Journal Issue

Reducing Poverty: Spreading the Word

International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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In keeping with its renewed emphasis on helping the poor escape from poverty, the World Bank has recently issued two publications aimed at disseminating information about policies and practices that work best. The message is clear: Countries should invest in basic social services, promote efficient and sustainable growth, and eliminate policy distortions that prejudice the poor’s interests.

Reflecting the progression of development thinking and the lessons of experience, the World Bank’s approach to poverty reduction has evolved over time. During the 1970s, the Bank’s focus on economic growth expanded to include first, redistribution With growth, and then, satisfaction of basic human needs. World Development Report (WDR) 1980 stressed that increasing incomes and reducing poverty would also require investments in human resources. In keeping with the Bank’s project orientation throughout this period, investment projects were the main development instruments under consideration. Then, during the 1980s, the focus on adjustment highlighted the importance of macroeconomic policies for growth; it provided evidence that such policies also matter for poverty—and for poverty reduction.

World Development Report 1990 pursued the connection between policies and poverty. Based on cross-country analysis, it concluded that the countries that had been most successful in reducing poverty had pursued a two-pronged approach, consisting of (1) policies that promote efficient growth, making use of the poor’s most abundant asset—labor; and (2) public expenditures and institutions that provide equitable access to education, health care, and other social services. It also emphasized the desirability of having in place a social safety net for the most vulnerable groups in society.

How the 1990 WDR’s approach to country policies, public expenditures, and institutions should be applied by the Bank in the policy dialogue, analytic work, lending, and donor coordination was established in the Bank’s policy paper, Assistance Strategies to Reduce Poverty. It recommended that poverty assessments (see box] be prepared for all active borrower countries as a basis for the design of Bank-supported programs. In mid-1992, the Bank also issued an operational directive on poverty reduction and a Poverty Reduction Handbook. Together, these documents provide guidelines, tools, and information to help the Bank implement the approach spelled out in WDR 1990. The directive provides practical guidelines for strengthening the focus of Bank operations on poverty reduction; and the handbook surveys operational examples of how this can best be done.

Analytic framework

Sustainable poverty reduction is the Bank’s overarching objective. Given limited resources, more poverty reduction can be achieved if pursued through economically efficient policies, programs, and expenditures. Economic stability and policies that allow prices to reflect relative scarcities and environmental impacts are thus essential. But the causes and solutions to poverty go beyond macroeconomics and efficiency pricing. The framework must therefore incorporate the behavioral context in which poverty persists in a particular setting. To this end, it is essential to understand the motivations and constraints of poor men and women and those who interact with them—such as their higher-income neighbors, potential employers, providers of credit, and landlords—in evaluating the impact of policies, programs, and projects.

What policies work?

The bad news that emerges from this approach is that many policies often considered pro-poor are not so, in practice. Well-intentioned programs often provide benefits for some poor individuals and groups, while making the situation worse for the vast majority of the poor. For example, by placing a ceiling on rents, rent controls create a situation in which the demand for housing exceeds the supply. Those who gain access to the rent-controlled housing get a good deal. But those who do not are required to seek shelter in informal markets, where rents are boosted by the spillover demand from the formal sector. Meanwhile, rent controls make formal-sector housing less attractive to investors; hence, less housing gets built and existing housing is not maintained. Price controls work in a similar fashion. Those lucky enough to get access to the product at the controlled price benefit. But others are forced to do without or to pay the street price, which—based on analysis and experience—is typically higher than without price controls.

Poverty assessments

In its simplest form, the poverty assessment addresses three questions: (1) who is poor; (2) why are they poor; and (3) what should policymakers do about it?

Who is poor? The assessment starts with a poverty line (the level of income associated with a minimum acceptable level of nutrition and other necessities of everyday life) and a count of the people whose incomes fall below it. Depending on the availability of data, it identifies the poor by gender, age, and ethnic characteristics; where they live; and how they fit into the consumption and production activities of the economy. It summarizes the available social indicators (child mortality, nutrition status, female and male literacy, fertility, maternal mortality, etc.) and income indicators (per capita income, unskilled wages, etc.). It indicates the poor’s ownership of assets, including land; the food security and other risks they face; and special environmental issues.

Why are they poor? The second step is to use the profile to help diagnose the constraints to poverty reduction. While the specific focus is determined by country circumstances, assessments normally (a) analyze the effectiveness of economic management in promoting efficient, labor-intensive growth; (b) evaluate government efforts to develop the poor’s human resources; and (c) examine the extent and cost-effectiveness of the social safety net.

What should policymakers do about it? The third step is to recommend actions to strengthen the poverty-reducing impact of country policies, public expenditures, and institutional development. The prescription is based on a realistic assessment of (a) the government’s capacity—both financial and institutional—to implement poverty reducing programs and policies, and (b) political economy considerations. In the context of adjustment, the assessment considers the impact on the poor of measures to stabilize and restructure the economy, as a basis for the design of compensatory programs.

In some cases, the situation is even worse, since those with higher incomes may preempt most of the benefits of programs, leaving only the costly side-effects for the poor. This tends to happen where credentials matter. For example, with interest rate ceilings, the demand for credit tends to exceed the supply. In such circumstances, banks ration credit to those borrowers with the lowest risk of default. This tends to be higher income applicants who can pledge assets as collateral.

The good news is that policies that work with incentives can succeed in improving the poor’s situation. Such solutions focus on opening up the economic system, so that the poor can use prices and market signals to compete with those with higher incomes; they simultaneously promote efficiency and poverty reduction. Thus, instead of setting interest rate ceilings, which lock in the poor’s disadvantage, it is better to ensure that financial regulations permit risk-reducing strategies—such as joint risk sharing, where community members guarantee each other’s loans, and leasing of equipment or its use as collateral—so that the poor are not barred from credit transactions by their lack of land or property ownership. Providing water to the poor through financially autonomous water companies with an economic stake in satisfying the poor’s market demand is another example of a “win-win” solution (see “Poverty and Water Supply: How to Move Forward,” in this issue).

Public spending strategies

The above examples suggest that the preferred approach to poverty reduction is to let markets work and to address redistributive goals through transparent public expenditure programs. Thus, instead of rent controls, it is better to establish an adequate regulatory framework, coupled with infrastructure services targeted to poor areas. Instead of price controls or general food subsidies, it is better to restrict food subsidies to products consumed exclusively by the poor. Where administratively feasible, such targeted approaches help to minimize the costs and distortions associated with safety net programs.

Public expenditure strategies for reducing poverty also need to address the dynamic context of poverty and poverty reduction programs. Most of all, the poor need the means to escape from poverty. Public expenditures should thus ensure access to basic education, health care, and family planning services—to enable the poor to develop their talents, improve their productivity, and achieve economic independence and autonomy. Such expenditures also tend to be politically more sustainable than narrowly targeted programs, whose budgetary virtue in excluding those with higher incomes is often costly in terms of political support. Nevertheless, in some countries, even basic social services are starved of funds, while programs with lower returns and higher income beneficiaries flourish.

Designing the program

These kinds of policy and public expenditure issues are important for the policy dialogue. They are central to the poverty assessment and the design of the country assistance strategy. Here, the handbook and directive mirror Assistance Strategies to Reduce Poverty in stating that the volume and composition of Bank lending should be linked to country efforts to reduce poverty. Stronger government commitment to poverty reduction—as measured by the adequacy of the policy framework for growth plus human development—warrants greater support. Meanwhile, the composition of lending should support and complement country efforts. For example, the poverty assessment may suggest the need to increase basic social services. This can be achieved by additional Bank lending to these sectors, or by linking Bank lending to shifts in public spending.

Growth and adjustment programs

Internal and external balance is a prerequisite for sustainable long-term growth and poverty reduction. Macroeconomic policies therefore must prevent the emergence of imbalances and adjust quickly to external shocks. Once in a disequilibrium situation, adjustment policies are needed to restore balance. They typically begin with a tightening of monetary and fiscal policies to bring aggregate demand into line with available resources, and exchange rate depreciation to equilibrate the market for foreign exchange. Over time, as efficient and sustainable growth resumes, the poor will gain. They will be in a better position to gain if spending programs to develop their human resources have been protected during the adjustment process, and if the policy package eliminates distortions that prejudice their interests in labor, asset, and product markets.

But adjustment policies also affect the poor more immediately. Determining the net impact requires a careful analysis of the activities in which the poor are engaged, what they consume, how prices change with the exchange rate or other events, and the public expenditure program. On the production side, the outcome depends mostly on whether the poor are net producers of tradables or of non-tradables—since currency depreciation tends to raise relative prices, wages, and employment in the tradables sector. In sub-Saharan Africa, for example, the poor are mostly rural, and as producers, they tend to benefit from currency depreciation’s positive impact on the agricultural sector; as consumers, however, both the urban and rural poor tend to lose from rising food prices.

Even if, for the poor as a group, the benefits from adjustment outweigh the costs, some poor people will be hurt by adjustment policies and their short-run effects. The directive and handbook therefore indicate that the design and implementation of Bank-supported adjustment programs should seek to protect the most vulnerable from declines in basic social services and consumption—with particular attention to food and nutritional security—in the context of the public expenditure program. In Latin America, for example, support for targeted nutrition programs has been a central feature of a number of adjustment programs.

Poverty reduction projects

Experience suggests that projects that yield high on-the-ground returns and benefit the poor involve the participation of the poor throughout the project cycle. In line with this finding and the analytic framework described above, those who are designing and implementing projects should have an understanding of how the poor make decisions; the constraints, risks, and incentives they face; and their preferences. Production-oriented projects must consider the likely financial returns for poor participants. If, for example, the poor perceive that a new agricultural technology is too risky, they will not adopt it, and the project will fail. For projects and programs designed to enhance the poor’s human resources, satisfactorily addressing the poor’s demand is likewise decisive for the project outcome. Benefits simply will not materialize if, for example, girls will not attend project-supported schools or women will not visit project-supported family planning clinics. During implementation, to determine whether targeted project beneficiaries are being reached and whether midcourse corrections in project design are needed, appropriate performance and participation benchmarks should be tracked and evaluated. Supervision of poverty reduction projects should also include contact with clients to assess service delivery.

Is it working?

To monitor its poverty reduction programs, the Bank has used different methods corresponding to its evolving operational approach. In the 1970s, for example, the Bank monitored the poverty focus of individual projects. That focus increasingly gave way in the 1980s to a more programmatic emphasis, paralleling the evolution of the Bank’s operational approach to poverty reduction. The logical extension of this trend would be to monitor Bank effort by results—as measured by country performance on poverty reduction. But exclusive reliance on results would be difficult to square with the fact that Bank involvement has only a partial and variable impact on country poverty outcomes. Input measures of the Bank’s contribution are also flawed. They require arbitrary distinctions between resources directed at poverty reduction and at other Bank objectives, such as growth, that are essential for sustained poverty reduction.

Recognizing that there is no perfect measure, monitoring the Bank’s impact currently relies on three kinds of information:

• estimates of what is happening to poverty in countries, including progress on key social and economic indicators;

• qualitative judgments about the Bank’s contribution, based on the poverty assessments, country assistance strategies, and operations; and

• the relative importance of total lending on projects with a specific mechanism for targeting the poor and on projects for which the proportion of the poor among project beneficiaries is substantially larger than their proportion in the overall population.

Next steps

Implementation is now the key. The Bank is preparing country poverty assessments as the basis for the design of country assistance strategies, and regular progress reports. But the Bank is only a small part of the story. A strong development partnership is needed, centered around country efforts. To facilitate consensus-building on operational approaches to poverty reduction, the discussion draft of the handbook was shared with member governments, UN agencies, the IMF, multilateral development banks, and nongovernmental organizations (NGOs). The current edition reflects their comments and suggestions. Future editions will reflect ongoing discussions and new lessons learned about poverty reduction.

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