From Despair to Hope: The Challenge of Promoting Poverty Reduction, A Lecture by Anne O. Krueger, First Deputy Managing Director, IMF

IMF News, November 17, 2005

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Published: November 17, 2005

Introduction and framing

Major theme: why growth—sustained and rapid—is the prerequisite for significant poverty reduction in low-income countries (LICs).
Historical context:
- Post-World War II forecasts predicted "stagnation" and persistent unemployment in industrialized countries; prevailing assumptions treated poverty in "underdeveloped" countries as endemic.
- Subsequent experience: activist government-led models, then dramatic success of some low-income countries (notably East Asia) that relied on uniform incentives for individuals.
Contemporary classification: at least three groups of countries—rich industrial countries; emerging markets (market-friendly, high growth, rising living standards); and a large group of low-income countries with little change or regression in living standards over decades.
Central question: why many LICs remain trapped in low growth and what policies and incentives can enable a turnaround to sustained growth and poverty reduction.

Growth as a prerequisite for poverty reduction — key findings

Redistribution limitations:
- Redistribution at very low per capita incomes often amounts to "redistribute the misery" (Amartya Sen quote preserved).
- Example: Guinea-Bissau per capita income less than US$ 200 per year at prevailing exchange rates and not much more than $700 in purchasing power parity terms.
- Highly progressive taxation in poor countries risks strong disincentives to investment and capital flight; enforcement is often infeasible due to widespread evasion.
Growth necessity:
- Rapid economic growth, paired with access to social and economic services (education, health, productivity-enhancing means), is necessary and sufficient for substantial poverty reduction.
Numeric illustrations (preserve original figures):
- 1956 (2000 prices, PPP): Ghana ~US$ 1,874; India ~US$ 900; Korea US$ 1,347.
- 2003 (2000 prices): Ghana US$ 2,114 (only 13 percent above the level 1956); India US$ 2,732 (3 times the level of 1956); Korea US$ 16,977 (nearly 13 times the 1956 level).
- Average per capita growth rates cited: Ghana averaged 0.52 percent per year over the entire period (and 0.10 per cent annually from 1962 to 2003); India averaged 2.4 percent annually (and 2.54 per cent from 1962-2003); Korea 6.07 percent over the 1962 to 2003 period.
Policy implication: prioritize policies that raise productivity and growth rather than attempting redistributive measures that erode incentives and output.

Economic policies for growth — essentials and mechanisms

Sustainable rapid growth defined operationally:
- "Relatively rapid rates of real economic growth—say more than 3 percent per capita—over a period of years."
- Examples: India per capita GDP grew at an average annual rate of 4.3 per cent over the decade starting in 1994; China per capita growth rate of 8 per cent over the same period.
Fundamental policy requirements (necessary, not always sufficient):
- Macroeconomic stability.
- Business environment that protects rights and provides reasonably uniform incentives.
- Provision of appropriate physical and human infrastructure.
- Relatively uniform incentives across economic activities and effective competition (including international trade).
Role of public vs private sectors:
- Both public and private activities contribute to productivity increases (public infrastructure, agricultural research and extension; private investment in equipment and knowledge).
- Incentives facing individuals strongly determine investment and productivity choices; public policy shapes those incentives.
Macroeconomic stability rationale:
- High and variable inflation discourages long-term investment; lenders demand high interest rates for long-term loans.
- Fiscal deficits can crowd out private investment via bond issuance or money creation.
- Example: Peru under Alan García—Real GDP expanded by 12 and 7 per cent in two years after expansionary policy; current account deficit reached 5% of GDP in 1990; foreign debt as a percentage of GDP rose from 73 in 1985 to 165 three years later; subsequently real GDP fell by 9 and 13 percent in the next two years.
Business environment and incentives:
- Distortions (excessive permits, favoritism for politically connected firms, public enterprise advantages) divert entrepreneurial effort from productivity improvement to rent-seeking.
- Secure property rights, functioning commercial code, enforceable contracts, and straightforward property registration are central to encouraging private investment.
Physical and human infrastructure:
- Transport, ports, telephony, power, irrigation, internet and mobile connectivity, and reliable public services matter directly for private sector productivity.
- Human capital accumulation via education and training raises labor productivity and supports higher wages and employment.

Growth failures — documented patterns and country-level indicators

Empirical patterns across LICs (1980–2000): many LICs experienced declines in real incomes; inflation, external debt/GDP ratios, and fiscal deficits were often high or rising.
Business regulation and costs (selected examples preserved exactly):
- Starting a business (January 2005 data examples): Chad — 19 procedures, 75 days, cost equal to 3.6 times per capita income, minimum capital 6 times per capita income.
- Obtaining operating licenses: Chad — 16 procedures, 199 days, costing 17 times per capita income.
- Hiring/firing indices and severance: Mozambique — difficulty of hiring index 83, difficulty of firing index 20, laid off worker must be paid 141 weeks of salary.
- Property registration: Ghana — 7 procedures, 382 days, cost about 4 percent of the value of the property; Mali — 5 procedures, 44 days, cost 20 percent; New Zealand — 2 procedures, 2 days, cost 0.1 percent.
- Contract enforcement: Burkina Faso — 41 procedures, 446 days, cost 95 percent of the debt to be collected.
- Trade documents and delays: Central African Republic — 9 documents (38 signatures) prior to exporting, average 116 days; Nigeria — 11 documents (39 signatures), average 41 days; Finland — 4 procedures (3 signatures), 7 days.
- Tax compliance burden: Ukraine — 2185 hours to accomplish the payment of taxes.
- Taxes as percent of gross profits (World Bank 2006 examples): Belarus 121 percent, Democratic Republic of Congo 135 percent, Burundi 173 percent.
Corruption and misallocation:
- Multiple delays, numerous procedures and heavy regulation expand opportunities for bribery and corruption, increasing project and operation costs and reducing public investment and service delivery.
Infrastructure deficits amplify costs and reduce the feasibility of production for exportable goods.

Virtuous and vicious circles — political economy dynamics

Vicious circle in low-growth settings:
- Low growth → political leaders seek short-term favors to maintain support → favors (licenses, subsidies, public sector jobs, suppressed prices) create incentives inconsistent with growth → further reductions in growth → deeper political incentives for more favors.
- Examples: subsidies of food and power; expanded state enterprise payrolls; suppressed power rates despite rising costs.
Virtuous circle in growing economies:
- Rising per capita incomes generate political support; politicians and bureaucrats find self-interest better aligned with social good; focus shifts toward growth-enhancing investments with longer-term payoffs.
Core insight: government failure (not only market failure) is a key determinant of persistent low growth; policy reforms are required to switch from vicious to virtuous dynamics.

Role of international institutions

International Monetary Fund (IMF) contributions:
- Annual surveillance of all 184 member countries yields cross-country policy knowledge and early identification of policy failures and reform opportunities.
- Research and surveillance combination enables the IMF to advance arguments in favor of economic reform.
- Technical assistance (TA) is a significant element of IMF work: customs, tax administration, monetary policy management, and other capacity-building measures.
- Financial assistance instruments: support for short-term balance-of-payments crises, policy-buttressing facilities such as the Poverty Reduction and Growth Facility, and a new facility intended to help countries adjust to external shocks.
Operational emphasis: support reforms that deliver macroeconomic stability and address structural impediments to growth; reforms need internal momentum to be durable.

Policy recommendations and implications (as articulated in the lecture)

Prioritize macroeconomic stability as a necessary condition for sustained growth and poverty reduction.
Reform business environment to:
- Reduce excessive procedures, delays, and costs for starting and operating businesses.
- Ensure property rights, contract enforcement, efficient registration, and predictable regulatory regimes.
Improve physical and human infrastructure:
- Invest in transport, ports, power, telecommunication (including internet and mobile), irrigation, education, and health services to raise private productivity.
Reduce distortive regulations and reorient public enterprises:
- Limit preferential treatment of SOEs that crowd out private investment; focus SOEs on economically justifiable roles or reform/privatize where appropriate.
Strengthen institutions to curb corruption and rent-seeking:
- Simplify procedures to reduce opportunities for bribery; enhance judicial and administrative capacity for enforcement and transparency.
Use international support strategically:
- Leverage technical assistance and conditional financial support to build capacity and sustain reform momentum.
Recognize political economy constraints:
- Design reform incentives that can trigger reforms in environments where political leaders face pressures for short-term favors.

Conclusion — core messages

Rapid and sustained economic growth is the vital prerequisite for meaningful poverty reduction; macroeconomic stability is necessary but not sufficient.
Historical experience demonstrates the feasibility of breaking out of poverty traps through policy reform and improved incentives.
The central challenge for the international economic community is creating incentives and support for policy reform in countries where growth has been slow or negative, to make progress toward goals such as the Millennium Development Goals.
Turning vicious circles into virtuous ones requires credible reform, institutional improvement, and sustaining political support for pro-growth policies.

Source: Lecture "From Despair to Hope: The Challenge of Promoting Poverty Reduction" by Anne O. Krueger, First Deputy Managing Director, IMF (Presented at the Annual Boehm-Bawerk Lecture, University of Innsbruck, November 17, 2005).