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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

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.
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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. Refer also to Pasha (2003) for a similar analysis (

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.

  1. The positions expressed in this paper are the author’s and do not necessarily reflect those of UNDP.
  2. 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.
  3. 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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