Fund and other institutions should support nationally driven strategies, one of the big lessons of the past, not just for the IMF but for all agencies that have been working in support of development, has been that without a process within the country to define, develop, and take ownership of the reform strategy that they want to embark upon, it is much more difficult to get sustained implementation. So the issue is not whether the IMF will be focusing on deciding what the sequencing ought to be or on helping to allocate resources. On the contrary, I think what we need to be doing is actually providing the space to ensure that that kind of debate and discussion is taking place within the country in a much more open, participative way. That is why one of the objectives of this exercise is to support countries in developing and implementing a strategy and monitoring its implementation with the participation of civil society and of other actors in the country, as well as the donors who will be supporting it.
Now, how much leeway is there in a country that owns and develops a strategy? Is any strategy that a country comes up with, because it is nationally owned, going to be supported by the Fund? That's a very good question. Does that mean that just because it is nationally owned, is that the only criterion, or are there also some margins on content?
I think the answer to that is that in many ways, members of the international community, including the IMF, have to participate and bring their views to the table in the discussion that is taking place in the country, doing so in a transparent and open way, so that if a country were to say, "Look, we would like to embark upon a strategy that is going to be based on hyperinflation and running budget deficits of 25 percent of GDP every year; we think it is a terrific way of growing and fostering poverty reduction," I think we should be willing to say, "That may be the strategy that you feel comfortable with, but based on the experience that we have, and based on the cross-country evidence, we don't feel that that is a strategy that we can support."
I think it is perfectly legitimate to have country ownership and yet for every institution that is supporting it-not just the IMF, but every institution-to have its own fiduciary responsibility and say what they can and what they can't support.
The difference, though, is that there is a wide range of economic development areas where it is not a black or white, zero-one, on-off switch; it is a range in which you may want to move faster or slower, this route or that route, where you can't very precisely say you have to follow this one route to get to this outcome. And it is in those areas where I think the IMF and other agencies are also going to be more flexible in adapting their approach to what the country feels it is most comfortable with doing.
Questioner: I wanted to ask your clarification on something. Is there in applying these new criteria more emphasis on PRGF countries? Because Brazil, for instance, is not one of them. It was not an ESAF country and is not a PRGF country. And what I wanted to understand is, when you apply such policy, are we talking here more about the poorest countries that are highly indebted low-income countries in the context of HIPC and all of that, or is this something that the IMF is going to apply more generally to all of its members?
Mr. Ahmed: Let me just clarify that point because it also comes back to the first question that was raised. The PRGF is a program that is applicable for countries that are IDA countries or countries that rely only on concessional funds. It is for poorer countries whose [per capita] incomes are below about $850 a year.
At this stage, that is what we have been focusing on this joint approach with the Bank. Some of these elements no doubt will filter into the work we are doing in other countries, but this is much more advanced at this stage for that low-income set of countries that I am talking about.
Questioner: Mr. Ahmed, if you could just look at an example of PRGF in practice, I thought it was interesting that you came up with a hypothetical example of privatizing the sugar industry before, because, of course, earlier this year you came under a lot of criticism for pressuring Mozambique actually to privatize its real sugar industry, and eventually I think they were beaten back. Now I have two points here. One is: Isn't this just the imposition of an idea out of the Washington Policy Book that you were supposed to have left behind? And the second is that the other week Horst Köhler told one of my colleagues that micromanaging sugar industries is the sort of the thing that the IMF is no longer going to do. Does this mean that the PRGF is actually being amended and changed quite radically less than a year after it has been introduced?
Mr. Ahmed: Sir, I didn't make the connection between your first and second question. Let me try and answer and see if I have got it right and then if I haven't, I will come back to it.
I think the example of micromanaging sugar industries is precisely an example of what the PRGF is about, not contrary to it, because, as I see the PRGF, it is basically saying that the pace and sequencing of reform and decisions on whether and how to move forward with particular elements of reform-as long as you have agreement on an overall strategy of moving forward-are not the kinds of things that should be micromanaged by any donor. And I don't think that this is something that necessarily donors, including ourselves, ought to be getting into. It is a country decision.
Now we do have one important role to play in that regard. And that is to raise awareness and provide information on what we believe to be the cost and benefits of a particular strategy. So, in that sense, this is coming back to the previous question also: How would we participate in the debate? I think the role that the Fund would be playing in that case is to be laying out what our analysis happens to be, which in this case is that we think that protecting the sugar industry is both bad for growth, because it is costly, and it is not pro-poor, because, in fact, we believe that the costs of that are borne by people who are poor.
So, if we believe that, which we do, the answer is not to say let's insist on it in terms of conditionality, which I think is the point we are moving away from, but rather to say let's lay out the costs of it but it is a decision the country would have to make.
Questioner: I have two questions. First, what led the IMF to discover maybe a little later that the adjustment process deeply affects the poor people around the world when the adjustment process is finished in most of the countries, chiefly in Latin America?
And second, there seems to be a contradiction or maybe a gap between the positions of the IMF and the World Bank because Mr. Wolfensohn and other officials of the World Bank are talking today about the need to fight poverty also in the middle-income countries and you said that only the poorest countries will receive this attention from the IMF.
Mr. Ahmed: On your first question that you raised about why now, suggesting the job is mostly done, first of all, I would say that if you look back over the last two or three years, you will see in a number of ways a greater focus on the challenge of poverty reduction. It is a focus in the work of the Bank, a focus in the work of aid agencies, focus in the international debate on development, focus in the UN goals. So, there has been I think over the last few years a coming together around the central challenge of poverty reduction as being the most important issue that faces the world today.
Second, I don't actually accept that the job is mostly done. Mr. Wolfensohn when he spoke this morning-I don't know whether you heard that press briefing this morning-spoke eloquently about the job ahead in terms of the adjustment, in terms of the numbers, in terms of the inequalities that are growing in the world, in terms of the work that still needs to be done to bring people out of extreme poverty and access to basic services in large parts of the world. Latin America is much further ahead but other parts of the world haven't gotten there yet. So, I think there is actually a huge challenge ahead where we do need to focus.
The other point I wanted to make is that this is that I don't want to leave the impression that the IMF is saying that poverty is only an issue in poorer countries. That is certainly not what I want to say. That is not the IMF view. What I was trying to say is that I was describing an approach which we were working on jointly with the Bank, which is the PRGF approach, for which countries that are eligible are poor countries. But it doesn't mean that the work that we are doing in other ways, whether it is through our surveillance work or through our work in systemic issues globally or whether it is through our work in middle-income countries-doesn't have an impact in different channels on lives of people and on the lives of the poor. It is a different set of programs. And that is why I didn't want to leave an impression that the PRGF was something that was applied across the board.
Questioner: Do you think this approach is going to require a change in the way the IMF recruits its staff? I mean, a couple of weeks ago a senior IMF official said to me, we're rather pleased with what Mr. Köhler has been saying about slimming down and getting back to basics because we're all macroeconomists here. We don't really know very much about development and we won't any longer have to take the decisions on that. Those will be farmed out. But if that is the case, it's not entirely clear where the-again, taking the sugar example, who is the person who knows about sugar who's going to proffer this advice if most of your officials are originally central bankers and macro-academics and so on?
Mr. Ahmed: I can't say whether or not it's going to change recruitment strategy or not. But I will say two words about the question you're raising more broadly.
One is that the notion of focusing the Fund's work more on our areas of responsibility is in my mind perfectly consistent with an approach that says that what we do needs to be more consistent with an overall strategy for poverty reduction. And I'll say one word about why I think that's consistent. The macro strategy that the Fund supports and advises on, the fiscal area the Fund advises on, the monetary policies and the financial sector the Fund advises on, broad approach to liberalization that the Fund advises on, are areas of expertise within the Fund. But what we advise, how we look at macro policy, how we look at fiscal cutbacks, to go back to the example of cutting back on expenditures, needs to be made much more consistent with the impact on the poor and on poverty reduction.
That's not to say though that we should become the place that now broadens out and hires people who start doing detailed analysis of, say, the poverty profile of countries, because that is precisely why this approach relies on this partnership with the World Bank. In fact we see the World Bank taking a leadership role on a whole range of areas including helping countries in the design of poverty strategies, in terms of looking at poverty profiles, in terms of providing technical assistance for safety net design.
So there's a whole range of areas where we need to be conscious of what our policy advice is leading to, but where the implementation and the detailed advice, and the expertise for the implementation lies elsewhere-frequently in the World Bank, and but again, it's WHO, it's UNDP, it's bilateral agencies, its NGOs, it's a whole range of people that are active. In the end, it's really the capacity in countries, in national administrations that is going to make a difference. And it's strengthening that capacity rather than supplanting it by advice from other agencies, that is the key to making it work.
Questioner: I have a technical question. You mentioned that you're going to be trying to track down the allocation of the money. If the money is supposed to go for education and primary education you're going to track down whether it actually ends up there. I'm wondering how are you going to do that? And whether you're going to provide funding and take that funding away if that is not met? Or are you going to wait and provide the funding only after the government meets?
Mr. Ahmed: Good question. First of all, just to be clear, we are not going to track down. We are going to focus on strengthening the capacity in government to be able to help them to track it down. Because it's not so much the IMF that needs to know whether the money was spent in poverty reduction in primary health care or education. Obviously, if national strategies are going to be implemented, they have to be informed by information on how those resources were being spent.
So when I said that there will be a greater focus on tracking of expenditures and on public expenditure management systems it's, I think, an important dimension of where we see a strengthening of support in the PRGF programs.
Then the question becomes, are you going to wait until you have a good system in place before you can actually go forward? And it's the same as in so many other areas where you obviously don't want to hold off providing support to countries that have weak capacity, but you want to be able to move forward with some tangible progress towards building that capacity. I think what we will find is that in many countries, making progress toward better management and tracking of expenditures will be a key part of the timing of Fund support.
Questioner: What does that mean? You said that it relates to the timing of the funding. Are you going to be giving the money as time goes, or are you going to keep the money after?
Mr. Ahmed: I don't think that there is going to be a standard, cross-country rule because it depends very much on the status -it's not a zero-one tracking. You can't say in one country you have no information and in another you have full information. It's a spectrum. If you look across countries you find in some countries you get information but it's with a lag of two years. So the objective becomes how feasibly you can move from a two-year lag on outcomes to a three-month lag on outcomes? How do you support that process? In other countries you may have government money but donors frequently aren't putting their money through the public expenditure system, so you have no idea of money that was spent by donors in primary education because it's not accounted for in the public system. There the answer is to work with donors to be able to bring that within the national system.
So I don't want to leave the impression that it's a kind of simple one-off solution. What needs to be done in each country will be very much a focus of the support and of the discussions that we have under the PRGF programs.
Ms. Mboto Fouda: Thank you, Mr. Ahmed. Thank you for coming.
Mr. Ahmed: Thank you all very much.
IMF EXTERNAL RELATIONS DEPARTMENT