Speech

Remarks by Mr. Eduardo Aninat
Deputy Managing Director of the International Monetary Fund
At the Development Policy Forum
Berlin, June 15, 2000

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Ladies and gentlemen, I am honored to open this international policy dialogue on poverty reduction and debt relief. We all know the problem, one of the greatest faced by mankind today: 1.2 billion people worldwide living on less than $1 per day, a number that has held roughly unchanged over the past decade and threatens to rise in the years ahead. What we need is a solution, and here, perhaps we can draw inspiration from the famous inventor, Benjamin Franklin. For it was on this day, in 1752, that he is said to have tossed a kite into the sky with a key tied to its string and proved that lightning contained electricity. It was a small step, achieved with simple means, but it was catalytic enough so as to transform our very existence.

So what step can we, the international community, take to transform the existence of the world's poor? I would like to suggest that perhaps we, together, have started that step by last September adopting a new approach to poverty reduction—one that builds on decisive good practices in countries and in donor agencies. The emphasis now will be more on the poor countries themselves taking the lead in setting their own priorities and defining their own programs through participatory processes, with the full involvement of the international community.

What is really different in this approach? Why should it deliver better results than old, past efforts? And how will debt relief tie in? I will try to answer these questions in my remarks today, but first a little background on why we are even headed down this road.

Origin of stronger poverty focus

Quite frankly, the old approaches were not yielding the hoped-for results in most parts of the world, including Africa and much of Asia. In 1995, the international community formally pledged to reduce by half the proportion of people living in extreme poverty by 2015, achieve universal primary education in all countries, reduce infant mortality rates, and improve a number of other social and environmental indicators. But a few years later, despite important progress on many fronts, it was clear that the chances of meeting these pledges were becoming slimmer. The regional variations have been great, with East Asia and the Pacific ahead of schedule, particularly on poverty reduction, but the other regions behind schedule.

Another influence was the greater recognition of the mutually reinforcing nature of growth and poverty reduction. We had long known that sound macroeconomic policies favor growth. We had also long known that sound macroeconomic policies and growth-enhancing structural reforms favor the poor, since growth is the single most important source of poverty reduction and an important source of financing for targeted social outlays. For instance, in Chile during the 1990s, four-fifths of the achieved 50 percent increase in real per capita social expenditure emanated from accelerated growth.

But there now is greater acceptance that causation also runs in the other direction. Poverty reduction and social equity feed back positively into growth. Without poverty reduction, it is difficult to sustain sound macro policies and structural reforms long enough to eradicate inflation and increase the growth rate—there is unlikely to be the political support to persevere. Indeed, for countries with a high proportion of the population in poverty, it is difficult to increase growth without tackling poverty directly. Also, policies that help the poor directly, such as investing in primary education and basic health, boost their potential to contribute to output and help speed up economic growth itself.

Yet another influence was the new lessons that we were learning on what works best when countries make poverty reduction a central objective of development efforts. We learned that there is no unique formula for success. But embracing the following actions are more likely to lead to better results: analyzing poverty and working on its determinants, choosing policy actions with the highest poverty-reducing impact, exercising good governance, taking ownership of policy programs, and using participatory processes to set and actively monitor results.

What is different?

For these reasons, the international community last year adopted a new approach to poverty reduction. The key innovation is deriving programs from comprehensive strategies for poverty reduction drawn up by individual governments, with the involvement of a broad range of key stakeholders, including civil society and the donor community. The strategy for each country, which is to be laid out in its so-called Poverty Reduction Strategy Paper (PRSP), will provide a focused policy agenda and promote government accountability by fostering a national dialogue on economic and social policies.

Here I would like to emphasize that this is a collaborative effort of the international community, with each partner playing a vital role. The World Bank, along with the regional development banks and UN agencies, takes the lead on discussions with authorities on the design of policies aimed at poverty reduction—including social safety nets to protect the poor and vulnerable. The IMF will do its part by supporting economic policies that provide a conducive environment for sustainable growth.

So what is new in this approach, a question raised by many in the development community? Let me answer from the IMF's perspective, focusing on five key elements.

First, we have changed the objectives of the IMF's concessional lending facility to explicitly include poverty reduction. For that reason, we reshaped the facility, previously known as ESAF, into the Poverty Reduction and Growth Facility (PRGF). What this means in practice is that we will help countries ensure that economic policies are pro-poor. Under the PRGF, countries will devise medium-term budgetary frameworks that contain explicit and specific poverty-reducing policies. The IMF will rely on the World Bank and other multilateral regional development banks for an assessment of the priorities included in these budgets and their costing. We will then help to ensure that these outlays are consistent with the available financing and with macroeconomic stability and faster, sustainable growth. If available financing is insufficient to meet priority spending needs in countries where additional resources could be used effectively, we will actively support countries in seeking additional resources from the donor community.

Second, there will be a much wider participatory process in the design and monitoring of poverty reduction strategies. This should bring benefits such as broad-based agreement within the country on priority goals, public services that reflect the needs of the poor, and better government accountability. For some countries, like Bolivia, Tanzania, and Uganda, the new programs offer an opportunity to take these processes even further.

Third, the content of country programs should change in a number of ways:

• There should be better availability of key information, both qualitative and quantitative in the design phase, as countries are encouraged to improve their statistical base, with technical assistance from donors, if possible. In recent years, almost 60 percent of the PRSP program countries have already completed poverty assessments; but major data gaps still exist for the rest.

• There should be more systematic analysis of the social and distributional impact of macroeconomic and structural policies before these policies are put in place—here we count on the World Bank for guidance. This will help ensure the effective implementation of social safety nets.¹

• There will be a shift to more pro-poor spending and service delivery in public expenditure programs. This should translate into higher outlays on primary education and health, or in the productive sectors and rural infrastructure. Of course, how well the funds are spent matters as much as their size. Indeed, as we have seen in Chile, well-targeted outlays can significantly improve income distribution.²

• There will be greater variation across countries in the pace and sequencing of reforms. But here, a word of caution: donors—and the international financial institutions—have a responsibility to be explicit about the sorts of reforms they will continue to favor. They must also give countries greater discretion to experiment and, even, to fail: more room for ownership!

• There will be greater attention paid to monitorable results. This will require the selection and tracking of key outcome indicators, and thus the institutional capacity to do so. The benefit should be more ex post evaluation of reforms, with the results thus fed into new policymaking.

• There will be greater emphasis on transparency, accountability, and good governance.

Fourth, the relationship between countries and external partners will change in a number of ways. This includes fully respecting country ownership by basing our programs on country strategies, and showing more flexibility in balancing program quality and country ownership. This means that the conditionality associated with donor support must evolve—it should be in support of objectives that emerge from the government's program; it should emphasize more the results rather than the intermediate process; and it should be selective and focused on the key issues and constraints for poverty reduction. Let me say that I am comfortable with the notion of country ownership of national strategies coexisting with conditions set by development partners for their support of a country's strategy. We should also see better donor collaboration, with all donors basing their operations on the PRSPs.

Finally, there is bound to be a change in the research agenda. We need to fill some important gaps in our knowledge—such as generating more evidence on the links between policy actions in different sectors and their anti-poverty effect, and the impact of economy-wide policies on individual sectors and families. The latter research needed is important for developing better assessments of effects on the relative distribution of incomes. Again, in this area, we will rely on the World Bank.

Why should we expect better results?

Which brings me to the next major question: Why should we expect better results this time around? I would like to suggest that there are several reasons, all of which stem from its holistic nature.

One reason for optimism is that the PRSPs will be specifically designed to ensure that macroeconomic policies are consistent with social goals.³ Country programs will continue to place a high value on sound, stable macroeconomic policies—low inflation, realistic and stable exchange rates, and reasonable fiscal burdens—which are critical for higher saving and investment, and higher growth.

Another reason is that we not only have stronger evidence that growth is critical for poverty reduction but we also have stronger evidence that a focus on growth alone is not enough. Where poverty is endemic, it persists because the poor do not have adequate access to the benefits of growth, lacking assess to basic social services, essential infrastructure, and income and employment opportunities. Poor governance also diminishes growth's potential impact on poverty. Economic opportunities for the poor will expand only where there are improvements in empowerment and security of the poor, and the enhanced approach puts the emphasis on government actions to enable the poor to benefit from this growth more fully.

We should also see big gains from the stress on explicit and monitorable shifts toward pro-poor, pro-growth policies in public expenditures. This should include explicit emphasis on greater accountability of public resource use, reliance on outcome indicators as an additional way of tracking efficiency of spending, and greater involvement of the poor in the design stage.

Another reason for higher expectations is the likelihood that structural reforms will actually be implemented, thanks to greater efforts to explain and build consensus, improve their sequencing, and build up institutional capacity. These reforms are vital for increasing the efficiency of the economy and attracting private investment.

Another reason for optimism is that the PRSPs, if well designed and properly implemented, should give donors better assurances that the funds will be well used. We expect that this will help to reverse the downward trend in official development assistance—for let there be no mistake, the poorest countries will continue to depend on official donor financing for some time to come. That source of financing should continue to be kept active. Moreover, the PRSPs, by providing a consistent framework for donor intervention will help to reduce duplication of efforts and hopefully encourage donors to provide financing for the overall strategy—in turn, helping countries to better plan ahead.

Finally, we should take heart from the fact that the stronger focus on poverty includes a stronger debt relief initiative for the heavily indebted poor countries (the HIPCs)—a topic to which I will now turn.

How does debt relief fit in?

The enhanced HIPC Initiative promises deeper, faster, and broader debt relief, eventually embracing 36 countries instead of the original 29. This should result in a reduction of their external debt burdens, in aggregate, by more than half. And when traditional debt relief mechanisms are factored in, the ratio rises to two thirds. But any debt relief program will do little if it fails to attack the root causes of the debt buildup in the first place. For that reason, the enhanced initiative makes country formulation of a PRSP an integral part of the process.

Of course, more generous debt relief brings with it higher costs. For multilateral creditors, this will come to around $14 billion in 1999 net present value terms, of which the IMF's share is $2.3 billion, two thirds of which is now in place.⁴ But for the other multilaterals—excluding the IMF and the World Bank—a financing gap of around $5.5 billion remains, and I cannot stress strongly enough the urgency of countries fulfilling their commitments.

Is the debt relief process moving quickly enough? Or, as some of our critics would charge, are the IMF and World Bank delaying by insisting on rigid or unreasonable conditions? Let us take a look at some of the early cases where there have been delays. In Republic of Congo, Ethiopia, Guinea-Bissau, Niger, and Sierra Leone, the hold up has been due to armed conflict. In Côte d'Ivoire, it was governance issues and political unrest. In Guinea, Guyana, Mali, Mozambique, and Zambia, it was major slippages in economic, social, and structural programs. None of these problems, I would submit, represent "rigid or unreasonable conditions."

Certainly, if there is reason to seriously question the appropriate use of resources freed through debt relief, delays will—and should—occur. The HIPC Initiative, after all, can only solve the debt problem if conditions are in place to prevent a renewed accumulation of unsustainable debts. Nonetheless, the IMF and World Bank hope to speed up the process with the recent establishment of the new Joint Implementation Committee, which oversees implementation of the HIPC Initiative and PRSPs, and provides a means of resolving any differences in approach that may arise. Moreover, countries need not wait for PRSPs to receive relief. They can adopt interim-PRSPs; indeed, implementation of the PRSP is only needed for the final, irrevocable granting of relief.

Of course, there will be tradeoffs to weigh: speed versus a comprehensive and full participatory PRSP. And for that reason, we should not create unrealistic expectations! What is critical is ensuring the debt relief is not a wasted opportunity, especially for the poor.

* * * * *

So where does this leave us? Not surprisingly with a list of challenges. How do we help countries avoid macroeconomic problems given the risks of large shocks? How do we weigh the tradeoffs of speed versus ownership? How can we ensure donor financing is additional? Should donors finance PRSPs as a whole rather than favorite projects? How can we improve the patchy record of implementation?

These are just a few of the many questions that policymakers and donors must grapple with. For they must also contend with a host of other factors—ranging from armed conflict and environmental degradation to the devastating impact of AIDS. The challenge is almost overwhelming, but perhaps, going back to my earlier reference to Benjamin Franklin the inventor, we can at least take one simple but decisive step that will truly make a difference—simulating a lightning rod to help protect the poorest and most vulnerable from major adverse external shocks.

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¹The social safety nets in IMF-supported programs have included new temporary arrangements-such as temporary subsidies and public works programs-as well as existing social protection instruments adapted to the needs of target groups, such as pensions and other permanent social security programs.

²Although the wealthiest 20 percent of the population receive over 15 times more "self-generated" income than the poorest 20 percent, this ratio falls to 8.5 when cash transfers and health care and education spending is included.

³Full PRSPs have been completed for Uganda and Burkina Faso, and Interim PRSPs for Albania, Bolivia, Honduras, Mozambique, Saõ Tomé and Príncipe, Senegal, and Tanzania. Interim PRSPs or PRSPs are in the final stage of preparation for Benin, Central African Republic, and Niger.

⁴See table.

HIPC Initiative—Estimates of Potential Costs by Creditor
(US$ billion in 1999 NPV terms)

	Updated Costing Exercise (32 countries) 1/
	1999 terms
Total costs	28.2
Bilateral and commercial creditors	14.1
Multilateral creditors World Bank IMF AfDB/AfDF IaDB Other	14.1 6.3 2.3 2.2 1.1 2.2

Source: HIPC Initiative: Update on Costing the Enhanced HIPC Initiative, December 7, 1999.

1/ Excluding Ghana, which has not requested HIPC Initiative assistance, and Liberia, Somalia, and Sudan. Based on the application of retroactivity to end-1998 data, the latest available at the time of endorsement of the enhanced framework, as discussed in the July 1999 Modifications paper.