Speech

The Challenge of Poverty: How the IMF Can Help Africa, Speech by Anne O. Krueger, First Deputy Managing Director, IMF

December 4, 2003

Introduction

I am delighted to be here with you today, and to share in some of your bi-annual workshop discussions. I found the sessions this morning stimulating, and it was also good to have the chance to meet some of you in a more informal setting last night. The AERC is setting high standards for research and it also provides a valuable network for economists across the continent.

I know how many researchers have benefited from their visits to Washington as part of the AERC-IMF Visiting Scholars program—now more than a hundred, I believe. The Fund remains committed to this program.

So I am grateful for the invitation to speak to you today, not least because it has given me the opportunity to visit Kenya. This is my first visit to Africa since joining the Fund: but I do not intend it to be the last!

Theme

It is not possible to visit Africa, of course, without being keenly aware of the challenge facing so many countries across the continent. There is too much poverty and too little growth and this is unacceptable. The same can be said for many other regions in the world; and what I have to say today applies to all low income countries. But the need to make progress is particularly acute in Africa, where meeting the Millennium Development Goals is going to be most difficult.

So I want today to share with you some thoughts about how low income countries can best tackle chronic and widespread poverty both in the short and longer term. And I want to outline how we in the IMF can best help countries to accelerate growth and raise living standards. My remarks should be seen in the context of the Monterrey Consensus which set the course for a co-operative approach to tackling poverty and providing assistance to poorer countries.

The need for growth

I start from the premise that poverty reduction or, if you prefer, a sustained improvement in living standards requires economic growth. Cutting the cake a different way will not significantly reduce poverty in the medium term. We need to make the cake bigger. History shows us that economic growth is the best way of raising everybody's living standards and reducing poverty. The experience of the second half of the twentieth century is particularly telling. The multilateral framework established after the second world war fostered the rapid expansion of international trade which was itself an important engine for global growth. The industrial countries prospered, of course. But living standards rose rapidly in most developing countries too. Infant mortality has fallen across the globe; literacy rates have risen; and life expectancy in many developing countries is both higher and significantly closer to that in the industrial world.

I recognize that in some countries, and especially in Africa, these improvements have been undermined by the spread of AIDS, and I will say more about that in a moment. Conflict, civil war and bad government—whether as a result of corruption or negligence—can also halt and reverse economic progress. But the evidence is clear: sustained growth is the key to poverty reduction in the medium and long term.

Sustained growth over a long period is difficult to achieve. It requires, first and foremost, a stable macroeconomic framework. In many parts of the world, and in many parts of Africa, recognition that macroeconomic stability is a prerequisite for growth and poverty reduction is a relatively recent development. All the more reason to welcome it.

A stable macroeconomic framework is critical not least because it alone brings somewhat higher growth than would otherwise be possible. But it also ensures that reforms in other areas of the economy have a bigger payoff.

Without stability, many other policies that contribute to rising living standards and poverty reduction are seriously weakened. History has shown that efforts to help low income countries by, for example, aid transfers, are much less effective when economic policies are inappropriate.

Developing a stable macroeconomic framework

Putting the right framework in place can be challenging. It requires, in some cases, far-reaching change. Improving economic performance, as we have all come to realize, is only possible if public finances are sound; if the government and institutions are market-friendly; if there is a legal framework that protects property rights; if there is an independent judiciary. The list is a long one, and sometimes the obstacles can seem insurmountable.

But it can be done, and it is certainly worth doing. It is, of course, a process, not a discrete step. Here in Kenya, the new government—not quite so new any more—has committed itself to important reforms that should help deliver the benefits that flow from macroeconomic stability. Just last month, the IM F restored support for Kenya's economic program.

Reforms aimed at rooting out corruption and improving governance are always welcome. We in the Fund are keen to support the process of reform here in Kenya. However, here and elsewhere in Africa, it is important that the proposed changes are implemented. Only actual, rather than promised, reform can deliver the economic improvements that could bring the higher living standards that all Africans seek.

Macroeconomic stability is not a sufficient condition for the sustained economic growth and poverty reduction that many low-income countries need. Stability must come first; but governments cannot neglect reforms elsewhere.

The benefits of reform

I want to outline some of the policies that I think are essential to build on the foundation of macroeconomic stability and exploit the potential for sustained economic growth that it offers. Before that, though, two more general points about reform. The first is that all reform is a continuous process that requires constant nurturing. Governments cannot introduce a series of reforms and then sit back.

Even in the most sophisticated industrial economies, policies are constantly being adjusted. As economies change, so must their institutions and legal processes adapt. One only has to look at the problems of corporate governance and accounting standards that have pre-occupied some countries in recent years to see an illustration of this.

The same holds true for developing countries. Faster growth is desirable and, indeed, is crucial if poverty is to be reduced. But faster growth brings with it the need to adapt more rapidly and governments cannot afford to be complacent if they want to ensure that higher growth rates are sustainable.

My second point is equally simple—and equally likely to be overlooked as governments grapple with a broad reform agenda. It is that reforms bring significantly higher payoffs if carried out in conjunction with other reforms. The broader and deeper the reforms, and the more successfully they are implemented, the greater will be the returns. Labor market reform and trade liberalization, for instance, will deliver a much bigger payoff if implemented together than if one is done without the other.

Re-balancing the economy

It is pleasing to see how many African countries have made significant progress towards achieving macroeconomic stability in recent years. But alongside this, developing countries often need to restructure their economies to take full advantage of the greater stability they have achieved.

I mentioned the need for market-friendly policies. By that I mean policies, and the accompanying institutional framework, that enable countries to exploit the economic benefits that markets can bring. In most cases markets provide much better signals for the efficient allocation of resources. Freedom from government interference can enable market incentives to operate more effectively, to the benefit of all, in a competitive environment.

In many cases, governments have yet to define clearly those activities they see as appropriate for them, and those they accept they should relinquish to the market. The provision of basic education, for example, is widely accepted as a public good that governments are best able to provide, or at least underwrite. Government clearly has a role in the provision of basic infrastructure, such as roads. Both of these activities are important in fostering growth and entrepreneurial activity.

So too is the institutional and legal framework that needs to be in place in a successful market economy. Property rights have a crucial role to play in attracting investors. Bankruptcy laws, commercial codes and independent, effective courts all help provide the right signals for the entrepreneurs who can help develop a thriving private sector creating jobs and raising living standards.

And in many areas of economic activity it makes sense for the state to relinquish control in favor of the market. State owned enterprises don't have an enviable track record—and that applies equally in industrial as well as developing countries. One glance at the problems some European countries still have with inefficient, subsidy-hungry state companies is enough to confirm that.

State protection of monopolies—whether they be publicly or privately owned-benefits the few at the expense of the many. This is true whether we are talking about protection from foreign imports or from greater domestic competition.

The same applies to government support for industry more generally. Trade-distorting interference in the market, however well-intentioned, always involves benefiting a minority at the expense of the majority. This is as much the case in developing economies as it is in industrial countries. And when private enterprise believes it can benefit from government favors, businessmen spend their time seeking those favors at the expense of activities that would make them more competitive—and would thus contribute more to growth.

It is understandable that governments want to nurture new enterprise. But financial support, or other forms of market-distorting protection, is not the best way to do that. Such help is addictive for the industries concerned. When did we last hear of a company going to a government—any government—and asking for support to be reduced?

Even in rich countries, the efficient allocation of resources is important. In developing countries, it is crucial that governments, facing so many more demands for scarce resources, ensure they are allocated wisely. Providing basic infrastructure, introducing more competition, and providing a level playing field for all economic actors, will raise productivity and economic welfare far more than any amount of state subsidies for industry.

In many poor countries, I know it has been customary to see the government as the employer of last resort. But countries that have started to cut the bureaucracy or let market incentives work have seen significant rewards, with more rapid growth of private sector employment when labor markets are liberalized. Look at India, for example. It resisted large-scale reform for many years, but once it embarked on the first phase of reform in the 1990s, its growth rate accelerated markedly. For much of the 1990s it was the fastest-growing developing economy—and it has seen a significant reduction in poverty, though there is clearly a long way still to go.

Trade liberalization

Stability will be difficult to sustain, and deliver fewer benefits if it is not accompanied by trade liberalization. Those countries resorting to high levels of protection first and foremost hurt themselves. When they open their markets they have much to gain. Of course, they would gain even more if other countries—developed and developing—removed their own trade barriers simultaneously.

The developing world should not—and cannot afford to—wait. The economic evidence is overwhelming: trade liberalization benefits those liberalizing first and foremost. Yes, the benefits are greater if trade liberalization is multilateral—as it has been for nearly sixty years. But there are very significant, and substantial, benefits to be had if developing countries liberalize unilaterally.

Even bigger gains can accrue from a successful Doha round. Remember, something like two thirds of the potential benefits from a Doha round settlement would flow to developing countries. They will be the principal beneficiaries of any deal. The payoffs from trade liberalization are huge—and even many of those who opposed it in the past later say they gained from it. No country has managed sustained rapid economic growth without opening its economy—look at Korea, for example, which achieved spectacular growth rates in the 1960s and 1970s; or Chile which has more recently enjoyed impressive growth performance, especially in contrast with many of its Latin American neighbors.

Let me be clear. The level of subsidies which farmers in rich countries receive is unacceptable. These farmers already enjoy much higher living standards than their counterparts in poor countries. The cosseting they receive from their governments cannot be justified, and makes no economic sense for those countries. The same is true of the restrictions on market access for products from other countries, whether these take the form of tariffs or are barriers of a different kind, such as unduly complicated product specifications. Consumers in rich countries pay more as a result of such trade-distorting subsidies and regulations.

There is now an urgent need for developed countries to open their markets and cut their agricultural subsidies. They should do so first in their own self interest. They should do so because otherwise they risk fatally undermining the Doha round of trade negotiations. And they should do so because it is unacceptable to preach one policy to developing countries while practicing another.

I attended the opening of the World Trade Organization ministerial meeting in Cancun in September. It is remembered now for its disappointing outcome. But at the start the mood was positive, and I was struck in particular by the speech which Mexico's President Fox made when he opened the meeting. His enthusiasm for free trade was striking. President Fox has no doubt that trade liberalization has brought great benefits for Mexico.

I was in Cancun with a specific purpose—to encourage those developing countries who fear that there could be some short-term costs to a Doha agreement on further trade liberalization. The Fund's preliminary research, along with our experience of previous trade liberalizations, suggests that the temporary costs of adapting to a Doha settlement will not be significant for the vast majority of countries.

But the Fund is anxious to reassure countries who worry that they might be affected. So I was able to announce a new trade initiative in Cancun: the IMF will make financial assistance available to developing countries that face the prospect of a challenging adjustment to the impact of multilateral trade reform.

As I said, we do not expect any of the costs involved to be large, even for the small number of countries that might be affected. Our proposal is therefore designed as a kind of contingent insurance in response to the concerns of some countries. Given the scale of potential benefits for the developing countries as a whole of a Doha deal, we do not want to risk undermining the prospects of a successful outcome to the round.

As you may know, Horst Kohler, the Fund's managing director, and James Wolfensohn, president of the World Bank, sent a joint letter to all WTO heads of government and their trade ministers last month. That letter urged everybody involved to overcome the obstacles encountered at Cancun and get the negotiations back on track as soon as possible.

A two-way process

The Fund's trade initiative is a good example of the two-way process that is vital if developing countries—here in Africa and around the world—are to see their growth rates accelerate and their living standards rise. Most of the effort has to come from the countries themselves. Neither the Fund nor any other outside agency can force change on an economy. Foreign aid or other assistance cannot be effective without the sort of economic reforms that lay the groundwork for faster growth and poverty reduction.

The Monterrey meeting last year made clear that countries have to be committed to reform if they are to receive the higher levels of aid promised by the rich countries. But is also important that industrial countries deliver on their commitment to provide countries with aid as they reform.

The Fund can help in this process. The Fund is wholly committed to its work in Africa. We want to see countries prosper. Higher living standards everywhere are in everybody's interest. They are an opportunity—they represent new markets for industrial country products and services.

It is probably fair to say that the Fund places greater emphasis on growth than in the past—though I cannot resist pointing out that promoting economic growth and the expansion of trade are, in fact, clearly set out as key objectives in the Fund's original articles of agreement, drafted nearly sixty years ago. We have not changed our main functions: our core aim is the maintenance of international financial stability that, in turn, facilitates growth.

But it has become increasingly evident that no macroeconomic framework can be stable over the long-term if it fails to deliver growth. So we have become more focused in the way we help some of our poorest members.

The launch of the Fund's Poverty Reduction and Growth facility—PRGF—in 1999 was intended to make the objectives of reducing poverty and delivering economic growth more central to our lending operations in poor countries. A review of the facility conducted last year confirmed that programs supported by the PRGF have become more pro-poor and pro-growth.

Many African countries now have Fund-supported programs designed around poverty reduction strategy papers, or PRSPs. Kenya's request for a three-year arrangement under the PRGF was approved by the Fund's executive board on November 21^st.

PRGF-supported programs are based on PRSPs so as to ensure they have several distinctive features. One of the most important is the broad participatory process involved in the preparation of PSRPs, with consultations about policy priorities going well beyond the normal policymaking circles. PSRPs are also meant to be comprehensive; to be based on a medium and longer-term perspective; and to set objectives in line with the International Development Goals. And they incorporate monitoring indicators so that progress in achieving the objectives can be measured.

AIDS

And the Fund's work in helping countries develop poverty reduction strategies is central to our effort to assist countries affected by AIDS. World AIDS day this week was a timely reminder of the havoc this illness has wrought. Fighting AIDS is an important element of many countries' poverty reduction strategies. The Fund's work in Africa and around the world means that we have seen at first hand the way that AIDS has undermined economic progress and impoverished communities in many countries.

The Fund is working in close co-operation with the World Bank and other development partners to improve prevention efforts and health care, and mitigate the impact on those living with HIV and their families. We also have an active research agenda, again in co-operation with other institutions, which is focusing on the economic, fiscal and broad development aspects of the epidemic. Our research program directly feeds into the work of IMF staff who have day-to-day contact with countries affected.

Spreading the benefits of globalization

It is important to ensure that the benefits of globalization are enjoyed by all. The AIDs crisis has, for some countries, represented a catastrophic setback to their hopes of economic progress, a setback from which it will take years, even decades to recover. That is why the effort to combat the epidemic is so important.

But more generally, there is always scope for improvement, and it is important to try to ensure that the short-term costs that globalization can bring for some people are further reduced. That is one motive behind the Fund's new trade initiative that I outlined a few moments ago.

It is also one of the factors behind our enthusiastic support for a new research program that I am pleased to be able to announce today. This program is largely funded by the British and Dutch governments through the Fund and the World Bank. Research projects will be undertaken in low income countries, using networks like the AERC and aimed at discovering the best ways to combat poverty on the ground.

There will be a conference at the end of next year to review the findings. This program should make an important contribution to poverty research—one that I hope will bring medium and long term practical rewards. The focus will be on three main issues: the relationship between growth and poverty; the management of domestic resources; and domestic debt and fiscal stability: all the issues I've been discussing today.

Conclusion

There is no doubt that this is a challenging time for low income countries. But it is, in my view, also a time of great opportunity. Apart from anything else, there is now a broader consensus about the way forward. More and more countries are implementing policies aimed at delivering macroeconomic stability; and more of them are seeing the results.

Now is the time to build on this work. The upturn in the world economy, which now appears to be gathering pace, offers a chance for countries to focus on exploiting the benefits economic stability can bring: sustained growth, rising living standards and, in turn, poverty reduction. The more rapid the growth an economy enjoys, the more resources it can devote to reducing poverty.

Nobody argues this is an easy path to follow. It requires discipline. It requires persistence. It requires sometimes dogged commitment. For some countries, the AIDs crisis greatly complicates the process—and will inevitably make results more difficult to achieve and slower to materialize.

There is always an alternative, of course. But state control of the economy, an institutional framework hostile to markets, trade barriers, poorly-enforced property rights, bad governance and corruption have not brought economic growth or poverty reduction. There is plenty of evidence to show bad policies instead bring economic stagnation, enrichment for a privileged few at the expense of the majority, a disengagement from the global economy.

In recent years, many African countries have emphatically rejected that approach. They are right to do so. The IMF stands ready to support them as they implement the policy reforms that will bring growth and rising living standards for an increasing number of people on this continent—and, indeed, around the globe.

Thank you