Wealth Creation and Social Justice: an IMF Perspective, Peter S. Heller, Deputy Director, Fiscal Affairs Department, IMF

IMF News, February 13, 2003

Source details

Canonical URL

Wealth Creation and Social Justice: an IMF Perspective, Peter S. Heller, Deputy Director, Fiscal Affairs Department, IMF

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: February 13, 2003

Introduction and IMF mandate

• Speaking Notes prepared for World Council of Churches — World Bank — IMF Meeting, Geneva, February 13-14, 2003.
• IMF objectives as derived from its Articles of Agreement: "to contribute to the promotion of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy."
• Evolution in IMF understanding:
  • Recognition of poverty reduction as "an equally critical objective in its own right, side by side with economic growth."
  • Growth is necessary for poverty reduction, and poverty reduction contributes to achieving high quality growth.
  • The Fund relies heavily on the World Bank for long-standing work on poverty and distribution issues.
• Core principle: policies should be country-driven; lending to low-income countries should be conditional on poverty-reduction strategies drafted by the countries themselves.

How the IMF views wealth creation and poverty (responses to conference questions)

• Definitions and scope:
  • "Wealth creation" can mean income generation or the creation of assets (physical and human capital).
  • "Poverty" is multi-dimensional: low absolute income and indicators such as "poor sanitation or access to clean water, high exposure to disease and premature mortality, illiteracy, etc."
  • Fund's principal focus: issues of absolute poverty, while recognizing relative poverty may exist even in developed nations.
• Principal findings on growth and poverty (Q1):
  • Evidence over the last two decades demonstrates that "wealth creation—manifested by real economic growth in incomes and employment—is the principal and most forceful engine by which poverty is reduced."
  • Growth generally increases a country's stock of physical and human capital, though in situations of high inequality the assets of the poor "may not grow commensurately."
  • Growth effects can be geographically uneven: "poor regions may experience less growth or may benefit less in terms of poverty reduction."
  • Growth can produce "churning" in poverty status: some groups gain, some lose; "in net terms, poverty rates may decline but some households may become poor at the same time that others escape poverty."
  • Sustainability concern: income growth may occur "at the expense of a depletion of a country's natural resource base," reducing net wealth creation.
  • Macroeconomic stability is critical: instability can increase inequality, harm the poor, create more poor, and pressure budget cuts that affect the poor.

Growth plus distribution: mechanisms and limits (Q2)

• Key issue: improving the "poverty reduction elasticity of growth"—ensuring growth has a significant impact on poverty reduction.
• Empirical observations:
  • Growth has reduced poverty in many cases (e.g., "the Asian experience"), but "growth alone does not eliminate absolute poverty in some contexts," especially with high inequality (e.g., Latin America).
• Characteristics of "high quality growth" (Michel Camdessus):
  • Sustained without macroeconomic imbalances.
  • Fosters human capital development.
  • Promotes greater equity, poverty alleviation, and empowerment of the poor.
  • Protects the environment and respects national cultural values.
• Redistributional policies and instruments:
  • Expenditure policies to subsidize basic social services (education, health) to build human capital.
  • Targeted subsidies and transfers to augment consumption of the poorest groups.
  • Public works schemes to supplement incomes for the unemployed.
  • Social safety net programs and unemployment insurance ("social safety 'rope' policies") to prevent nonpoor from falling into poverty during shocks.
• Policy design caution: pursue redistribution while minimizing adverse efficiency effects (e.g., "excessively high marginal tax rates, untargeted subsidies, or price controls").

Income generation by the poor and participation (Q3)

• Recognition that some will fall into poverty during growth, but "the net number in poverty will fall with growth."
• Emphasis on income generation by the poor:
  • Policies targeting income creation: micro credit schemes, public works for the unemployed, training, agricultural extension.
  • Education and health programs to build human capital for future employment opportunities.
  • Job creation for the nonpoor is also relevant to stimulate demand and generate incomes for the poor.
• Some poor cannot escape poverty solely by their own efforts; targeted income or consumption assistance may be vital.
• Participation: Bank and Fund emphasize "the importance of the participation by the poor in terms of the formulation of strategies for poverty reduction" to ensure country ownership.

Guiding growth by values of social justice (Q4)

• Social justice is normative and culturally specific; countries differ in definitions (race, gender, income).
• Commonality exists in core elements: inalienable human rights and global ethical principles (e.g., Declaration Toward a Global Ethic; Millennium Development Goals).
• Country-led poverty reduction strategies reflect that "the people of countries themselves must define and own how to go about reducing poverty" and thus allow for cultural and religious diversity.
• Social justice more likely achieved when directly concerned populations reveal and implement their own values.

Beyond safety nets: policy design and PSIAs (Q5)

• The Fund promotes Poverty and Social Impact Analyses (PSIAs) to assess ex ante the distributional impact of policies and improve policy design.
• Emphasis on policies that:
  • Foster economic growth and income-generation opportunities.
  • Provide critical health and education services to promote human capital.
  • Promote macroeconomic stability to avoid future poverty dynamics.
• Safety nets are important but insufficient alone; they cushion adverse impacts and protect nonpoor who fall into poverty and must be "tailored to the specific country setting."
• Global responsibilities highlighted by Horst Köhler:
  • Foster a global macroeconomic environment supportive of growth.
  • Open markets of industrial and emerging market countries to exports of developing countries.
  • Promote global public goods, increase financial assistance to poorest countries, resolve financial crises that threaten the global economy, and attack sources of climate change affecting poorest countries.

Growth and environmental sustainability (Q6)

• Tension between growth and environmental sustainability acknowledged; Kyoto Accord and IPCC reports recognize rich countries must implement mitigation strategies to stabilize greenhouse gas concentrations.
• Challenges noted:
  • Implementation of Kyoto alone may not significantly alter global climate for at least a century.
  • Emerging market and poorest countries need environmentally sustainable growth for effective greenhouse gas stabilization.
  • All countries face adaptation challenges from inevitable climate change.
• Fiscal policy roles:
  • Phase out harmful subsidies and inappropriate tax policies that lead to overexploitation of natural resources.
  • Ensure energy prices reflect social costs.
  • Eliminate subsidies for pesticides and fertilizers that contribute to overfarming; replace with government expenditure programs that directly benefit small farmers.
  • Industrial countries must implement similar policies to prevent overexploitation of global environmental resources.
• IMF attention:
  • Consider whether Fund-supported program policies have adverse environmental effects or whether environmental issues should influence program design.
  • Increasing recognition of taking environmental effects into account in measuring real growth rates.
• Long-term constraint: aging populations in rich countries will add fiscal pressures that complicate environmental sustainability programs and additional foreign assistance to poor countries.

Source: Wealth Creation and Social Justice: an IMF Perspective, Peter S. Heller, Deputy Director, Fiscal Affairs Department, International Monetary Fund, February 13, 2003.

References

• Speeches
• PRESS CENTER
• The Poverty Reduction and Growth Facility (PRGF)— Operational Issues
• Monterey Consensus and Beyond: Moving from Vision to Action
• Development and Poverty Reduction: a Multilateral Approach
• World Religions—Universal Peace—Global Ethics
• https://www.imf.org/en/home