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Economic policies for growth and poverty reduction: PRSPs, neoliberal conditionalities and 'post consensus' alternatives
Terry McKinley
Adviser on Macroeconomics and Poverty, UNDP, New York1
Contact: terry.mckinley@undp.org
22-24 January, 2004
School of Social Sciences (SSS-I) Committee Room, Jawaharlal Nehru University (JNU), New Delhi.
SARPN would like to acknowledge the website of International Development Economics Associates (IDEAS)
as the source of this analysis.
www.networkideas.org
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Introduction
This paper focuses on economic policies and judges their success based on their impact
on growth and poverty reduction. The Millennium Development Goal of halving extreme
income poverty by 2015 expresses the consensus of the international development
community that poverty reduction is of overriding importance. There is also consensus
that national poverty reduction strategies, and Poverty Reduction Strategy Papers in
particular, are the primary vehicle for focusing national policies on reducing poverty.
Beneath this apparent consensus, there are, however, significant differences. This
paper "swims against the tide", so to speak, in arguing that such differences are healthy
and should be encouraged, and, moreover, that achieving international consensus is not a
desirable goal. In this respect, this paper 'steals' at least one idea from neoliberalism -
namely, that a "marketplace of ideas", in which there is competition among conflicting
views, should be promoted.2
Ironically, this is an ideological stance that neoliberals themselves do not
endorse - most likely because their ideas have achieved hegemony over economic
policymaking and development discourse. Within this context, 'consensus' connotes the
unilaterally imposed monopoly of one set of ideas rather than agreement based on
discussion and debate among competing ideas - in order words, it signifies the
international imposition of monopoly-based "intellectual property rights". For the last ten
to fifteen years, the space for dissent has been progressively appropriated or co-opted by
the Bretton Woods Institutions.
Curiously, despite its poor performance in the last quarter century, neoliberalism
remains hegemonic, most certainly in practice. Compared to the performance of postcolonial
policymaking in developing countries, roughly from the 1950s through the mid
1970s, Neoliberal conditionality-based policies have performed poorly, in terms of 1)
slowing economic growth 2) greater economic instability 3) rising inequality 4) widening
underemployment and 5) persistently pervasive poverty. If one questions, for example,
the statistical anomaly of a dramatic reduction in poverty in China from 1993 to 1996 (a
very short period of time), one is hard pressed to argue that the proportion of the
population in extreme income poverty in the world declined in the 1990s.
Of course, neoliberalism is not without its critics. Within mainstream economics,
there has been a recent stream of prominent critics - such as Joseph Stiglitz, Jeffrey
Sachs, Nancy Birdsall, Ravi Kanbur and William Easterley - who have broken with neoliberalism in one form or another. They are mounting a powerful attack on its
foundations and they might well be eventually successful and move the economic
mainstream to the left. But, in practice, the bulk of external recommendations on
economic policymaking still being supplied to developing countries remain neoliberal.
More importantly, these recommendations are tied to binding conditionalities. Even if
national policymakers disagree with the recommendations, they are bound to implement
them, if they wish their country to receive debt relief or continue receiving concessional
lending, or even grant-based technical assistance.
More ominous has been the encroachment of conditionalities across a wide gamut
of national policymaking - including social policies and governance as well as economic
policies. In the early days of structural adjustment, the lives of national policymakers
were simpler: economic policies were imposed on them by international financial
institutions but they had, at least, some degrees of freedom in how they picked up the
pieces thereafter. Of course, at first, conditionalities just applied to macroeconomic
policies, but soon they were applied to broader structural issues, i.e., structural
adjustment. In short order, national policymakers found that they had no real 'ownership'
of their own economic strategies - and their overall development strategies were soon
forced to tail after their economic strategies, or relegate themselves to irrelevance.
As was well documented in the late 1980s and early 1990s (cf. UNICEF's
Structural Adjustment with a Human Face and UNDP's Human Development Reports),
structural adjustment imposed heavy social costs in the countries on which it was
imposed. In order to foster greater "national ownership", international financial
institutions extended their assistance to constructing social safety nets in order to help
mitigate the consequences of adjustment. But since the adverse impact of adjustment
continued to be pervasive through the early 1990s, constructing nets was no longer
regarded as adequate. By the mid 1990s, these social safety nets were well on their way
to being upgraded to national poverty reduction strategies (cf. the 1995 World Summit
for Social Development). By 1999, the World Bank and IMF agreed to tie their
assistance, and their conditionalities, to the national adoption and 'ownership' of Poverty
Reduction Strategy Papers.
There are, however, several serious problems that remain after the graduation
from structural adjustment to Poverty Reduction Strategy Papers. One is the glaring
inconsistency between economic policy conditionalities, which continue to be based on
neoliberalism, and the social focus of Poverty Reduction Strategy Papers. There appears
to be a shotgun wedding being enforced between neoliberalism in economic policies and
"bleeding-heart" liberalism in social policies. Reconciling these two approaches has
proven to be difficult. Social policies remain ill equipped to undo the detrimental effects
of neoliberal economic policies - e.g., economic stagnation, growing underemployment,
increasing vulnerability, intensifying insecurity and widespread poverty.
Even when growth occurs in some developing countries, it is often not reaching
the poor. This has raised the importance in the international development community of
identifying policies that can foster "pro-poor growth". This is growth that not only can
improve the "absolute" conditions of poor households (by raising their level of real
incomes) but also can enhance their "relative" conditions vis-Р°-vis nonpoor households(by reducing inequality between the poor and nonpoor).3 This is difficult enough to
accomplish under normal capitalist patterns of development but doubly difficult when the
governing economic strategy is neoliberal. In most cases, growth has been too slow and
too pro-rich. One might expect the more enlightened rich to remain unsatisfied with such
an ambivalent outcome - namely, a larger share of a more slowly expanding pie. There
are bound to be diminishing marginal returns to self-aggrandizement under such a
scenario. This is, no doubt, one of the factors fueling the emerging differences within
mainstream economics.
In consideration of some of the factors outlined above, UNDP has in recent years
begun to more critically examine the impact of orthodox (i.e., neoliberal) economic
policies on growth, human development and poverty reduction. It has been motivated by
three major concerns: 1) trying to determine, practically, how "pro-poor growth" can be
achieved 2) trying to reconcile the seeming inconsistencies between neoliberal economic
policies and Poverty Reduction Strategy Papers (PRSPs) and 3) trying to promote a
broader and healthier policy dialogue on these issues by helping create a larger menu of
viable economic options and alternatives.
"Pro-poor growth" is an unlikely outcome unless economic policies and PRSPs
are mutually consistent and this consistency is unlikely, in turn, as long as neoliberalism
dominates economic policymaking. In addition, insofar as neoliberalism remains
dominant, there is little room for meaningful dialogue and debate on economic policies.
These are the initial lessons from UNDP's support to an array of national studies
on Economic Policies and Poverty Reduction. The major policy lessons contained in the
following sections are based on twelve national studies. Nine of the studies have been
part of an Asia-Pacific Regional Programme on the Macroeconomics of Poverty
Reduction, which has been a joint effort of the Regional Bureau for Asia and the Pacific
and the Bureau for Development Policy of UNDP. This programme has covered
Bangladesh, Cambodia, China, Indonesia, Mongolia, Myanmar, Nepal, Sri Lanka and
Vietnam. For more details, refer to Terry McKinley (2003), "The Macroeconomics of
Poverty Reduction: Initial Findings of the UNDP Asia-Pacific Regional Programme" (cf.
www.networkideas.org). Refer also to Pasha (2003) for a similar analysis
(www.asiapropoor.net).
Studies on Economic Policies and Poverty Reduction have also been conducted in
three countries in the Caucasus and Central Asia: Armenia, Kyrgyz Republic and
Uzbekistan. Another paper used as background for this paper is Terry McKinley (2004),
"Macroeconomic Policy in Transition Economies," which covers issues of
macroeconomic policy in the above three countries as well as in Cambodia, China,
Mongolia and Vietnam.
In the following sections, the paper concentrates on seven inter-related issues: 1)
the links between participation and economic policy dialogue 2) the ambiguities of
"national ownership" of PRSPs, especially of pro-poor economic policies 3) the "smallgovernment"
bias of neoliberalism 4) the need for pro-active, public-investment based
fiscal policy 5) the roadblock of restrictive inflation targeting 6) the adverse impact of
financial deregulation on poor households and 7) the adverse impact on the poor of
privatization, particularly privatization of public services.
Footnotes:
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The positions expressed in this paper are the author’s and do not necessarily reflect those of UNDP.
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This paper uses 'neoliberalism' primarily as a descriptive term to denote the dominant paradigm dictating
macroeconomic and adjustment conditionalities enforced by the Bretton Woods Institutions since the
1980s.
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For an elaboration of these points, see the UNDP Practice Note, "The Role of Economic Policies in
Poverty Reduction." UNDP: New York, 2003.
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