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Conference debates complex links between macroeconomic policies and poverty reduction

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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In his opening remarks, Eduardo Aninat, Deputy Managing Director at the IMF, observed that “while there exists a great deal of scholarship and much experience on poverty and poverty eradication, many of the links between macroeconomic policies and poverty are not well understood.” Sustained growth is necessary for poverty reduction, he pointed out, but it is clearly not sufficient. Countries and their development partners must deepen their understanding of the types of policies that foster poverty-reducing growth. Aninat also noted that policymakers face a formidable challenge in developing the ability to monitor and analyze the social impact of policies before, during, and after the implementation of key reforms.

Picking up on Aninat’s challenge to examine the links between macroeconomic policies and poverty reduction, several studies examined whether and how economic reforms could be harnessed to reduce inequality and poverty. Stefan Dercon (Oxford University) found that 1990s reforms in rural Ethiopia, especially the liberalization of agricultural prices, helped some grow out of poverty. Those with better “endowments” of land, labor, and access to roads, he observed, were better positioned to benefit from the opportunities that agricultural reform provided.

From his study of Argentina, Bangladesh, and India, Martin Ravallion (World Bank) concluded that as aggregate government spending declined in line with fiscal contractions, targeted spending on the poor also declined—the “nonpoor” tend to be protected during fiscal adjustments. Boosting pro-poor spending in periods of fiscal contraction is desirable, he emphasized, but it is not politically easy.

Orazio Attanasio (University College, London), Pinelopi Goldberg (Yale University), and Nina Pavcnik (Dartmouth College) examined trade reform in Colombia and discerned an indirect link between trade liberalization and increased wages for skilled workers. Sectors that saw a large reduction in protective tariffs tended to be labor-intensive with a higher percentage of low-skilled workers. And it was these sectors that saw their wages decline relative to other sectors. At the same time, the study found that the premium for skills had risen over time. But overall, it found that trade liberalization in Colombia had only a modest impact on income distribution. This case study and others, T.N. Srinivasan (Yale University) remarked, raised an interesting political economy question—namely, why is protectionism greater in sectors with more lower-skilled workers?

Robin Burgess (London School of Economics) and Rohini Pande (Columbia University) challenged the conventional view that large-scale credit intervention by governments ends up benefiting elites. Their study of rural banks in India suggested that the government’s promotion of “social banking”—that is, the expansion of banking in rural areas to achieve social objectives—did help reduce inequality and poverty. The credit that this program provided, they explained, enabled the rural poor to diversify into nonagricultural production and employment.

The finding that large-scale credit intervention by the government can help reduce poverty contrasts sharply with current thinking, which argues that microfinance is more effective in providing credit to the poor and marginalized. One drawback, Jonathan Morduch (New York University) noted, is that micro-finance is too scattered and its projects too small to make an appreciable dent in poverty. Other participants pointed out that while social banking may have helped reduce poverty in rural India, it still left unanswered the question of whether it was really the most cost-effective way to do so.

Financial crises and the poor

Are the poor always the hardest hit by financial crises? Robert Townsend (University of Chicago), reviewing Thailand’s experience, found that drought, floods, and illness had a greater immediate impact on people’s lives than did the financial crisis. Not surprising, said Abhijit Banerjee (MIT), who maintained that the country’s semiurban and rural people are “not playing in the Thai economy.”

The breakdown of financial linkages that followed the crisis had a broader effect, however. Townsend argued that maintaining the viability of the financial system during a crisis is key to containing the ripple effects of the crisis. As Banerjee highlighted in his discussion of Townsend’s paper, the two most vulnerable groups in the Thai crisis were the poor and small businessmen. For them, Banerjee said, old-fashioned programs such as food-for-work and loan write-offs would have helped.

Who gets hurt and who does not during a crisis? asked Emanuelle Baldacci, Luiz de Mello, and Gabriela Inchauste (IMF) in their study of Mexico’s 1994-95 crisis. Already poor households, they argued, were not the hardest hit. Poverty rates soared in urban areas, in the Yucatan region, and in households headed by the young and the elderly. Elizabeth Frankenberg (UCLA), James Smith (Rand), John Strauss (Michigan State University), and Duncan Smith (UCLA) looked at Indonesia’s experience and found that while some households were devastated by the crisis, others—notably rice producers and exporters—benefited from new opportunities.

Lant Pritchett (Kennedy School of Government) cautioned that the category “poor” is neither well-defined nor static, with people moving in and out of poverty, depending on their immediate economic circumstances. What this implies for policymakers, Pritchett said, is that safety nets are not enough. Invoking the terminology of mountain climbing, he proposed that the authorities devise safety “ropes” to prevent those who had raised themselves above the poverty line from slipping back into poverty.

Providing for the poor

How well did social safety nets do when they were most needed? In Thailand, Townsend contended, safety nets were in place during the crisis but did not target the most vulnerable. Similarly, Dercon’s study of rural Ethiopia found food aid programs insufficient to protect the poor from shocks. He argued for more attention to the development of credit and insurance markets. Other papers stressed the importance of protecting pro-poor spending during financial crises and having well-targeted safety nets in place before a crisis strikes.

In Ravallion’s view, deeper institutional and policy reforms are needed to protect public spending on the poor during fiscal adjustments. He proposed permanent, automatic protection programs that would support the poor during bad times but be withdrawn during good times. He held up the famine prevention and relief program of Maharashtra, India, as a model for successful insurance programs.

What can international financial institutions contribute to the development of effective social safety nets? They should, Ravallion argued ensure that “an effective safety net is in place with secure funding, as a crucial element of sound domestic policymaking, even in normal times.” Angus Deaton (Princeton University) also suggested that the IMF and the World Bank conduct baseline surveys whenever an adjustment program is initiated. This, he said, would provide the means to assess the impact of reforms on the poor over time.

Does aid work?

In an analysis of aid’s impact on recipient countries, Ales Bulir and Timothy Lane (IMF) highlighted their finding that aid tends to be more volatile and unpredictable than domestic revenue, thereby undermining its potential positive effects and making it difficult for countries receiving aid to manage their fiscal affairs. (This is especially true, they said, for countries whose budgets are financed largely through aid.) Aid also tends to be procyclical. Countries receive more aid when they are growing and less aid when their economy slows, which exacerbates cyclical shocks rather than smoothing them out. Moreover, aid commitments are likely to overestimate disbursements. But none of this, Bulír and Lane conclude, should keep donors from being more generous or aid-recipient countries from formulating fiscal plans on more realistic projections.

Alberto Alesina (Harvard University) wondered why skepticism about aid was swelling even as enthusiasm for debt relief continued unabated. The problem with aid, he said, is that it is neither well disbursed nor well used. In most cases, he said, less corrupt governments do not receive more aid. Typically, aid sparks a “war of attrition” among domestic constituents, leading to the adoption of inappropriate policies. Institutional reform would make aid more effective, and Alesina urged international financial institutions to make institutions, not policies, the focus of their conditionality. T.N. Srinivasan seconded this recommendation, saying the message for Monterrey was clear: the international financial institutions should focus on grants and institutional conditionality.

Odious debt

When illegitimate regimes incur debt, are successor governments responsible for repaying them? Michael Kremer and Seema Jayachandran (Harvard University) argued that sovereign debt incurred for private rather than public gain and without the consent of the people should be deemed “odious” and not transferable to successor governments. This would be a self-enforcing sanction, they said, because banks would have little incentive to lend to an illegitimate regime if successor regimes could refuse to repay. They also suggested that an independent, international institution composed of jurists, the UN Security Council, or perhaps domestic institutions of major creditor countries could be entrusted with the task of declaring debt odious.

But what if these jurors declared legitimate debts odious? What if the system backfires and simply creates incentives for markets to stop lending to developing countries? Such outcomes could be avoided, Kremer and Jayachandran argued, by having the declaration of odious debt made ex ante and by a supermajority. Conference participants pointed out, however, that such a system could nevertheless create perverse incentives and exacerbate conditions for people living under illegitimate regimes.

New ideas for reducing poverty

The conference ended with an economic forum with Nicholas Stern, chief economist, World Bank; Santiago Levy, Director General, Mexican Institute of Social Security; Nancy Birdsall, President, Center for Global Development; and Montek Ahluwalia, Director, IMF Independent Evaluation Office. Anne Krueger, IMF First Deputy Managing Director, moderated. On the links between growth and poverty reduction, Ahluwalia noted that India’s experience validated the claim that strong growth helped reduce poverty over the longer term. Stern spotlighted World Bank and IMF efforts to develop a new “tool kit” that combined micro- and macro-level analysis to better assess the distributional and poverty impact of economic policies. As for safety nets, Birdsall echoed Pritchett’s view that “safety rope” programs are useful, while Levy noted that direct monetary transfers are more effective than subsidies. (For details, see IMF Survey, March 25, 2002 issue).

The full text of the papers presented at the Macroeconomic and Poverty Reduction Conference are available on the IMF’s website (www.imf.org). The June issue of the IMF Research Bulletin will provide summaries of the conference papers.

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