relations between pfm and prgf

8/9/2019 Relations between PFM and PRGF

1/27

Relation between Public Finance Reforms and

Poverty Reduction and Growth Strategy (PRGF)

Tarun Das, Macroeconomic Adviser

ADB ISPEFG, the Gambia, Banjul.

______________________________________________________________________

1. Introduction

This paper has two parts. Part-1 presents the Gambian case study on the interrelationsbetween PFM Reforms, PRSP, PRGF and MDGs. Part-2 presents an abridged version of

a comprehensive report prepared by the author as a Consultant for UN-ESCAP, Bangkok.

Thailand on the base of case studies in 14 selected countries in Asia and Pacific.

Part-I:

Case Study for the Gambia on the Interrelations

Between PFM Reforms, PRSP, PRGF and MDG

Contents of Presentation

1. Basic objectives of PFM reforms

2. Salient components of NDP, PRSP Report and MDG Report

3. Rationality of integrated policies4. The case study for the Gambia

5. Concluding observations

1. Basic objectives of PFM reforms

To maintain macroeconomic stability with moderate inflation and sustainedgrowth

Enhance fiscal discipline and accountability

Enhance revenue realization

Curtail unproductive expenditure Improve delivery and quality of public goods and services

To make subsidies targeted to the really needy and weaker sections of the society

All these objectives are also preconditions for high growth and poverty reduction.

2.1 Salient components of NDP, PRSP Report and MDG Report

MDG and PRSP reports deal with policies and programs to achieve MDGs. PRSP

has a focus on poverty reduction, but it also deals with other goals such aseducation, health, gender equality, environmental sustainability.

Reports emphasize that attainment of broad-based economic growth, which is

more inclusive, participatory, and stable over time, is a pre-requisite forsustainable reduction of poverty and unemployment.

All the countries have initiated various reforms and programs to enhance

efficiency of their economy; and are trying to mainstream MDG and PRSP intothe National Development Plans.

1


2/27

2.2 Stylized Policies and Programs under MDG and PRSP

a) Macro stabilization policies & PFM reforms;

b) Structural reforms in trade, industry, land, labor and capital marketsc) Sectoral priorities for poverty reduction and employment generation

d) Development of physical infrastructure and human capital

e) Conflict resolution, social development and environment protectionf) Direct poverty alleviation programs

g) Improving legal and institutional set-up

h) External Aid coordination and harmonizationi) Strengthening systems for measurement, evaluation, monitoring and review

3.1 Rationality of Integrated policies

Root cause of poverty is unemployment. Therefore, any poverty reduction program must focus on development of

employment-intensive sectors such as agriculture, SMEs, retail trade, transport

and communications.

However, poor cannot participate fully in these activities unless they areadequately skilled and healthy.

Therefore, improving education levels and health conditions of the poor andupgrading their skill are essential for poverty reduction.

But all these activities require higher revenue collection, private participation,

improvement in supply and quality of basic public services.

And so the need for PFM Reforms.

3.2 Role of macro-stabilization policies

Macro-economic volatility puts a break on economic growth. Stablemacroeconomic environment, with low inflation and sustainable fiscal deficit,

helps the poor to safeguard their purchasing power in years of natural calamities

or adverse business and trade cycles. High inflation hurts everybody particularly the poor as their incomes are not

indexed to prices, and thus increases the poverty ratio.

However, sound macro-economic polices have only limited capacity to alleviatepoverty as the trickle down effects of high growth may be uneven, slow, lagged

and time consuming.

We also need targeted poverty alleviation and employment generation programs.

3.3 Role of PFM reforms for poverty reduction

Various studies by the World Bank conclude:

PFM reforms lead to reduction of fiscal deficit, increased private investment,stable inflation.

Increased share of private sector in total investment leads to poverty reduction, as

private investment is more productive and more efficient than public investment. A reduction of fiscal deficit helps in poverty reduction, as it does not lead to

crowing out of private investment.

Increased share of investment in social sectors lead to poverty reduction.

2


3/27

Increased share of services in GDP lead to poverty reduction as they have higher

employment elasticities.

3.4 Lessons from country case studies

Broad-based growth and overall human development lead to attainment of other

millennium development goals such as universal education, gender equality, goodhealth, sustained environment and global partnership for development.

But, it is neither possible nor advisable to identify a unique set of policies or

programs which will hold good equally for all countries at all times. They depend on the countrys socio-economic-political environment.

3.5 Lessons from best practices

International best practices of development process indicate that a piece-mealapproach to development policy does not serve tangible results, rather delays

comprehensive reforms program, raises transitional costs and lengthens the

transition period to achieve desirable development goals.

Basic question is not: whether these policies or programs need to be taken. Ratherthe question is: how to prioritize and sequence these reforms and with what speed

and intensity? Again, a universal answer to this question is neither feasible nor desirable.

4.1 The Gambia PRSP-II (2007-2011) PRSP-II incorporated programs focused on the Millennium Development Goals

(MDGs) with the following overall strategic priorities:

a) macroeconomic stability and effective public resource management;

b) promotion of pro-poor growth and employment through private sectordevelopment;

c) improved basic social services;d) strengthened local communities and civil society organizations (CSOs); ande) Multi-sectoral programs on gender, environment, nutrition, and population.

4.2 PRSP-II of the Gambia- Pillars 1-2

PILLAR 1 - Create an enabling policy environment to promote economic growth

and poverty reduction

1.1. Macro-economic management1.2 Improve legal system

1.3 Civil service reforms

1.4 Public Utilities Regulation Reforms

Pillar-2: Improve productive capacity and social protection of the poor andvulnerable sections (MDG-I)

2.1-2.2 Agriculture, Fisheries & marine resources

2.3 -2.4 Tourism, and Industry2.5-2.6 Trade and Employment

2.7-2.8 Energy and Infrastructure

2.9 Telecommunication

3


4/27

4.3 PRSP-II of the Gambia- Pillars 3-4

PILLAR 3 - Improve coverage of the basic social service needs of the poor and

vulnerable [MDG 2, 4, 5 and 6]3.1 Health,

3.2 Basic Education,

3.3 Higher Education3.4 Water supply,

3.5 Sanitation,

PILLAR 4 - Build the capacity of local communities and Civil SocietyOrganizations (CSOs) to play an active role for poverty reduction

4.4 PRSP-II of the Gambia- Pillar-5

PILLAR 5 - Mainstream poverty-related cross-cutting issues into poverty reduction

[MDG 3, 6, 7]5.1 Gender,

5.2 HIV/ Aids,

5.3 Population

5.4 Nutrition,5.5 Climate change

5.6 Environment

4.5 PRGF- Medium Term Macroeconomic Framework

a) Real GDP growth rates of 4.66% a year;

b) Inflation falling to 6 percent in 2009 and to 5 percent in 2010;c) A reduction in governments domestic debt from 25.5 percent of GDP at end-

2008 to 17.3 percent at end-2011;

d) External current account deficits (including official transfers) falling from about16% of GDP in 2008 to about 12% in 2011; and

e) Rebuilding international reserves to cover at least 4 months of imports.

5.1 Fund-Bank Review of PRSP-II

Progress towards the MDGs is reported to be mixed. While the target of reducing

poverty to 15 percent (goal 1) is unlikely to be achieved, The Gambia has madesignificant strides in several areas including:

(i) Goal 2 on the achievement of universal primary education;

(ii) Goal 3 on the promotion of gender equality and empowerment of women; and

(iii) Goal 4 on the reduction of child mortality.5.2 Fund-Bank Review of PRSP-II

The Joint Staff Advisory Note (JSAN) on PRSP recommends the following

priority tasks by the government of the Gambia:a) developing a comprehensive agricultural sector strategy;

b) maintaining macro-economic stability

c) prioritizing improvement of governance; andd) Refining PRSP performance indicators.

e) The Fund-Bank recommends development of sectoral strategic plans and overall

Medium Term Expenditure Framework.

4


5/27

Selected References

Das, Tarun (2007) Inter-linkages between UN-MDGs, Poverty Reduction Growth

Strategy and National Development Plans - Selected Country Experiences from ESCAP,

Part-1, Main Report, pp.1-84, Part-2, Annexes, pp.1-78, UN-ESCAP, Oct 2007.

Das, Tarun(2003a) Role of Agro-based and Resource-Based Industries for Export Promotionand Poverty Alleviation in ESCAP countries, pp.1-126,ESCAP, UN, Bangkok, January 2003.

Das, Tarun (2003b) Economic Reforms in India- Rationale, Scope, Progress and UnfinishedAgenda, pp.1-80, Bankof Maharashtra, Pune, February 2003.

International Monetary Fund (IMF) (2003) Aligning the PRGF and the PRSP Approach:

Issues and Options, Washington D. C., April 25, 2003.

IMF, Independent Evaluation office (2004), Evaluation Report on PRSPs and the PRGF,

Washington D.C., July 7, 2004.

International Monetary Fund (2009a)The Gambia: Letter of Intent,Memorandum of Economic and Financial Policies, and TechnicalMemorandum of Understanding, pp.1-23, IMF, Washington D.C., 3February 2009.

International Monetary Fund (2009b) The Gambia: Poverty Reduction Strategy Paper

Annual Progress Report, IMF Country Report No. 09/75, pp.1-134, InternationalMonetary Fund, Washington, Feb 2009, available on IMF Website http://www.imf.org

under Country/the Gambia.

IMF and International Development Association (2009) the Gambia: Poverty

Reduction Strategy PaperAnnual Progress Report Joint Staff Advisory Note, IMF

Country Report No. 09/76, IMF and International Development Association, Feb 2009,Washington D.C.

Son, Hyun H. and Nanak Kakwani (2006) Global estimates of pro-poor growth, IPC Working

Paper series no.31, International Poverty Centre, Brazil.

United Nations, ADB and UNDP(2008)A Future Within Reach,2008.

United Nations International Poverty Centre (2007) Analyzing and Achieving Pro-poorGrowth, in Poverty in Focus, International Poverty Centre, Brazil, March 2007.

World Bank and the International Monetary Fund (2004)Poverty Reduction Strategy

PapersProgress in Implementation,pp.1-56, September 20, 2004.

National Planning Commission, Office of the President (2008), PRSP II Annual

Progress Report, January- December 2007, pp.1-132, May 2008.

5
http://www.imf.org/http://www.imf.org/


6/27

Part-II:

Abridged version of a Report prepared on the basis of

Case Studies in 14 selected countries in the Asia and PacificTarun Das, Macroeconomic Adviser

ADB ISPEFG, the Gambia, Banjul.

______________________________________________________________________

This paper is a part of a wider study made by the author as a Consultant for UN-ESCAP 1,Bangkok, Thailand in 2007 on the interrelationships among Millennium Development

Goals (MDG) Reports and strategies, National Development Plans (NDPs) and Poverty

Reduction Strategy Papers (PRSPs) on the basis of case studies in 14 Asian countries viz.Afghanistan, Bangladesh, Cambodia, China, Laos, Maldives, Mongolia, Myanmar,

Nepal, Pakistan, Papua New Guinea, Samoa, Thailand, Timor Leste.

1.1 Growth and Pro-poor Policies

The reduction of income poverty depends on sustained high economic growth. There is a

general consensus among the poverty experts, policy makers and multilateral funding anddevelopment agencies that a rise in per capita income is a major element in sustainable

poverty reduction. However, similar rates of growth can have very different impact on

poverty depending on the initial levels of income inequalities and different socio-economic-political environment over time and space (UNDP IPC 2007). A recent

working paper from the UNDP International Poverty Centre, Brazil (H. H. Son and N.

Kakwani 2006) presents regional and global estimates of growth and their pro-poornesson the basis of cross-country data for 237 growth spells in 80 low-and middle-income

developing countries during 1984-2001. The study indicated that there are large

variations not only in growth rates but also in the impact on poverty.

The study defined growth as pro-poor if poor households increase income proportionately

more than the non-poor (i.e. households above the poverty line). When growth is negative

i.e. in a recession, it is termed as pro-poor if the income decrease for the poor isproportionately less than that for non-poor households. The study indicated that of all the

237 growth spells under observation, 44.7 percent witnessed negative growth rates. In the

remaining 55.3 percent growth spells with positive growth rates, growth was pro-pooronly in 23.2 percent cases. Out of all the growth spells (including negative growth rates),

majority of the cases (accounting for 55.5 percent of total) were anti-poor (Table 1.1).

The study suggests that global growth processes have generally not been pro-poor.

1 Das, Tarun (2007) Inter-linkages between UN-MDGs, Poverty Reduction Growth Strategy andNational Development Plans - Selected Country Experiences from ESCAP, Part-1, Main Report, pp.1-84,

Part-2, Annexes, pp.1-78, ESCAP, United Nations, Bangkok, Oct 2007. Report was presented by the

author at the Regional MDG Workshop at Bangkok on 15-18 Oct 2007, and main conclusions of the

study published in a joint ADB-ESCAP-UNDP Report entitled A Future Within Reach,2008.

6


7/27

Table 1.1 Country grouping by pro-poor and anti-poor growth ratesCountry Groupings Positive growth Negative growth

Pro-

poor

Anti-

poor

Total Pro-

poor

Anti-

poor

Total

Low income countries 20.8 33.3 54.2 27.8 18.1 45.8

Low middle income 26.7 31.4 58.1 19.0 22.9 41.9

Upper middle income 21.7 35.0 56.7 21.7 21.7 43.3

Heavily indebted poor

countries (HIPC)

18.6 27.1 45.8 32.2 22.0 54.2

East Asia and Pacific 17.1 57.1 74.3 17.1 8.6 25.7

South Asia 29.4 52.9 82.4 11.8 5.9 17.6

East Europe and CentralAsia

12.3 21.1 33.3 21.1 45.6 66.7

Latin America and

Caribbean

30.4 29.1 59.5 24.1 16.5 40.5

Middle East and NorthAfrica

35.7 14.3 50.0 28.6 21.4 50.0

Sub-Saharan Africa 20.0 34.3 54.3 31.4 14.3 45.7

All countries 23.2 32.1 55.3 22.4 22.4 44.7

Source: H. H. Son (2007)

Above observations also hold good for Sub-Saharan Africa. Table 1.1 shows that in Sub-

Saharan Africa, growth rates were positive in 54.3 percent of the spells, but only 20percent of the spells witnessed both positive and pro poor growth. However, during

recession, majority of the spells were pro-poor indicating the respective

governments adopted adequate safety nets for the poor during the periods of

economic crisis.

Although cross-country regression analysis is subject to serious statistical estimationproblems, this study also investigated the relationship between different policies and

growth rates. It was observed that lower inflation and price stability are associated

with pro-poor growth. Contrary to conventional wisdom, the study found that low levels

of trade openness were significantly associated with positive growth and high level oftrade openness with negative growth, and there was no significant relationship between

trade openness and pro-poor growth.

There seems to be a broad consensus among analysts and policy makers that highergrowth is a necessary condition but not sufficient for poverty reduction. It needs to

be accompanied by pro-poor policies and strategies. But there is no consensus about how

7


8/27

to define and measure pro-poor growth. The International Poverty centre (IPC) at Brazil

initiated a debate on this issue among researchers in 2004-05 in a series of One-Pagers,

summarized in Number-6: Pro-poor growth; finding the Holy Grail. The March 2007Issue of the IPCs Journal Poverty in Focus carries this debate further and concludes

that much more pro-poor growth, whatever be the definition, is needed in most

2. Common Policies and Programs under MDG Reports and PRSP

This section analyses the stylized policies and programs advocated in both MDG Reports

and PRS Papers. It is observed that the attainment of stable and broad-based economic

growth, which is more inclusive and participatory, is a pre-requisite for sustainablereduction of poverty and unemployment.

This requires adoption of a comprehensive reforms program and policy package

encompassing stabilization policies and structural reforms, and measures for improvingboth physical infrastructure and human capital, strengthening institutional set-up,

improving governance and adopting targeted poverty alleviation programs.

The experiences of development process in many countries indicate that a piece-meal

approach to development policy does not serve tangible results, rather delay

comprehensive reforms program which leads to enhancement of transitional costs andlengthens the transition period to achieve desirable development goals.

2.1 Stylized Policies and Programs under MDG and PRSP

Both the MDG reports and the Poverty Reduction Strategy Papers (PRSP) deal withpolicies, programs and strategies to achieve MDG targets. Although the PRSP has a focus

on poverty reduction, it also deals with other goals such as education, health, gender

equality, environmental sustainability and global partnership for development. Thereports emphasize that the attainment of broad-based economic growth, which is more

inclusive, participatory, and stable over time, is pre-requisite for sustainable reduction of

poverty and unemployment. It is observed from country case studies that all the countrieshave initiated a wide range of policies, reforms and programs to enhance efficiency,

productivity and international competitiveness and to impart dynamism to the overall

growth process with a focus on faster reduction of poverty, hunger, illiteracy and ill

health. These policies and program can be grouped under nine broad heads as below:

1. Macro stabilization policies and public finance reforms;

2. Structural reforms in trade, industry, land, labour and capital markets3. Sectoral priorities for poverty reduction and employment generation

4. Development of physical infrastructure and human capital

5. Conflict resolution, social development and environment protection6. Direct poverty alleviation programs

7. Improving legal and institutional set-up

8. External Aid coordination and harmonization

9. Strengthening systems for measurement, evaluation, monitoring and review

8


9/27

These broad policies are listed in details in Table-2.1. It may be emphasized at this stage

that all these polices and programs are interrelated and provide a package of reforms and

policies that need to be undertaken collectively by a country, although at varying degreesof coverage, scope and intensity depending on its size, level of development and socio-

political environment, for attaining sustained growth with poverty reduction. Broad-based

growth and overall human development will lead to attainment of other millenniumdevelopment goals regarding universal education, gender equality, good health, sustained

environment and global partnership for development. It is neither possible nor

advisable to identify a single policy or program which will satisfy all the

development goals or which will hold good equally for all countries at all times. Age-

old Tinbergen (1964) theory on planning techniques also states that a planner needs at

least the same number of policies as the number of objectives he is entrusted with.

The experiences of development process in many countries indicate that a piece-meal

approach to development policy does not serve tangible results, rather delay

comprehensive reforms program, which leads to enhancement of transitional costs

and lengthens the transition period to achieve desirable development goals. Thebasic question is not: whether these policies or programs need to be taken or not. Rather

the question should be: how to prioritize and sequence these reforms and with what speedand intensity? Again, a universal answer to this question is neither feasible nor desirable.

Even for a single country, an answer cannot be given without painstaking research and

modeling works which are beyond the scope of this report.

Table-2.1: Common policies and programs under MDG Reports and PRSPBroad Heads Detailedstrategies, policies and programs

1. Sustaining macroeconomicstability and macro liberalization

policies for enhancing growthwith poverty reduction andemployment generation

1.1 Fiscal and budgetary reforms and policies1.2 Monetary and credit policies

1.3 Medium Term Fiscal Sustainability1.4 Public expenditure reforms1.5 Medium Term Expenditure Framework

(MTEF)/ Expenditure Projection (MTEP)

2. Structural reforms to enhance

productivity and efficiency, and to

impart dynamism to overallgrowth process

2.1 Reduction and rationalisation of customs

duties and exports promotion

2.2 Decontrol, delicensing and deregulation ofindustrial production and investment

2.3 Public enterprises reform and privatisation

2.4 Private sector development and Public-

Private Partnership

2.5 Labour market reforms2.6 Financial and capital market reforms

2.7 Micro finance /micro insurance schemes

3. Sectoral priorities for poverty

reduction and employmentgeneration

3.1 Development of agriculture and irrigation

3.2 Development of employment-intensiveand agro-based industries

3.3 Development of small and medium sized

enterprises (SMEs)

9


10/27

4. Development of efficient

physical infrastructure and skilledhuman capital

4.1 Infrastructure development Power,

transport, telecommunications, water andsanitation

4.2 Social sectors development- education and

health

4.3 Forestry p policy5. Conflict resolution, social

development and environment

protection

5.1 Community participation5.2 Control of pollution and environmental

hazards

5.3 Economic and social security measures

5.4 Mainstreaming women and the excludedgroups through reservation in parliament

6. Direct poverty alleviationprograms for the target groups

6.1 Targeted employment generationprograms

6.2 Food for works programs, public works

programs for local communities

6.3 Housing programs for the poor7. Improving legal and institutional

set up7.1 Good governance and strengthening

institutional set up

7.2 Civil service and administrative reforms

7.3 Decentralization and local governance

7.4 Devolution of resources and

implementation of programs to the

subnational levels7.5 Strengthening Anti-Corruption Strategy,

Transparency and Accountability

7.6 Legal and Judicial Reform

8. External Aid coordination and

harmonization

8.1 Need for external resources

8.2 Aid coordination and harmonization8.3 Enhancing absorptive capacity

8.4 Encouraging foreign direct investment

9. Strengthening systems for

measurement, evaluation,

monitoring and review

9.1 Improving concepts, measurement and

analysis of poverty

9.2 Poverty monitoring and poverty mapping9.3 Output and outcome budgeting

10


11/27

2.2 Rationale for a package of policies and programs for poverty reduction

There is need to adopt a comprehensive package of programs to deal with poverty,

illiteracy and ill health. The major cause of poverty especially in income is

unemployment and underemployment. Therefore, any poverty reduction program must be based on generating remunerative employment opportunities through sustained high

growth and focusing on employment-intensive sectors such as agriculture, small and

medium enterprises and various kinds of services in retail trade, transport and

communications. However, poor cannot participate fully in these activities and contributeto economic development unless they are adequately skilled and healthy. Therefore,

improving education levels and health conditions of the poor and upgrading their skill

and capabilities are essential for poverty reduction. Therefore, we need a package ofpolicies and programs to attack simultaneously on unemployment, illiteracy, hunger and

disease. As these poverty reduction strategies require massive investment in

infrastructure and human capital formation, developing countries, particularly the leastdeveloped countries, need technical assistance and financial aid from the developed

community and international development and financial organisations.

2.3 Poverty traps at individual, local, national and global levels

The poor persons are caught by forces at the individual, local, national, and global levels

that combine to form a four-tiered poverty trap. At the individual level, factors includeskewed distribution of land and other assets, various demographic factors leading to

physical weakness and higher probability of disease and high fertility rate. At the local

level, poor faces greedy moneylenders and false promises by self-interested politicians,and has relatively lower power to fight against corrupt institutions. These are reinforced

at the national level by various policies ranging from tax laws to the sanction of

commercial credits that are generally pro-rich or anti-poor. At the global level, the poor

are held down by a mix of factors such as oppressive debt burdens, high interest rates,tied grants, falling export prices, and rising capital flight.

At the individual level, there are four factors that lead to poverty trap. The first

individual factoris the lack of productive assets. The poor are poor not only because they

earn less but also because they own less.

The second individual factor leading to poverty trap relates to physical weakness and

illness due to lack of nourishment, clean water, basic medical care, and adequate housing

space and sanitary services. Physical weakness often combines with low income to forma vicious circle of poverty and ill health.

High fertility rates form the third part of the individual poverty trap. The poor families

have larger size, larger proportion of children, irregular sources of livelihood, lowproductive jobs, high risk and insecure shelter and limited accessibility to basic services.

Rapid population growth and lack of sufficient employment opportunities force wages

down to the survival level, as the poor compete with each other for limited jobs.

11


12/27

Thefourth individual factorcombines a host of other demographic factors. The culture of

poverty theorists argue that poverty breeds poverty and a poor family has a high

probability of staying poor as these families are associated with high risks of ill health,high fertility rates, inadequate education and training and lack of dynamism. With the

progress of urbanization and rapid growth of services sectors, traditional joint families,

which provided limited but efficient mutual support networks within a family,progressively broke down into micro families, which are economically less viable.

Demographic factors interact with socio-economic and environmental factors. For anurban family a child is born by parental planning and family size is limited to the

necessary minimum. But in rural areas in a developing country, a child is regarded as an

asset and is expected simply because of normal life cycle progressions. Government is

trying to change this environment by suitable public policy on health and welfare. But thespread of education, economic incentives and facilities for family planning have marginal

impact on the fertility, net reproduction rates and the family size as socio-cultural

environment puts a constraint on the effectiveness of family planning.

At the local level, majority of the poor people live in rural areas. A poor family is

associated with extreme vulnerability to unforeseen expenses due to natural calamities,crop failures, fires, illness, funerals, and the costs of legal battles and bribes. To meet

these expenses a poor family very often borrows at usurious rates from greedy

moneylenders, piling debt on deprivation, or sell or mortgage at low rates whatever assets

they have such as land, livestock, family silver, house, tools, even their future labour.

Another factor leading to the local poverty trap is powerlessness of the poor. Ignorant ofthe law and without adequate resources to hire legal advice, the poor household is an easy

victim of exploitation by moneylenders, merchants, landlords, petty officials and police.

Aware of the power of the richer rural and urban people and their alliances with the

bureaucrats and politicians, the poor household avoids any activity, which mightendanger their employment, tenancy, loans or protection. There is a saying by the

peasants in province of West Bengal in India that Fishes cant afford to live on bad

terms with the crocodiles in the pool.

At the national level, poverty trap arises due to pro-elite or anti-poor public policies.

Public credit schemes for agriculture generally flow to the privileged rural groups or theso-called kulaks. Education budgets are similarly tilted towards the rich. University and

higher education is an excellent investment for any nation, but the poor need primary and

secondary education first. In health care, the same pattern emerges. Subsidized urban

hospitals take the lions share of public health budgets, but help those who least need

public assistance. Community-based health centres and rural clinics, which form thebackbone of a health care system and cater to the poor, are generally under funded.

At the international level, international development assistance explicitly targeted to help

the poorest of the poor has very often tended to benefit not the poorest population of a

country, but those who are nearer to the average income and the individuals in the middleand upper income brackets who have better knowledge of public policies and programs,

and better access to the government machinery.

12


13/27

2.4 Poverty and the Environment

Most of the worlds environmental threats, from ground-water contamination to air andnoise pollution and climate change, are byproducts of affluence. But poverty also leads to

ecological deterioration when people overexploit their resource base. The prevailing

conditions of poverty and unemployment force the poor people to live in slums andsquatter settlements without basic services and further degrade their environment. Rural

sector also faces the emerging environment problems. The pressure of land is exacerbated

by farmers needs to gather fuel wood and graze their livestock. Farmers burn animaldung and agricultural waste instead of using these resources for soil enrichment. Poor

people use forest resources as fuel wood leading to deforestation, which cause droughts.

The short-term needs force landless families to put forestland and mountain slopes on

cultivation. Environmental degradation, in turn, perpetuates economic deprivation, as

degraded ecosystems result in diminishing yields to their poor inhabitants and furtherimpoverishment of the population. A self-enforcing downward spiral of economic

deprivation and ecological degradation takes place. Pushed to the brink of starvation,

evicted from familiar lands and ancestral homes, or deprived of alternatives by misguided

laws, they lack access to sufficient quantities of food, land, water or capital to providethem with a sustainable livelihood.

3. Stylized Policy Package for Pro-Poor Growth

3.1 Macro Adjustment Policies

Macro adjustment policies are broadly divided into two groups- stabilization policies andstructural reforms. While stabilization policies aim at reducing macro economic

imbalances by attacking demand, structural adjustment policies aim at increasing supply

and improving productivity and growth by imparting competitiveness, efficiency and

dynamism to the system. These encompass the following specific measures:

Macro stabilization policies:

(a) Fiscal policies

(b) Monetary and credit policies

(c) Exchange rate adjustment(d) Tariff and price policies

Structural adjustment policies

(a) Reforms in trade and external sector(b) Reforms in industry and infrastructure

(c) Reforms in agriculture(d) Public sector reforms and privatisation

(e) Private participation and public-private partnership

(f) Factor market reforms- land, labour and capital markets

13


14/27

3.2 Reorientation of public policies

Almost all the countries of the world now are going through a phase of extensive market

reforms with an emphasis on the so-called LPG (viz. liberalization, privatisation and

globalization). There is a re-orientation of public policies and a change of the role of thegovernment from a controller to an enabler, from a supplier to a facilitator, from an

operator to a policy maker, and from a regulator to a trustee of social equity and

environmental sustainability. At present the basic job of the government is to createenabling environment for public-private partnership, to link fiscal, monetary and other

incentives to productivity, to streamline public investment and social welfare programs,

to repair market failures, and to strengthen institutional structures and legal system. There

is emphasis on greater decentralization in implementation, transparency in policy making,and consultations with stakeholders for greater public participation in development.

Two basic trends are affecting governance in most of the Asian countries. The firsttrend is decentralization i.e. increased administrative, political and fiscal power is

being transferred to the sub-national governments for implementation of programs,

particularly relating to social sectors. This means that the basic job of the nationalgovernment is to formulate policies and programs, monitor performance and

implementation, build institutional capacity, facilitate change and enforce standards and

quality. On the other hand, more powers and resources are being devolved to the sub-national governments.

The other trend is an emphasis on transparency and accountability in governance

and utilizing techniques such as performance and output-and-outcome based

budgeting. Output is the continuous or end result of a program, whereas outcome is the

medium-term or long-term impact of a program. Under results based budgeting systems,

line agencies enter into contracts or memorandum of understanding (MOUs) with the budget allocating ministry to deliver specified outputs in return for certain inputs

(personnel and financial resources). The system requires developing output and outcome

indicators and monitoring their trends over time.

There is a distinct change in the mindset of bureaucrats and the realization of a need for

greater co-ordination, co-operation and partnership with private economic agents fordevelopment. It is now recognized that both well-governed state and well functioning

markets are essential for high growth and sustainability, and Government and free

markets should supplement and complement each other. Government should withdrawfrom sectors where private participation would be more productive and more efficient,

and still the scope of government should remain large in development of social sectorsand physical infrastructure.

3.3 Role of Macro Stabilisation Policies for Poverty Reduction

Macro-economic stability is one of the necessary conditions for efficient development ofresource base of industries and poverty reduction. Macro-economic volatility puts a break

on economic growth. High and unpredictable inflation hurts everybody particularly the

14


15/27

poor as their incomes are not indexed to prices, and thus contributes directly to higher

poverty rates. However, sound macro-economic polices have only limited capacity to

alleviate poverty directly as the trickle down effects of high growth may be uneven andtime consuming. These policies should be directed at promoting growth through prudent

implementation of macro-economic goals, and eschewing direct interventions for

protecting the interests of the poor and for developing target groups of industries withemployment potential and comparative advantage.

Studies done by Dutt and Ravallion (1997), Ravallion and Dutt (1996) and the WorldBank (1998, 1999, 2000, and 2002) on the interrelations between poverty reduction and

macro stabilization policies made the following observations:

(a) An increase in per capita income is essential for reduction of poverty, as itgenerates extra income that can benefit the poor.

(b) Educational achievement facilitated by public investment in health allows the

poor to participate and contribute more in the economic growth process throughhigher and productive employment.

(c) Inflation had a negative effect on poverty reduction. Higher inflation in

developing countries is generally associated with monsoon failures and a

relatively higher rise in the price of food grains. The poor are doubly hit, as their

consumption basket is predominantly food, and their wages and demand forlabour in the years of poor harvests rise less than general prices.

(d) Services sectors are the fastest growing sectors in a developing economy andaccount for more than sixty per cent of GDP. These sectors have in general higher

employment elasticities. Their growth, therefore, helps in poverty reduction.

(e) An increasing share of private sector in total investment leads to poverty

reduction, as private investment is more productive and more efficient than the

public investment in many sectors.

(f) A reduction of fiscal deficit helps in poverty reduction, as it does not lead to

crowing out of private investment.

The relations of poverty with other variables lead to the following policy prescriptions:

(1) Higher growth rate of income than that of population is essential for povertyreduction as it provides extra income for distribution among the poor without

affecting adversely the well being and savings of the relatively richer households.

(2) While growth in per capita income is a necessary condition for poverty reduction, it

is by no means sufficient. It is important to create an enabling environment for the

poor so that they can participate in, and benefit from the growth process. The pro-

15


16/27

poor public policies include creation of employment opportunities and enhancing

the level of health, education and skill of the poor.

(3) A stable macroeconomic environment, along with low inflation and sustainablefiscal deficit, makes it possible for the poor to safeguard their purchasing power in

years of natural calamities or adverse business and trade cycles.

(4) The reduction of government deficit allows commercial and development banks to

provide more funds for private investment, which is more productive and more

efficient. It also allows the government to devote more scarce resources toinvestment in social sectors.

3.4 Fiscal Incentives

In many countries, various fiscal incentives and direct subsidies are provided for

development of health, education, sanitation, water supply and other social services.

Government also provides fiscal incentives such as tax holidays, deferment of taxes and

duties, concessional supply of land, power and other basic inputs to the industry. In manycases, the benefit has been marginal either because they are not available to small and

medium industries or they are more accessible to larger industries. Moreover, taxholidays have been less effective in the regional dispersal of industries, as industries tend

to be located near the main demand centres or regions with better infrastructure facilities.

Instead of providing tax breaks for industries, it may be more productive to develop basic

infrastructure facilities in backward areas through increased allocation of public funds.

A reform of government policies should redirect the focus from the microeconomic level

of the firm to the macroeconomic level of business and the economic environment.Instead of focusing on the different concessions to be provided, greater emphasis should

be placed on creating an enabling environment for long-term development of industries

and services. This may entail the dismantling of costly incentives and subsidies thatencourage inefficiency and waste in firms, increasing the availability of essential inputs

and bank credits for small and medium industries, and introducing a wide array of

marketing options and possibilities.

3.5 Role of Foreign Direct Investment (FDI)

All the developing countries are trying to attract foreign direct investment (FDI) andportfolio investment. FDI acts an engine of growth and embodies a package of important

sources of capital, technology, and managerial, marketing and technical skills. The

presence of multinationals promotes greater efficiency and dynamism in the domesticeconomy. The training gained by workers and local managers and their exposure to

modern organizational system and methods are valuable assets.

In order to improve private participation including foreign investment, developing

countries are unbundling risk in production, transmission and distribution of utilities,

improving public-private partnership through risk-sharing, rationalizing user charges, andstrengthening institutional, legal and regulatory framework. They are also separating

policymakers from service providers and regulators.

16


17/27

The diversity of experiences in Asian economies with respect of FDI requires different

policy approaches on the part of host countries. Those countries that have only recentlybeen open to FDI need to ensure that the open door policy is maintained and remains

stable. They should examine the possibility of a further 17liberalization of FDI regimes;

the harmonization of FDI and related policies on industry, trade and technology; andimproving the efficiency of their administrative set-up for investment approvals. In doing

so, all countries in the region should pay particular attention to the firms from

neighbouring countries, so as to capitalize the growing intra-regional investment. Specialattention needs to be given to small and medium-sized enterprises whose special needs

dictated by their limited financial and managerial resources and insufficient information

may call for incentives for the joint ventures. The Asian market has high potentials for

small and medium-sized TNCs.

3.6 Innovative Financing Techniques for the poor

There is a need for developing innovative financing measures for the poor such as settingup of venture capital funds, leasing and hiring companies, mortgage finance companies,

factoring companies,trade credit suppliers and micro finance.

Micro Finance

Development of micro-finance promotes economic growth, thereby contributing to

poverty alleviation. Not only financial development fosters economic growth and creates

employment opportunities for the poor, but also helps to mobilize savings.

Micro-finance institutions (MFIs) can be defined as formal, semi-formal, or informal

providers of financial services to low-income clients, including the self-employed.

Financial services generally are restricted to lending although some MFIs also providesavings, insurance and payments services. The Bangladesh Gramin Bank is a success

story of micro finance institution helping the poor.

There are a number of reasons why MFIs are likely to bring benefits to the poor. MFIs

enjoy better local knowledge and proximity, which is an important advantage because the

majority of poor households live in vast rural areas that are underserved by thecommercial banks. Furthermore, the semi-formal and informal MFIs complement the

formal financial system by providing financial services to those who have limited access

to the formal financial system.

However, the importance of micro-finance as an instrument of poverty alleviation shouldbe treated with caution. The quality of the loan portfolio of MFIs is often poor because of

inadequate management. A large number of these institutions are not efficient andsurvive on subsidies from their donors. Lending rates charged by MFIs are usually very

high. The linkages between MFIs and commercial banks are often weak. Replication of

successful MFI models is often impossible due to differences in demographic or culturalcontexts. Finally, there are still no countries with a comprehensive network of micro-

finance institutions.

17


18/27

3.7 Sectoral Policies

3.7.1 Rationale for development of agriculture

And agro-based SMEs for poverty alleviation

In many developing countries, agro-based and resource-based SMEs contribute

significantly to GDP growth, employment generation and poverty alleviation. In general,SMEs have higher labour elasticity and have grown at a higher rate than overall industrial

sector. This proves their ability to compete globally.

But, SMEs face a number of problems and constraints, such as outdated technology andlow productivity, lack of skill of labour and management, infrastructure constraints, low

economies of scale, lack of modern marketing, high cost of domestic credit and lack of

foreign investment, and increased competition due to removal of quantitative restrictions

and reduction of customs duties. A wide range of opportunities can be seized by small-scale and labour-intensive industries for additional employment and poverty alleviation if

suitable government policies are taken to remove these constraints.

The experiences of India, Bangladesh, Pakistan, China, Korea, Indonesia, Thailand,

Philippines, Japan and Singapore suggest that given appropriate program and policy

assistance, SMEs can make substantial contributions not only to output and employmentbut also to exports (Das 2003a). Rather than general subsidies, selective support may be

extended to qualified firms and industries only with fixed term finance for the specific

purpose of assisting them to become competitive.

Rationale for promoting agro and resource based SMEs lies in their valuable

contributions to employment generation and poverty alleviation. These enterprisescontribute significantly to poverty alleviation and promote economic and social justice by

employing a significant portion of the poor and low skill work force, which may

otherwise remain unemployed or under employed. Higher employment in rural areashelps in reduction of inequalities, development of backward areas and balanced regional

growth and development.

The poor persons cannot participate in the growth process for reasons of extremedeprivation or vulnerability combined with poverty or face continuing exposure to risks

of ill health and malnutrition, which may jeopardize their ability to participate in the

opportunities offered by growth. Employment generated by the SMEs provides effectivesafety nets that insure rural poor against the income fluctuations.

Development of agro-based and resource-based industries provides opportunities for thegrowth of economic activities in the informal sector and micro enterprises in both rural

and urban areas. The informal sector remains an important source of income and

employment for the poor and self-employed in developing countries. This sector is very

diverse and covers multiple economic activities ranging from petty trading and personal

18


19/27

and domestic services to manufacturing, transport and construction. The social groups

include artisans and craftsmen, hawkers, fruits and vegetable vendors, women, and daily

laborers for construction and other services. Employment or ownership of microenterprise provides the poor with a source of empowerment and income security and

enables them to participate actively in rural and overall economic development.

Agro-based industries open up new channels of distribution and marketing for

agricultural commodities produced by the small and marginal farmers and raise their

incomes. Development of resource-based industries, particularly SMEs, in rural areasleads to valorization of agricultural land, agricultural commodities and other resources.

Locations of agro-based SMEs in rural areas help to distribute the benefits of economic

growth broadly among the rural poor. They also improve value addition and productivityof rural industries through wider distribution networks and greater access to both internal

and external markets. A dynamic SMEs sector serves not only to create employment but

also to earn foreign exchange through exports, upgrade the quality of the labour force and

diffuse technological know-how throughout the economy. These industries help tomobilize domestic resources by utilizing the savings, labour and agricultural raw

materials that otherwise remain idle. They serve the low-income consumer markets andproduce a wide variety of goods that also include sophisticated products for export.

The location of small and medium industries in rural areas creates livelihood

opportunities that help to stop migration to urban centres. They provide a training groundfor the small-scale entrepreneurs and business management personnel, who may later join

larger undertakings.

The role of financial markets as an instrument to promote SMEs and to alleviate poverty

is generally focused on supplying credit facilities. However, credit is only one of the

financial services that the poor need. Access to bank accounts or savings facilities in therural areas is equally important. For example, people who extract their income primarily

from agriculture must build up financial assets following harvests to sustain themselves

for the rest of the year. Even the poorest households are eager to save if they can obtainpositive real interest rates and there are conveniently located deposit collecting facilities.

This point has been confirmed by the experience in Bangladesh and Indonesia.

Integration of SMEs into global market offers the potential for more rapid growth andpoverty reduction. Increased market access for agricultural products would work to

directly address poverty reduction in developing countries. While the rapid expansion of

demand for unskilled labour in manufacturing and urban services in many developingcountries has sharply reduced rural poverty, about three-quarters of the worlds poor still

live in rural areas, where agriculture is often the dominant economic activity (Das

2003a). Agriculture accounts for about 27 per cent of GDP in developing countries, asimilar share of exports and 50 per cent of employment. This dependency on agriculture

is even higher in LDCs. But agricultural markets are among the most heavily distorted

and attract tariffs several times higher than those facing manufactured imports.

19


20/27

Historically, textiles and clothing (T&C) have played a unique role in economic

development and poverty reduction. Their contribution to the Industrial Revolution inWestern Europe and North America in the 18 th and 19th centuries is well known, and they

continued to spearhead industrialization in many developing countries in the 20 th century.

Since textile and clothing production often requires only simple technology and isintensive in unskilled labour, many developing countries have a strong comparative

advantage in these sectors. In the mid-1960s, developing countries accounted for 15 per

cent of world textile exports and less than 25 per cent of world clothing exports. By 1998,these shares had reached 50 per cent and 70 per cent, respectively. However, the sector

has also long been a prime target for protectionism.

Despite these positive aspects, SMEs are criticized for their inability to realize economiesof scale in procurement and production, and to have higher costs of production. In many

countries, SMEs exist on the strength of costly government support programs in terms of

several fiscal, monetary and other concessions.

3.8. Targeted Pro-poor Policies

Various empirical studies by Ahluwalia (1990), Chakravarty (1990) and the World Bank(2000 and 2003) concluded that higher economic growth, with a focus on pro-poor

economic policies, is a key driver of poverty reduction. A research study by Ghura, Leite

and Tsangarides (2003) also observed that some public policies are super pro poor i.e.

they appear to directly influence the incomes of the poor. On the basis of cross-country

econometric relations, they concluded the following:

(i) Countries with higher income shares of the poor are characterized by higher

macroeconomic stability, lower income inequality, higher literacy, more democraticinstitutions, better governance, better internal environment, more open traderegimes and higher levels of financial development than those in other countries.

(ii) Economic growth is an important factor in raising the incomes of the poor.

(iii) Certain public policies have direct impact on the incomes of the poor, even after

taking into the effect of growth. These include policies that lower inflation, shrinkthe size of the government, promote financial deepening, and raise the educational

level. The policies are considered super pro- poor because they raise the incomes

of the poor directly, as well as indirectly through economic growth. The direct andindirect effects are mutually reinforcing, and there is thus no trade-off between

growth promotion and poverty alleviation.

(iv) The poor are significantly vulnerable to adverse movements in the terms of trade

and acceleration of inflation rates as their incomes are not indexed to prices.

(v) A number of variables, such as trade openness, investment rate, the extent ofdemocracy, life expectancy, and civil wars that are generally shown to affect

economic growth do not directly influence the incomes of the poor.

20


21/27

Most of the Asian economies have introduced several employment generation and

poverty alleviation programs over the years. The ongoing economic reforms have also a

human face and are trying to strengthen the anti-poverty programs and to provide safetynets to the vulnerable sections that might be adversely affected by structural changes. In

the past, public expenditures for poverty alleviation in the form of subsidies and price

controls tended to be captured mostly by the better off and funded by the fiscal deficits.These policies may have harmed the poor through the adverse effects of inflation. More

recently, progress in poverty reduction has been attributed to policies that enabled more

rapid economic growth than in the past by shifting public expenditure away from industrytowards development of physical infrastructure and human capital and other social

concerns, and by improving targeting of poverty reduction programs through changes in

the public distribution system and involvement of civil societies and NGOs for

formulation, implementation and monitoring of poverty alleviation programs.

Any country needs to reformulate an anti-poverty strategy that is fiscally

sustainable and more finely targeted to those who truly cannot benefit from the

opportunities offered by growth. Safety nets should focus on those who either cannot

participate in the growth process (such as for reasons of extreme deprivation, lack of

productive assets such as land and capital or vulnerability combined with poverty) or facecontinuing exposure to risks, which may well jeopardize their ability to participate in the

opportunities offered by growth. Effective safety nets that insure rural poor against the

income fluctuations, such as public works programs, are also essential in overcomingimportant market failures.

3.9 Development of Efficient Infrastructure and Human Capital Formation

3.9.1 Infrastructure Development

Power, water, industrial estates, roads, telecommunications and a clean environment are

some of the more critical aspects of infrastructure for doing business. Production andcommerce are heavily dependent on these inputs. Development of proper legal and

institutional set up and efficient infrastructure are, therefore, essential for inducing

industrial development, employment generation and overall economic growth.

In open and developed economies, such as Singapore and Hong Kong, only minimal

investment laws and regulations exist and administrative costs are negligible. Most of thedeveloping countries face infrastructure constraints. The experiences of China, Indonesia,

Malaysia, Taiwan and Thailand suggest that the faster an economy is reformed and

infrastructure is built, the greater would be the participation of private investmentincluding foreign investment. Regulations need to be made simpler and more transparent,

and their administration may be made more efficient.

The World Wide Web is changing the face of the market place. Information is beingdescribed as the fifth factor of production in addition to land, labour, capital and

entrepreneurship. Databases on market related and financing related information need to

be identified and made accessible in a user-friendly manner. Government must providemore information related to poverty reduction, health, education and other social services

through the Net.

21


22/27

3.9.2 Human Resource Development

Along with efficient physical infrastructure, skill labour is a critical factor for enhancingproductivity and efficiency of the more dynamic traded goods and services sectors.

Technological and organizational innovations drive foreign investment into those

countries, which have trained and skilled workforce and fairly high educationalstandards. This explains the overriding importance of developing countries to invest more

in the development of human resources, infrastructure and services. It also highlights the

risk of the least developed countries (LDCs) of being marginalized due to infrastructureconstraints and lack of skilled labour.

The existence of a dynamic local business sector creates a supportive environment

through efficient networks of local suppliers, service firms, consultants, partners orcompetitors. It is, therefore, necessary to concentrate efforts on the development of local

entrepreneurship. Equally important is the availability of high quality telecom and

transport systems, energy supply and other utilities.

While improving education, special care needs to be taken to ensure gender equality as

research shows that gender inequality in education and employment has a negativeimpact on economic growth and notably on poverty reduction (Stephen Klasen 2006).

Gender inequality has much more adverse impacts on growth rates than on overall

income inequality.

Another key finding is that women tend to devote a larger share of households resources

to most essential activities of a household (Janet Stotsky 2006). Women are also more

oriented toward productive savings and investments behaviour though they are less likelyto take financial risk. In general, women are less corrupt and their political empowerment

supports a larger role of public insurance. It is, therefore, desirable to formulate country-specific policies for promoting pro-poor growth through reduction of gender inequality.

3.9.3 Legal, Institutional and Regulatory system

It is also necessary to strengthen the regulatory system and the legal and institutional set-

up for orderly growth of industries. As regards the limits and nature of governmentintervention in private sector activities, it is necessary to devise optimal rules for

regulatory system, which while servicing its legitimate purpose will not transcend its

limits to the disadvantage of the private sector development. First, any policy affecting

allocation of resources and regulation of private sector needs to be transparent and basedon a specified set of procedures. Second, even when there is strong presumption in favor

of government intervention, it is imperative to limit it to minimum necessary scale.

Third, from amongst the available alternative regulatory sets, it is necessary to go in forone, which provides the least scope for rent seeking.

Along with deregulation, more important measures are needed to be directed towardscreating a legal and institutional infrastructure for the smooth functioning of the private

22


23/27

sector. This is well illustrated by the Indonesian experience. Though Indonesias

industrial policy, trade and financial sector reforms were deep and sweeping, they failed

to get a full pay-off as Indonesia lagged in changing its corporate law and other laws vitalto trade and industry. Similar was the case with issues of land and property rights.

An important lesson from the East Asian development experience is that a holisticapproach to deregulation is more productive than a partial deregulation in any one sphere

say in industrial policy which is divorced from any reform in other areas. Domestic

deregulation should proceed pari pasu with 23liberalization of trade and tariffs in order toensure optimal allocation of resources between traded and no-traded goods.

3.9.4 Competent and Committed Bureaucracy

Another important institutional prerequisite appears to be the establishment of a

competent economic bureaucracy. The complexity and difficulty ofmanaging targeted poverty reduction programs places high demands on

the economic administrators for policy formulation and planning,

evaluation and monitoring outputs and outcomes. Bureaucrats must be

able to balance financial support for targeted programs with penalties fornon-performance. The economies of Japan, Korea, and Taiwan, China

had economic bureaucracies capable of imposing discipline on private

sector. In short, management of a set of successful industrial policiesrequires a stable macroeconomic framework and committed economic

bureaucracy capable of running complex pricing policies and objectively

running public subsidy schemes.

3.10Regional Economic Co-operation

Regional economic cooperation promotes technology and capital transfer and helps toaccelerate growth of trade and industry. The successful use of strategic trade, industrial

and macro-economic policies in South East Asia led to a pattern of regional division of

labour, described as the flying geese model. As the leading economies in the regionsuccessfully shifted from resource-based and labour-intensive industries to sophisticated

manufacturing activities, they provided space for the less developed countries to enter

simpler manufacturing stages. Regional trade and investment flows played a central rolein this process by helping to create markets and by the transfer of skills and technology to

neighbouring countries. The challenge now lies in the extension of this regional dynamics

and the growth pattern to include newly emerging countries such as China and India, aswell as other less developed countries in South and East Asia (Das 2002).

Since regional economic arrangements imply close interdependence among a group of

economies, there is the risk of contagion effect that problems in one country may betransmitted to its neighbors. In fact, a number of financial problems in the regional

integration at the end of 1990s contributed to volatile capital flows fuelling a boom-bust

cycle in East Asian economies. Thus, maintenance of a stable and rapid regional growthneeds not only credible economic policies for upgrading of production and exports, but

23


24/27

also appropriate regional arrangements to ensure the stability of financial markets,

including lending facilities and agreement on a sustainable pattern of exchange rates.

3.10.1 Technical Assistance

For stronger regional integration in South Asia as well as East and Southeast Asia, manycountries are starting to coordinate and harmonize policies for tariffs, taxation,

investment and business regulations. But the most productive impetus to regional

integration would come from removing the restrictions on movements of goods, capital,and people and improving the transport and communications connectivity among the

countries, particularly among the neighbors. Regional integration is also likely to get a

boost from strengthening the regional growth centres in South Asia and Southeast Asia.

These could produce important pull effects on growth throughout the continent. Theywould help promote FDI by enlarging markets. But regional integration should not be a

substitute for globalisation, but should be a means to strengthen it.

The international organizations like the World Bank, IFC, IMF, Asian DevelopmentBank, UNDP, UNICEF, UNIDO and UNCTAD are engaged in the provision of technical

assistance, consultancy and advisory services with regard to the development of theprivate sector, infrastructure and human resource development, and promotion of non-

debt-creating financial flows. The regional organizations can spur institutional progress

by providing forum for high-level discussions on Asian solutions to Asian problems and

by providing a framework for collective policy actions for poverty reduction,development of technology and higher education, environment sustainability, and control

of HIV/ AIDS and other communicable diseases.

3.10.2 Official Development Aid (ODA)

Donors of foreignaid expect it to boost investment and aggregate demand by transferring

real resources to recipient countries. Furthermore, attaining the Millennium Development

Goals (MDGs) calls for substantial increases in aid in order to strengthen domesticinvestment and expenditures on development of infrastructure and social sectors. Yet, the

IMF has been encouraging some of the poorest countries, particularly in Sub Saharan

Africa (SSA) to adopt restrictive policies that prevent the transfer of real resources fromabroad, including capital imports. A recent report by the Independent Evaluation Office

of the IMF, entitled The IMF and Aid to Sub-Saharan Africa, 2007, found that SSA

countries with an IMF Poverty Reduction and Growth Facility (PRGF) spent an averageof only 28 per cent of aid flows during 1999-2005. This report also sates that only 63 per

cent of aid flows to Sub-Saharan Africa were absorbed during 1999-2005. The

remaining 37 per cent were used to stockpile reserves (Lapavitsas 2007).

This implies that not only the italicization of committed ODA is low butalso the aid receiving country does not have the adequate absorptivecapacity. This is due to various restrictions on utilization of aid. Thereis need to Liberalise some of these policies by the donor countries and

24


25/27

allowing aid to be utilized even for operational expenditure related tothe achievement of MDG targets.

The Paris Declaration on Aid Effectiveness and the UN World Summit(2005) also underscore the emerging consensus for a new aid

environment focusing on national ownership, convergence aroundnational planning processes, capacity building, harmonization ofpolicies, results and mutual accountability, and realignment with theMillennium Development Goals (MDGs).

3.11 MDG and PRSP Coordination

Both the MDG reports and PRSP put emphasis on the need for aneffective, efficient and coordinated policies and programs at thecountry level. They fully support national priorities and developmentneeds as indicated in the national plans. There is also emphasis on

analysis, reporting and monitoring poverty, hunger and otherdevelopment indicators over time, integration of the goals into nationaldevelopment plans or poverty reduction strategies, andimplementation and operational activities.

The UN Country Team (UNCT) also undertook a number of initiatives tohelp countries meet their MDGs in areas such as poverty, hunger andfood security, governance, natural resource management, education,land rights, water supply, micro-credit, social services, HIV/AIDS andgender. It provided support to formulation of national developmentplans, poverty reduction strategies, promotion of broad civil society

participation; costing of the MDGs; identification of opportunities forimplementation, advocacy for pro-poor policy reforms, service deliveryand national capacity building in the areas of statistics, monitoring,reporting, planning and budgeting.

3.12 Ten Commandments of pro-poor growth

It may be mentioned here that recently in a study for the International Poverty Centre;Mwangi S. Kimenyi has proposed 10 Commandments of pro-poor growth. The basic

notion is that the policies must be designated to stimulate growth in those sectors and

areas in which the poor people earn their livelihood.

The 10 Commandments suggest that pro-poor reform policies should:

(i) Target activities, which most poor are involved in;

(ii) Improve the functioning of markets where poor people participate;

(iii) Target low-skill, labour intensive economic activities;

(iv) Integrate markets for the poor by improved forward and backward linkages;(v) Ring-fence public expenditures for raising capabilities of the poor;

25


26/27

(vi) Target those groups that operate outside the markets;

(vii) Include a food security policy;

(viii) Include policy initiatives that protect vulnerable populations from shocks;(ix) Include policies that support accumulation of tradable assets by the poor; and

(x) Improve institutions that empower the poor with increased diffusion of power.

26


27/27

Selected References

Ahluwalia, Montek Singh (1990) Policies for poverty alleviation, Asian Development Review,Vol.8, No.1, pp.111-132, Asian Development Bank, Manila.

Besley, Timothy and Louise J. Cord (2006) Delivering on the Promise of Pro-poor Growth,Palgrave, New York.

Bouch, Nathalie, Carl Riskin, Li Shantong, Ashwani Saith, Wu Guobao and Wang

Huijiong (2006) Macroeconomics of Poverty Reduction- The Case Study in China, pp.1-150,

United Nations Development Programme, New York, 2006.

Chakravarty, S. (1990) Development strategies for growth with equity: The South Asian

experience,Asian Development Review, 8(1), pp.133-159, Asian Development Bank, Manila.

Das, Tarun (2007) Inter-linkages between UN-MDGs, Poverty Reduction Growth

Strategy and National Development Plans - Selected Country Experiences from ESCAP,

Part-1, Main Report, pp.1-84, Part-2, Annexes, pp.1-78, UN-ESCAP, Oct 2007.

Das, Tarun(2003a) Role of Agro-based and Resource-Based Industries for Export Promotionand Poverty Alleviation in ESCAP countries, pp.1-126,ESCAP, UN, Bangkok, January 2003.

Das, Tarun (2003b) Economic Reforms in India- Rationale, Scope, Progress and UnfinishedAgenda, pp.1-80, Bankof Maharashtra, Pune, February 2003.

International Monetary Fund (IMF) (2003) Aligning the PRGF and the PRSP Approach:

Issues and Options, Washington D. C., April 25, 2003.

IMF, Independent Evaluation office (2004), Evaluation Report on PRSPs and the PRGF,

Washington D.C., July 7, 2004.

Khan, A. R. (2007) Asian experience on Growth, Employment and Poverty, An overview with

special reference to the findings of some recent country studies, International Labor Office (ILO).

Kimenyi, Mwangi S. (2007) Ten Commandments of Pro-Poor Growth, in Poverty in Focus,International Poverty centre, Brazil, March 2007.

Son, Hyun H. and Nanak Kakwani (2006) Global estimates of pro-poor growth, IPC Working

Paper series no.31, International Poverty Centre, Brazil.

United Nations, ADB and UNDP(2008)A Future Within Reach,2008.

United Nations International Poverty Centre (2007) Analyzing and Achieving Pro-poorGrowth, in Poverty in Focus, International Poverty Centre, Brazil, March 2007.

World Bank and the International Monetary Fund (2004)Poverty Reduction Strategy

PapersProgress in Implementation,pp.1-56, September 20, 2004.

relations between pfm and prgf

Documents