Poverty Reduction Strategy Papers: neglecting growth, employment and external shocks

Poverty reduction strategies often focus too much on controlling inflation, achieving price stability and setting tight fiscal targets. As a result, they pay too little attention to economic fluctuations arising from external shocks. New policies could help developing countries withstand drops in commodity prices, shocks from natural disasters and post-liberalisation instability.

Under the Heavily Indebted Poor Countries (HIPC) initiative, poor countries have been encouraged to prepare Poverty Reduction Strategy Papers (PRSPs) as a condition for debt relief. This requires a development strategy to contribute to poverty alleviation and achievement of the Millennium Development Goals. All PRSPs aim to promote rapid and sustainable economic growth, but stress that this has to be pro-poor.

A paper from the Institute of Development Studies (UK) analyses the content of 15 PRSPs from the perspective of growth and poverty reduction. It argues that most previous research on PRSPs has focused on the participatory process involved in their formulation, while neglecting their content, particularly core macroeconomic policies.

Most PRSPs have set ambitious growth and poverty reduction targets close to the peaks of the trends observed in the 1990s. However, donors are encouraging poorer countries to continue with the sorts of policies that may have been useful in the past to bring about macroeconomic stability and balance-of-payments equilibrium, but which nonetheless have failed to support growth and reduce poverty.

Examination of PRSPs shows that:

• They are vague on monetary policy.
• They do not quantify the additional sources of private sector finance needed to support growth.
• They assume that HIPC will allow greater public investment, forgetting that HIPC is designed to increase pro-poor current expenditure on health and education.
• Some have unrealistic projections of expected increases in tax revenues.
• They lack response mechanisms that can be activated when the economy is hit by shocks.
• They do not specify clearly the required sources of finance to support accelerated growth.
• The monetary policy frameworks of the PRSPs do not contain any references to two vital poverty reduction objectives: growth and employment.

The vagueness of PRSPs on monetary policy is the result of developing countries’ lack of monetary instruments to control liquidity effectively as well as limited technical and monitoring capacity for the implementation of a carefully designed monetary policy. Almost all PRSP countries have got inflation under control but have not adapted their monetary policy to include growth and employment objectives.

The author recommends that PRSPs should:

• include growth and employment among the objectives of monetary policy
• follow Chile’s example in having a structural rather than an actual fiscal target: this allows governments to increase public expenditure during the downswing phase of the business cycle and decrease it during the upswing phase
• emulate Mozambique and Tanzania’s permanent safety nets and adopt programmes to reduce vulnerability to natural disasters and prevent collapse of crop production
• be careful about excessive exchange rate volatility, for it can have a negative impact on foreign trade, domestic prices and private sector balance-sheets.

Source(s):
‘The macro content of PRSPs: assessing the need for a more flexible macroeconomic policy framework’, Development Policy Review, 23 (4), pages 419-442, by Ricardo Gottschalk, 2005

Funded by: North-South Institute

id21 Research Highlight: 22 December 2005

Further Information:
Ricardo Gottschalk
Institute of Development Studies
University of Sussex
Brighton BN1 9RE
UK

Tel: +44 (0)1273 678777
Fax: +44 (0)1273 621202 / 691647
Contact the contributor: RicardoG@ids.ac.uk

Institute of Development Studies

Other related links:
'Poverty Reduction Strategies: getting it right second time around'

'The need to monitor poverty reduction strategies'

'Linking rural livelihoods to poverty reduction strategies in Africa'

'Putting water and sanitation at the heart of poverty reduction'

GRC-Exchange's Topic Guide on PRSPs

WHO's database on health in PRSPs