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

_IMF News, February 13, 2003_

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## Bibliographic details
- Published: February 13, 2003

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### 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.*

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## References

- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [The Poverty Reduction and Growth Facility (PRGF)— Operational Issues](https://www.imf.org/external/np/pdr/prsp/poverty2.htm)
- [Monterey Consensus and Beyond: Moving from Vision to Action](https://www.imf.org/external/np/speeches/2002/032102.htm)
- [Development and Poverty Reduction: a Multilateral Approach](https://www.imf.org/external/np/speeches/2000/021300.htm)
- [World Religions—Universal Peace—Global Ethics](https://www.imf.org/external/np/speeches/2002/091902a.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp021303a_