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Relations Between PFM and PRGF

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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 interrelations
between 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 policies
4. The case study for the Gambia
5. Concluding observations

1. Basic objectives of PFM reforms

• To maintain macroeconomic stability with moderate inflation and sustained


growth
• 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 as
education, 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 for
sustainable 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 into
the National Development Plans.

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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 markets
c) Sectoral priorities for poverty reduction and employment generation
d) Development of physical infrastructure and human capital
e) Conflict resolution, social development and environment protection
f) Direct poverty alleviation programs
g) Improving legal and institutional set-up
h) External Aid coordination and harmonization
i) 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 are
adequately skilled and healthy.
• Therefore, improving education levels and health conditions of the poor and
upgrading 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. Stable
macroeconomic 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 alleviate
poverty 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.

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• 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, good
health, 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 country’s socio-economic-political environment.

3.5 Lessons from best practices


• International best practices of development process indicate that a piece-meal
approach 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. Rather
the 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 sector
development;
c) improved basic social services;
d) strengthened local communities and civil society organizations (CSOs); and
e) 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 management
1.2 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 and
vulnerable sections (MDG-I)
2.1-2.2 Agriculture, Fisheries & marine resources
2.3 -2.4 Tourism, and Industry
2.5-2.6 Trade and Employment
2.7-2.8 Energy and Infrastructure
2.9 Telecommunication

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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 Education
3.4 Water supply,
3.5 Sanitation,
• PILLAR 4 - Build the capacity of local communities and Civil Society
Organizations (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 4.6–6% a year;
b) Inflation falling to 6 percent in 2009 and to 5 percent in 2010;
c) A reduction in government’s 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 about
16% 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 made
significant 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; and
d) Refining PRSP performance indicators.
e) The Fund-Bank recommends development of sectoral strategic plans and overall
Medium Term Expenditure Framework.

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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 Promotion
and Poverty Alleviation in ESCAP countries, pp.1-126, ESCAP, UN, Bangkok, January 2003.

Das, Tarun (2003b) Economic Reforms in India- Rationale, Scope, Progress and Unfinished
Agenda, pp.1-80, Bank of 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 Technical
Memorandum of Understanding, pp.1-23, IMF, Washington D.C., 3
February 2009.

International Monetary Fund (2009b) The Gambia: Poverty Reduction Strategy Paper
— Annual Progress Report, IMF Country Report No. 09/75, pp.1-134, International
Monetary 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 Paper—Annual 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-poor
Growth, in Poverty in Focus, International Poverty Centre, Brazil, March 2007.

World Bank and the International Monetary Fund (2004) Poverty Reduction Strategy
Papers—Progress 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.

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Part-II:
Abridged version of a Report prepared on the basis of
Case Studies in 14 selected countries in the Asia and Pacific
Tarun 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-ESCAP1,
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 and
development 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-poorness
on 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 is
proportionately 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-poor
only 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.

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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, 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.

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

Pro- Anti- Total Pro- Anti- Total


poor poor poor poor

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 18.6 27.1 45.8 32.2 22.0 54.2


countries (HIPC)
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 Central 12.3 21.1 33.3 21.1 45.6 66.7
Asia
Latin America and 30.4 29.1 59.5 24.1 16.5 40.5
Caribbean
Middle East and North 35.7 14.3 50.0 28.6 21.4 50.0
Africa
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 20
percent 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 estimation


problems, 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 of
trade 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 higher
growth 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

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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 2007
Issue of the IPC’s 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 sustainable
reduction of poverty and unemployment.

This requires adoption of a comprehensive reforms program and policy package


encompassing stabilization policies and structural reforms, and measures for improving
both 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 and
lengthens 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 with
policies, 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. The
reports 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 countries
have 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 markets
3. Sectoral priorities for poverty reduction and employment generation
4. Development of physical infrastructure and human capital
5. Conflict resolution, social development and environment protection
6. 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

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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 degrees
of 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 millennium
development 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. The
basic 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 speed
and 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 PRSP
Broad Heads Detailed strategies, policies and programs

1. Sustaining macroeconomic 1.1 Fiscal and budgetary reforms and policies


stability and macro liberalization 1.2 Monetary and credit policies
policies for enhancing growth 1.3 Medium Term Fiscal Sustainability
with poverty reduction and 1.4 Public expenditure reforms
employment generation 1.5 Medium Term Expenditure Framework
(MTEF)/ Expenditure Projection (MTEP)
2. Structural reforms to enhance 2.1 Reduction and rationalisation of customs
productivity and efficiency, and to duties and exports promotion
impart dynamism to overall 2.2 Decontrol, delicensing and deregulation of
growth process industrial production and investment
2.3 Public enterprises reform and privatisation
2.4 Private sector development and Public-
Private Partnership
2.5 Labour market reforms
2.6 Financial and capital market reforms
2.7 Micro finance /micro insurance schemes
3. Sectoral priorities for poverty 3.1 Development of agriculture and irrigation
reduction and employment 3.2 Development of employment-intensive
generation and agro-based industries
3.3 Development of small and medium sized
enterprises (SMEs)

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4. Development of efficient 4.1 Infrastructure development – Power,
physical infrastructure and skilled transport, telecommunications, water and
human capital sanitation
4.2 Social sectors development- education and
health
4.3 Forestry p policy
5. Conflict resolution, social 5.1 Community participation
development and environment 5.2 Control of pollution and environmental
protection hazards
5.3 Economic and social security measures
5.4 Mainstreaming women and the excluded
groups through reservation in parliament
6. Direct poverty alleviation 6.1 Targeted employment generation
programs for the target groups programs
6.2 Food for works programs, public works
programs for local communities
6.3 Housing programs for the poor
7. Improving legal and institutional 7.1 Good governance and strengthening
set up 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 levels
7.5 Strengthening Anti-Corruption Strategy,
Transparency and Accountability
7.6 Legal and Judicial Reform

8. External Aid coordination and 8.1 Need for external resources


harmonization 8.2 Aid coordination and harmonization
8.3 Enhancing absorptive capacity
8.4 Encouraging foreign direct investment
9. Strengthening systems for 9.1 Improving concepts, measurement and
measurement, evaluation, analysis of poverty
monitoring and review 9.2 Poverty monitoring and poverty mapping
9.3 Output and outcome budgeting

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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 contribute
to 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 of
policies 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 least
developed 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 include
skewed 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 factor is 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 form
a 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, low
productive 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.

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The fourth individual factor combines 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 an


urban 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 the
spread 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 of
the 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 might
endanger their employment, tenancy, loans or protection. There is a saying by the
peasants in province of West Bengal in India that “Fishes can’t 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 the
so-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 lion’s share of public health budgets, but help those who least need
public assistance. Community-based health centres and rural clinics, which form the
backbone 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 middle
and upper income brackets who have better knowledge of public policies and programs,
and better access to the government machinery.

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2.4 Poverty and the Environment

Most of the world’s environmental threats, from ground-water contamination to air and
noise 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 and
squatter 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 animal
dung 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 further
impoverishment 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 provide
them 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 and
structural 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

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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 the
government 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 create
enabling 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 first
trend 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 national
government 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 for
development. 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 withdraw
from sectors where private participation would be more productive and more efficient,
and still the scope of government should remain large in development of social sectors
and physical infrastructure.

3.3 Role of Macro Stabilisation Policies for Poverty Reduction

Macro-economic stability is one of the necessary conditions for efficient development of


resource base of industries and poverty reduction. Macro-economic volatility puts a break
on economic growth. High and unpredictable inflation hurts everybody particularly the

14
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 and
time 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 with
employment potential and comparative advantage.

Studies done by Dutt and Ravallion (1997), Ravallion and Dutt (1996) and the World
Bank (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 it


generates 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 through
higher 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 for
labour in the years of poor harvests rise less than general prices.

(d) Services sectors are the fastest growing sectors in a developing economy and
account 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 poverty
reduction 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
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 sustainable
fiscal 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 to
investment 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 many
cases, 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, tax
holidays 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 that
encourage 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) and
portfolio 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 domestic
economy. 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, and
strengthening institutional, legal and regulatory framework. They are also separating
policymakers from service providers and regulators.

16
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 recently
been 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; and
improving 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. Special
attention 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 setting
up 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 provide
savings, 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 the
commercial 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 should


be 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 and
survive 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 cultural
contexts. Finally, there are still no countries with a comprehensive network of micro-
finance institutions.

17
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 and
low 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 employment
but 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 enterprises
contribute 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 areas
helps 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 extreme
deprivation 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 effective
safety nets that insure rural poor against the income fluctuations.

Development of agro-based and resource-based industries provides opportunities for the


growth 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
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 micro
enterprise 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 areas
leads 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 productivity
of 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 to
mobilize domestic resources by utilizing the savings, labour and agricultural raw
materials that otherwise remain idle. They serve the low-income consumer markets and
produce 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 ground
for 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 the
rural 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 obtain
positive 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 and
poverty 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 developing
countries has sharply reduced rural poverty, about three-quarters of the world’s 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, a
similar 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
Historically, textiles and clothing (T&C) have played a unique role in economic
development and poverty reduction. Their contribution to the Industrial Revolution in
Western Europe and North America in the 18th and 19th centuries is well known, and they
continued to spearhead industrialization in many developing countries in the 20th century.
Since textile and clothing production often requires only simple technology and is
intensive 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 economies
of 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 democratic
institutions, better governance, better internal environment, more open trade
regimes 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, shrink
the 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 and
indirect 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 of
democracy, life expectancy, and civil wars that are generally shown to affect
economic growth do not directly influence the incomes of the poor.

20
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 safety
nets 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 industry
towards 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 face
continuing 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 overcoming
important 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 and
commerce 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 the
developing 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 investment
including 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 being
described 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 provide
more information related to poverty reduction, health, education and other social services
through the Net.

21
3.9.2 Human Resource Development

Along with efficient physical infrastructure, skill labour is a critical factor for enhancing
productivity 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 educational
standards. 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 infrastructure
constraints 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 or
competitors. 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 negative
impact 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 likely
to 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 government
intervention 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 based
on 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 for
one, which provides the least scope for rent seeking.

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

22
sector. This is well illustrated by the Indonesian experience. Though Indonesia’s
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 vital
to 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 holistic
approach 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 to
ensure 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 of
managing 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 for
non-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 policies
requires a stable macroeconomic framework and committed economic
bureaucracy capable of running complex pricing policies and objectively
running public subsidy schemes.

3.10 Regional Economic Co-operation

Regional economic cooperation promotes technology and capital transfer and helps to
accelerate 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 region
successfully 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 role
in 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, as
well 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 be
transmitted 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 growth
needs not only credible economic policies for upgrading of production and exports, but

23
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, many
countries 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. They
would 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 Development
Bank, UNDP, UNICEF, UNIDO and UNCTAD are engaged in the provision of technical
assistance, consultancy and advisory services with regard to the development of the
private 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 foreign aid 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 domestic
investment 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 from
abroad, 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 average
of 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 but
also the aid receiving country does not have the adequate absorptive
capacity. This is due to various restrictions on utilization of aid. There
is need to Liberalise some of these policies by the donor countries and

24
allowing aid to be utilized even for operational expenditure related to
the 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 around
national planning processes, capacity building, harmonization of
policies, results and mutual accountability, and realignment with the
Millennium Development Goals (MDGs).

3.11 MDG and PRSP Coordination

Both the MDG reports and PRSP put emphasis on the need for an
effective, efficient and coordinated policies and programs at the
country level. They fully support national priorities and development
needs as indicated in the national plans. There is also emphasis on
analysis, reporting and monitoring poverty, hunger and other
development indicators over time, integration of the goals into national
development plans or poverty reduction strategies, and
implementation and operational activities.

The UN Country Team (UNCT) also undertook a number of initiatives to


help countries meet their MDGs in areas such as poverty, hunger and
food security, governance, natural resource management, education,
land rights, water supply, micro-credit, social services, HIV/AIDS and
gender. It provided support to formulation of national development
plans, poverty reduction strategies, promotion of broad civil society
participation; costing of the MDGs; identification of opportunities for
implementation, advocacy for pro-poor policy reforms, service delivery
and 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
(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
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.

Bouché, 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 Promotion
and Poverty Alleviation in ESCAP countries, pp.1-126, ESCAP, UN, Bangkok, January 2003.

Das, Tarun (2003b) Economic Reforms in India- Rationale, Scope, Progress and Unfinished
Agenda, pp.1-80, Bank of 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-poor
Growth, in Poverty in Focus, International Poverty Centre, Brazil, March 2007.

World Bank and the International Monetary Fund (2004) Poverty Reduction Strategy
Papers—Progress in Implementation, pp.1-56, September 20, 2004.

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