Strengthening Our Commitment to Low-Income Countries, A commentary By Rodrigo de Rato, Managing Director of the International Monetary Fund

November 30, 2005

A commentary by Rodrigo de Rato
Managing Director of the International Monetary Fund
Les Echos (Mali)
November 30, 2005

This past September, world leaders gathered in New York at the UN Millennium Summit. They took stock of progress made toward the Millennium Development Goals (MDGs) in the last five years, and examined the realities we face if the MDGs are to be met in the next decade.

The UN Summit has come and gone. But the momentum it generated should not be lost. Reducing poverty in African and other developing countries worldwide is not an issue that the international development community can embrace only during global conferences. It is a task that demands an ongoing commitment. As a partner in the global effort to reduce poverty, the International Monetary Fund is fully committed to doing its part to help countries meet the MDGs and halve extreme poverty by 2015.

What have we learned from past poverty reduction efforts? More importantly, what actions does the international community—low-income countries, donor nations, and multilateral organizations—need to take now to make more rapid progress toward the MDGs? Most importantly, low-income countries need to put in place policies that promote economic growth, for it is growth that drives development and poverty reduction. There are three prerequisites to achieving growth: economic and financial stability, policies that help the private sector flourish, and support from the international community.

Free trade is crucial. While in the Republic of Benin earlier this year, I heard firsthand from farmers and government officials from all over West Africa about the damage being done to agriculture in developing countries by the industrial countries' protectionist policies. But even without these barriers, many African countries would still be limited in their ability to compete. Trade between African countries is among the most expensive in the world. Africa's share in global trade has declined from 4 percent in the 1970s to about 2 percent at present. Indeed, all countries, including developing countries, need to work together to lower trade barriers and eliminate trade-distorting subsidies. This is why it is crucial that the international community, led by the industrial countries, should conclude the current round of trade negotiations, the so-called Doha Development agenda, as soon as possible. A breakthrough in these negotiations would help lift millions of people out of poverty and boost growth throughout Africa.

But developing countries also need more—and better targeted—aid. The recent pledges of the G8 countries to increase aid, particularly for Africa, are indeed welcome. The IMF has long advocated increasing aid flows to developing countries. As the 2005 Global Monitoring Report—the second such report—prepared by the World Bank and IMF concludes, aid needs to double in the next five years if progress toward the MDGs is to accelerate as it needs to do.

Aid is really effective only when it is aligned with recipients' priorities and is predictable, and donors must make sure that aid does not create unreasonable administrative demands on recipients. Low-income countries, for their part, face significant challenges when aid rises. They must ensure that the capacity of their public services is not overstretched. They must also make sure that aid flows do not have unintended economic effects Large aid flows can result in an appreciation of a country's currency, making exports less competitive, or causing an increase in inflation. The IMF can help countries design economic policy to meet these and other challenges.

Like aid, debt relief can play a significant role in giving low-income countries a needed boost. The Multilateral Debt Relief Initiative, which has now received support from the entire international community, aims at writing off debts of many highly indebted poor countries to the IMF, the World Bank, and the African Development Bank. It will free up additional resources, which can then be allocated to poverty reduction and development. Overall debt relief through the initiative is expected to amount to roughly US$4.8 billion.

The private sector also has a key role in the poverty reduction effort, including its financing. A vibrant private sector can contribute significantly to job creation and government revenues. Private investment—by both domestic and foreign investors—is essential to economic development. This is why IMF policy advice emphasizes the need to establish an environment conducive to private sector activity. The emergence of a healthy private sector rests heavily on investor confidence, which is inspired by the rule of law, impartially applied and enforced by a vibrant business environment, and by a strong, well-supervised financial sector.

Reducing poverty and improving growth in low-income countries calls for dedication by all parties. The IMF remains faithful to the commitments made in Monterrey, Mexico in March 2002. The Monterrey Financing for Development Conference outlined the responsibilities of all development partners. We have reassessed our role in low-income countries in order to make sure that our assistance is better tailored to meeting their specific needs. The Poverty Reduction Strategy approach and our Poverty Reduction and Growth Facility continue to guide our operations in low-income countries. In response to the changing needs of these countries, however, we recently created a new non-financial mechanism called the Policy Support Instrument to signal the quality of economic policies of countries that desire an IMF endorsement, but do not necessarily want or need IMF financial assistance. And we are also working to create a new service to help poor countries deal with shocks such as hikes in oil prices and natural disasters.

The IMF strives to be responsive to the needs of low-income countries. Other parties must be responsive too. But the task is not a short-term one. It is one that calls for an ongoing commitment.

In today's world of increasingly globalized economic activity, the well-being and security of all peoples are connected. We must be mindful that what happens in low-income countries is integrally linked with developments and fortunes elsewhere. Only international cooperation, combined with good policies at the country level, can meet the challenge of reducing poverty.

The writer is Managing Director of the International Monetary Fund


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