Journal Issue

Economic Forum: New ideas for reducing poverty

International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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New poverty “tool kit”

Nicholas Stern noted that the World Bank’s most innovative work on poverty reduction of late is in designing and assessing pro-poor growth policies. The design work is based on a two-pillar approach: helping countries improve their investment climate to attract foreign investors and investing in people so they are able to participate in the growth process. The emphasis is on helping countries make the right decisions rather than telling them how to allocate resources.

As for assessment, he said, one of the biggest problems is inadequate data. Countries need decent household surveys to evaluate the distributional incidence of public spending and taxation on households. They also need firm-level surveys to determine the problems that firms face with regard to the investment environment. Service-delivery indicators would also be useful to measure service quality and efficiency, such as how well hospitals function. The goal would be to evaluate economic policy choices ex ante and monitor ex post the impact on poverty and distribution. To achieve this, Stern said, the World Bank, in collaboration with the IMF, has been developing a new “tool kit” for evaluating the distributional and poverty impact of economic policies. This comprises several tools (from simple benefit incidence analysis and poverty maps to more sophisticated models) to be used by economists in the field and is expected to become operational in two to three months. It will help poverty-impact analysis of macroeconomic policies to be conducted by linking the tools used in traditional microeconomic analysis of the distributional incidence of policies with the tools used for macroeconomic simulations.

Mexico’s social safety net

Santiago Levy stressed that macroeconomic shocks hit the poor the hardest and, thus, social safety nets are critical. They provide a mechanism for transferring income to the poor—for example, through price controls and food subsidies—and allow investment in human capital. But, he warned, governments need to be careful about the costs of setting up and administering the various social programs so that they do not reduce actual transfers to the poor. An overly narrow range of goods covered by subsidies might also render the programs ineffective. Given these potential problems, he argued that governments should rely more on monetary transfers than on subsidies because they are more efficient and have lower administrative costs.

Mexico, for example, is moving in this direction, he said, with the elimination of general food subsidies. This is being done as part of PROGRESA—the government’s integrated program for education, health, and nutrition—which Levy said helps 20 million Mexicans at an annual cost of ⅓ of 1 percent of GDP.

“Safety rope” programs

Nancy Birdsall commended Levy for leading a social safety net program that successfully fights poverty. However, she noted that Mexico’s highly targeted PROGRESA program is an exception.

She stressed how politics and ownership matter in the design of socially responsible macroeconomic policies by governments and international financial institutions. In most developing countries, there is a missing political alliance between the poor and nonrich—those who are at risk of becoming poor, typically in the informal sector. “Safety rope” programs, rather than safety net programs, can forge such alliances.

Birdsall said the fact that the IMF was even holding a conference on poverty reduction was an “enormous step forward,” but in its work, the IMF and others should pay more attention to the middle quintile income groups. This means looking at how these groups are affected by fiscal and monetary policies, especially during crises. She cautioned that, too often, the crisis response pits the political interests of the nonrich against those of the poor.

Tackling poverty in India

Montek Ahluwalia stressed the need to distinguish between longer-term issues of the impact of development policies on poverty and short-term problems of the impact of crisis management on poverty.

On the longer-term, India’s experience validates that strong growth contributes greatly to reducing poverty. At the start of India’s reforms there were concerns that growth might be picking up without a reduction in poverty, but recent data confirm that 10 years of around 6 percent growth in GDP have produced a significant reduction in poverty.

He said the concern with poverty reduction is sometimes projected as if achieving growth alone is easy, and what is difficult is poverty-reducing growth. However, experience around the world shows that the failures in poverty reduction are almost always cases where there was a failure to achieve growth. There were no examples of rapid growth where poverty had not come down. This is not to deny that some types of growth would be more poverty reducing than others, and we should certainly try to design policies that ensure that the maximum poverty reduction takes place, but the central focus must be on policies that can stimulate growth.

On the shorter term, he stressed the need to avoid hurting the poor in periods of crisis management, seconding Levy’s thoughts on social safety nets. However, it is not easy to design policies that can do this effectively within a 12 to 18 month time horizon, especially since it is not a simple matter of increasing allocations for existing poverty programs. Often, it is those who are linked to the modern economy that are worst hit at times of stabilization but they may not be beneficiaries of existing anti-poverty programs. In fact, poverty reduction programs are often designed precisely for those not linked to the market economy. Nor is it easy to design new programs for groups that become vulnerable. Hence, the importance of establishing social safety nets that can be intensified countercyclically.

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