Executive Board Meeting
September 13, 1999

For several months now--building on the experience gained in recent years, in light of the lessons from the internal and external evaluations of the ESAF, and from the ongoing work in the pilot countries selected with the World Bank--we have been preparing for a transformation of the ESAF into an instrument that would better foster durable growth, leading to higher living standards and a lasting reduction of poverty. The increasing priority given by the international community to poverty reduction as a fundamental goal of economic policy makes such a transformation particularly timely, as many donors are reorienting and redesigning their own aid programs to reflect this new approach. The same spirit is reflected in the papers we will be discussing on enhancing social policies and strengthening the link between poverty reduction and debt relief under the HIPC Initiative. The proposals in these papers are ambitious. They have implications that extend beyond the HIPC Initiative to all the programs the Fund supports in low-income developing countries, and indeed more widely. For the ESAF, in particular, giving greater prominence to poverty reduction calls for important changes in the definition of objectives and the content of programs, as well as in the way they are formulated. Our discussion of the papers on September 13 provides us with an opportunity to consider these broader issues and their implications for Fund operations.

Poverty reduction strategies and the role of the Fund

Social policies, especially social spending objectives and safety net measures, have for some years now been an important element in ESAF-supported programs. We have recognized that macroeconomic sustainability requires rising incomes founded on durable productivity growth, and that this in turn entails policies--in areas such as health and education--that raise productivity and enhance employment opportunities, especially for the poor. Thus programs have, on average, targeted and delivered significant real per capita increases in public expenditures on health and education in ESAF countries over the past decade, and have been instrumental in the creation of effective schemes to protect poor and vulnerable groups during the reform process in many countries.

But we have always known that poverty reduction is about more than just social programs. Indeed, there is now a consensus--among policy makers in developing countries as well as in the donor community--that prudent macroeconomic management, freer and more open markets, and a stable and predictable environment for private sector activity are prerequisites for growth, without which no serious inroads into poverty can be made. These are the policies the ESAF has promoted, and helping countries maintain these policies should remain the Fund's central role. In this context, the beneficial impact of the new initiatives the Fund is pursuing to improve transparency (and hence accountability) in policy making, especially in the fiscal area, and to help countries establish safer and more efficient financial systems, should not be underestimated. These initiatives should become a priority as much in ESAF countries as elsewhere.

There is, however, a missing link. The current framework that ties the policies in ESAF-supported programs to poverty reduction is insufficiently comprehensive and lacks the elements needed to ensure the consistency of these policies with the country's social goals and vice versa. Part of the problem is that, in many countries, a comprehensive poverty strategy has simply not existed. As a result, there has been no way to ensure that the efforts made in recent years to accommodate rising social spending and targeted safety net measures in ESAF-supported programs, including in our response to the external evaluation of the ESAF, have been adequate to the task. The Policy Framework Paper (PFP) has not filled this role effectively--the relationship between policies and social goals in the PFP is weak and largely implicit--in part because the PFP has had a well-defined role vis-à-vis the ESAF but not in the operations of the Bank, where the primary expertise on poverty analysis and social policy lies, and in part because the process by which it is formulated is not sufficiently open and consultative.

To remedy these problems, the ESAF must be made to benefit from an open and comprehensive approach that starts with an understanding of the main obstacles to growth and poverty reduction, and iterates toward a constellation of macroeconomic, structural and social policies sufficient to achieve realistic and monitorable goals for poverty reduction. The process by which policies and goals are chosen must be led by the government, which in turn should be helped and encouraged to consult widely with labor, business, and civil society, in order to draw on their knowledge and build their support for the government's program. The government should also be guided in this by the long-term development goals that have been derived in consultation with the donor community.

The Fund's continuing role would be to advise on the policies needed to ensure macroeconomic stability, including related structural reforms, and to help ensure that the supply of domestic and foreign resources is commensurate with the government's social and other spending needs. The Bank would be the key advisor on social and sectoral policies, and on the links to poverty reduction and related structural policies.. The interrelationships between these various aspects of policy and the need to ensure that they are all consistent will require the Bank and the Fund to integrate their operations in the countries concerned more closely than ever before.

Hence the proposal--which has the joint support of both Bank and Fund managements--to create a new comprehensive vehicle, the Poverty Reduction Strategy Paper, that is government-led, poverty-focused, based on an open and consultative process, and from which all ESAF and IDA operations should stem. I view this integration between future ESAF-supported programs and the comprehensive poverty reduction strategies as the Fund's primary contribution to the achievement of the long-term international development goals and to the strengthened HIPC Initiative, and I encourage Directors to give their backing to the proposal. Once it is effectively established as a basis for the operations of both the Bank and Fund, I would envisage that the Poverty Reduction Strategy Paper would replace the PFP.

While future ESAF-supported programs should be consistent with the comprehensive poverty reduction strategy, they should retain the key features of ESAF arrangements and avoid a proliferation of conditionality. I see the strategy being reflected in the policy content of the new ESAF-supported programs in three ways:

• First, the costs associated with social and sectoral programs aimed at poverty reduction will more directly influence the design of the macroeconomic framework--especially government expenditure aggregates and the fiscal and external deficits--subject of course to the scope for mobilizing, with Fund assistance, sustainable, non-inflationary financing.

• Second, there will be a higher premium on good governance in general and, with respect to government budgets in particular, on full transparency and effective monitoring procedures. This emphasis will ensure that resources are used effectively and for their intended purposes. I would envisage measures in this area receiving even greater emphasis in future ESAF-supported programs than in the past.

• Third, the poverty reduction strategy is likely to highlight two or three key measures (e.g. in price or land reform, or in eliminating obstacles to the delivery and efficient targeting of health and education services) that are critical to achieving the government's social goals. These measures would be expected to appear prominently in the ESAF-supported program.

Adoption of the new approach to formulating ESAF-supported programs would, in effect, broaden the underlying objectives of the facility, which are currently defined in the ESAF Instrument as "...to strengthen substantially and in a sustainable manner [the member's] balance of payments position and to foster growth." I would propose that we seek the consent of ESAF creditors to amend this clause, to read: "...to strengthen substantially and in a sustainable manner [the member's] balance of payments position and to foster durable growth, leading to higher living standards and a reduction in poverty."

These important reforms to the facility would also call, I believe, for a new name. We should stress the goals of the programs the facility supports, rather than the means ("structural adjustment") by which those goals are achieved. I therefore propose that we adopt a name, such as the Sustainable Growth Facility, that signifies the facility's fundamental purpose.