A quarterly magazine of the IMF

June 2002, Volume 39, Number 2

What exactly is a poverty reduction strategy paper (PRSP), the centerpiece of the international community's new assault on poverty? It is essentially a road map prepared by countries themselves to help them better target public policies in support of poverty reduction. The emphasis is on putting countries in the driver's seat—so that they take ownership of their economic reforms—and encouraging a broad participatory process involving not only governments and donors but also local communities and civil society groups, such as nongovernmental organizations (NGOs), labor unions, faith-based organizations, and research and policy development institutes. In addition, PRSPs are to be results-oriented, focusing on outcomes that would benefit the poor; take a holistic, long-term perspective; and stress transparency and accountability.

Although there is no single blueprint, all PRSPS contain four core elements: (1) a description of the participatory process used in preparing them; (2) a poverty diagnosis, including the identification of obstacles to poverty reduction and growth; (3) targets, indicators (such as annual growth rates or primary school enrollments), and monitoring systems, based on the poverty diagnosis; and (4) priority public actions countries are committed to taking—within specific budget constraints—to attain the targets established in the PRSPs.

So far, 10 countries (Albania, Bolivia, Burkina Faso, Honduras, Mauritania, Mozambique, Nicaragua, Niger, Tanzania, and Uganda) have completed their first full PRSPs, and more than 40 others have prepared interim PRSPs—short documents that describe a country's current poverty situation and policies, along with a plan for preparing full PRSPs.

How is this novel approach going? In July 2001, the IMF and the World Bank launched a major review, drawing on internal evaluations and extensive external consultations. Because only a few PRSPs have been completed to date, the review focused primarily on process and, more tentatively, on content, rather than on the impacts on poverty outcomes and indicators. A second review, to be completed by early 2005, should provide more information on the latter.

Although the pace at which countries are completing their full PRSPs is slower than originally expected, there is enough information to begin drawing lessons and sharing experiences—in effect, defining "good practices" (see box). Moreover, the efforts of these countries should not be undervalued. Besides managing a complex policy dialogue with development partners, governments of low-income countries are being asked to put together an integrated medium-term economic and poverty reduction strategy, complete with short- and long-term goals and monitoring systems—a set of tasks that few industrial countries could systematically do well. And, in many countries, these tasks must be managed with limited technical and institutional capacity and in ways that reinforce—rather than undermine—existing national institutions, processes, and governance systems.

Checklist of good PRSP practices For countries: Involve parliaments, cabinets, and sectoral ministries in PRSP preparation at appropriate stages.  Analyze the impact of major poverty programs and policy actions.  Develop appropriate indicators to enable timely monitoring of performance and feedback.  Set realistic targets for growth and poverty outcomes.  Develop alternative macroeconomic scenarios in PRSPs, including contingency spending plans and measures supporting alternative revenue paths. Include policies to reduce the risks from external shocks and ensure debt sustainability. For development partners, including the World Bank and the IMF:  Provide timely and constructive feedback to PRSP teams but resist making extensive comments on drafts that could undermine country ownership. Coordinate assistance in preparation of poverty diagnoses and poverty and social impact analyses. Provide timely and appropriate analysis of key areas of PRSPs, prepared jointly with governments, whenever possible.  Intensify efforts to understand the links between policy actions and pro-poor growth at the country level.  Respect and align assistance with national cycles for government decision making, particularly annual budget cycles.  Align donors' own business plans with national PRSPs, including performance triggers and conditionality, and justify the choice of instruments against PRSP objectives.  Support capacity building of civil society.

Giving everyone a voice

What were the main findings of the review? First, it found a growing sense of country ownership and more open dialogue within governments themselves as well as between governments and civil society groups, even in countries without a well-established tradition of consultation. Engaging a more diverse group of actors in the policymaking process brings with it greater accountability and transparency, broader-based country ownership, and a deeper understanding of the different dimensions of poverty and the priorities of the poor. In Tanzania, for example, citizen lobbying led to the abolition of primary school fees, greater emphasis on community-driven development projects, and the creation of employment schemes for the poor. Similarly, the PRSP process in Mauritania produced a lively policy debate in which civil society raised a number of issues—including the need to clarify the links between governance and poverty—and prompted the inclusion in the PRSP of a national education program and decentralized health care services. In Bolivia, the PRSP approach has helped to institutionalize the more open policy debate under way since the ending of military dictatorship and the beginning of a multiparty democracy in 1982 (see "Crafting Bolivia's PRSP: Five Points of View" in this issue).

Even so, there is much room for improvement. The review says that the main challenge is to promote wider, more substantive participation by domestic stakeholders. Many civil society organizations noted that the quality of participation varied widely from country to country, with discussions often limited to a narrow set of issues related to targeted poverty reduction programs, effectively excluding these organizations from the broader debate over structural reforms and macroeconomic policies. Moreover, civil society organizations raised the issue of the capacity of civil society to participate meaningfully in policy debates, particularly on technically demanding areas such as the macroeconomic framework. The issue of weak capacity becomes more pressing as civil society engagement extends into implementation and monitoring and evaluation. In this regard, the review found that development partners should step up technical assistance to bolster civil society's ability to participate fully and effectively in the PRSP process.

Other concerns centered on the limited engagement of groups that could play key roles in successful poverty reduction efforts—for example, parliamentarians, sectoral ministries, and the private sector. In particular, the review recognized the need to involve parliamentarians in the preparation, approval, and monitoring of country strategies. Parliamentarians have a unique role in representing the poor as constituents, and their participation could strengthen the voice of the disadvantaged while bolstering democratic institutions.

Focusing on the nuts and bolts

The second main finding of the review was that the PRSP process had carved out a more prominent place for poverty reduction in policy debates, extending beyond social sector interventions. Indeed, data collection, analysis, and monitoring are becoming more systematic. Most governments have intensified efforts to identify the causes of poverty and taken greater responsibility for the design of effective poverty reduction strategies, while policymakers have gained a better understanding of poverty and the priorities of the poor.

Now the focus must shift beyond process to content and implementation and the urgent need to better understand the links between policies and poverty outcomes. Where would efforts have the biggest payoff? The review suggests the following four areas:

Macroeconomic frameworks. Every country's full PRSP is underpinned by its macroeconomic framework in support of its growth and poverty reduction objectives. But some countries set unrealistically high growth rate targets—from 5 percent in Bolivia and Nicaragua to 7�8 percent in Albania, Burkina Faso, Mauritania, Mozambique, and Uganda. While such growth rates are needed if living standards are to improve and if income poverty is to decline, they bear no relation to country circumstances and constraints. The consequences of excessive optimism in macroeconomic projections include unrealistic revenue forecasts and, in turn, higher levels of expenditure than can be financed in a sustainable manner. More care needs to be given to identifying the sources of pro-poor growth underpinning these growth projections.

Honduras's PRSP did just that. Because poverty is extensive in the country's rural areas, Honduras outlined measures to improve the competitiveness of the rural economy by increasing the rural poor's access to infrastructure, market support services, technology, and financing. Specific programs and projects include business development of the small-farm economy, construction and repair of rural roads, expanded irrigation, rural electrification, basic sanitation, and seed capital for small producers. To combat poverty in cities, the PRSP calls for creating employment and income opportunities for the urban poor; formalizing and regulating street vendors; nurturing micro, small, and medium-sized enterprises; developing the potential of intermediate cities to serve as regional growth poles; and increasing access to housing and basic services.

Poor countries also need to pay more attention to their extreme vulnerability to external shocks by identifying in advance potential areas of vulnerability and appropriate social safety nets or other relevant policy responses. Mauritania framed its strategy around a continued high dependence upon a narrow export base, and Bolivia and Uganda remain highly susceptible to terms of trade fluctuations. Yet only Bolivia discussed the macroeconomic policies needed to reduce the risks from external shocks and ensure debt sustainability. Here, the international community needs to assist countries in designing measures in advance that can insulate the poor from shocks.

Prioritization of public actions. To achieve the targeted growth rates and shift the benefits of growth in favor of the poor, PRSPs are expected to identify a set of priority public actions to be taken over a three-year period, along with policies to improve governance and sector programs. The first PRSPs demonstrated an impressive ability to consolidate a wide range of policy actions in a single document. In many cases, however, the PRSP process also produced extensive lists of goals and even longer lists of actions in support of these goals.

Trade-offs and prioritization are clearly needed if the strategy is to be realistic, especially in the face of tough budget constraints. But PRSP countries often find it difficult to set priorities in the face of uncertainties regarding their overall growth strategy, the cost of various actions, and their own budget constraints. Frequently, they also struggle to offer the appropriate level of detail about their public actions—which institution, for instance, should be expected to accomplish what outcome in an identified time frame. Development partners need to do more—through technical and financial assistance—to ensure that countries develop the capacities needed in these areas.

Poverty and social impact analysis. In choosing among policy priorities, countries must weigh the effect of their policies on the poor. Yet despite advances in poverty data and analysis, policy actions are often not clearly linked to either a comprehensive diagnosis of poverty or an analysis of their impact on the poor. The problem lies with national capacity constraints and inherent technical difficulties. Here is where development partners, particularly the World Bank, can step in. With their help, countries can improve their ability to undertake more systematic poverty and social impact analyses of major policy changes—for example, agricultural pricing reforms or energy price liberalization—and design compensatory measures when needed.

Public expenditure management systems. Good budgetary planning and execution are essential for ensuring that government money goes to poverty-reducing activities. But in many countries—especially heavily indebted poor countries—current public expenditure management systems are beset with problems, such as incomplete coverage, inappropriate classifications, limited capacity to track spending and estimate value for money, and weak auditing. As a first step, countries need to assess and improve these systems, as Uganda did. Its first public expenditure tracking survey revealed that, in the early 1990s, only 13 percent, on average, of central government allocations for education reached schools. Following public expenditure management reforms, the situation improved considerably: preliminary survey results show that, on average, about 80�90 percent of intended per capita grants reached schools in 1999 and 2000.

Getting donors on board

The third main finding of the review was that the donor community—from major UN organizations to bilateral donors—has embraced the principles of the PRSP approach and indicated its intention to align its assistance programs to support PRSPs. The hope is to overcome long-standing problems of poor donor coordination, weak country ownership of externally financed programs, and fragmented government programs and institutions caused by multiple, and often inconsistent, aid delivery and management policies and procedures.

But much remains to be done to narrow the gap between donors' promises and practices. Some recipient governments expressed concern that the procedures and reporting requirements associated with PRSP-related lending operations remain overly demanding. Governments and civil society representatives also pointed to continuing tensions between the principle of country ownership and the tendency of donors to promote issues of importance to themselves (such as gender, AIDS, environment, governance, corruption, and rural development). If the PRSP is truly to represent a more effective means of delivering aid, donors must reduce the cost for low-income countries of mobilizing and using aid. Donors could do this by harmonizing and simplifying their reporting requirements and aligning their assistance with national cycles of government decision making, particularly annual budget cycles. Further, more information on aid commitments and more predictable aid flows would help low-income countries plan and implement their strategies.

Future monitoring

When all is said and done, how can a country and its development partners be sure that their efforts are making a difference? At the country level, progress toward the goal of poverty reduction and sustainable growth must be evaluated periodically to ensure that PRSP implementation remains on track and that country strategies remain relevant. At the global level, progress is best assessed by movement toward achieving the Millennium Development Goals. This yardstick is the key to keeping the world community focused on achieving long-term goals and to building sustained support for greater international assistance to low-income countries.

The team that carried out the PRSP review was led by Brian Ames of the IMF and Jeni Klugman of the World Bank. The findings of the review were published in two papers, "Review of the Poverty Reduction Strategy Paper Approach—Main Findings and Issues for Discussion" and "Review of the Poverty Reduction Strategy Paper Approach—Early Experience with Interim PRSPs and Full PRSPs"—which are available on the IMF website: http://www.imf.org/ external/np/prspgen/review/2002/031502a.htm