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 PovertyReduction Strategy Papers (PRSPs) as a condition for debt relief. This requiresa development strategy to contribute to poverty alleviation and achievement ofthe Millennium Development Goals. All PRSPs aim to promote rapid andsustainable 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 povertyreduction. It argues that most previous research on PRSPs has focused on theparticipatory process involved in their formulation, while neglecting theircontent, particularly core macroeconomic policies.

Most PRSPs have setambitious growth and poverty reduction targets close to the peaks of the trendsobserved in the 1990s. However, donors are encouraging poorer countries tocontinue with the sorts of policies that may have been useful in the past tobring about macroeconomic stability and balance-of-payments equilibrium, butwhich nonetheless have failed to support growth and reduce poverty.

Examination of PRSPsshows that:

• They are vague on monetarypolicy.
• They do not quantify theadditional sources of private sector finance needed to support growth.
• They assume that HIPC will allowgreater public investment, forgetting that HIPC is designed to increasepro-poor current expenditure on health and education.
• Some have unrealisticprojections of expected increases in tax revenues.
• They lack response mechanismsthat can be activated when the economy is hit by shocks.
• They do not specify clearlythe required sources of finance to support accelerated growth.
• The monetary policyframeworks of the PRSPs do not contain any references to two vital povertyreduction objectives: growth and employment.

The vagueness of PRSPs on monetary policy is the result of developingcountries’ lack of monetary instruments to control liquidity effectively as well as limitedtechnical and monitoring capacity for the implementation of a carefullydesigned monetary policy. Almost all PRSP countries have got inflation undercontrol but have not adapted their monetary policy to include growth andemployment objectives.

The authorrecommends that PRSPs should:

• include growth andemployment among the objectives of monetary policy
• follow Chile’sexample in having a structural rather than an actual fiscal target: this allowsgovernments to increase public expenditure during the downswing phase of thebusiness cycle and decrease it during the upswing phase
• emulate Mozambique and Tanzania’s permanentsafety nets and adopt programmes to reduce vulnerability to natural disastersand prevent collapse of crop production
• be careful about excessive exchange rate volatility, for it can have anegative impact on foreign trade, domestic prices and private sectorbalance-sheets.