Growth, poverty and the IMF

Journal of International Development

J. Int. Dev. 16, 621–636 (2004)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.1111

GROWTH, POVERTY AND THE IMF

GRAHAM BIRD*

Surrey Centre for International Economic Studies, University of Surrey, Guildford, Surrey, UK

Abstract: Although the IMF presents itself as a monetary institution, it plays an important

role in providing support to poor countries via its Poverty Reduction and Growth Facility. It is

difficult to imagine more central development issues than poverty and growth. However, while

there is a broad consensus surrounding the stabilization issues with which IMF programmes

conventionally deal, there is much less agreement about the causes of economic growth and

poverty. This carries lessons for the design of the PRGF. While most reviews of it focus on

‘process’, this paper offers a more fundamental analysis of the Fund’s involvement in growth

and poverty reduction. It suggests that the design of conditionality needs to distinguish

between elements according to the degree of scientific consensus. It also suggests that the

success of the Fund’s attempts to facilitate growth and poverty reduction will be severely

constrained unless the necessary external, financial support is provided. Copyright # 2004

John Wiley & Sons, Ltd.

1 INTRODUCTION

On its web site, the IMF clearly states that it is ‘a monetary not a development institution’.

Yet, its principal mechanism for providing financial support to poor countries is called the

Poverty Reduction and Growth Facility (PRGF). It is difficult to imagine more important

development issues than poverty and growth. This implies something of a split institu-

tional personality and a potential—and one suspect’s actual—cause of internal ambiguity

and tension. Outside commentary on the Fund reveals similar ambiguities. Some observers

state that there is no clear dividing line between monetary and development issues; longer

term balance of payments policy often becomes indistinguishable from development

policy and macroeconomic stability is seen as a precondition for development. However,

others claim that there has been excessive and undesirable ‘mission creep’. They advocate

that the Fund should return to dealing exclusively with short-term financial emergencies

Copyright # 2004 John Wiley & Sons, Ltd.

* Correspondence to: G. Bird, Surrey Centre for International Economic Studies, University of Surrey, Guildford,Surrey, UK. E-mail: [email protected]

and should withdraw from long term lending to developing countries.1 This would involve

relocating the PRGF from the IMF to the World Bank or abandoning it altogether.

Perhaps somewhat uncertain of its own role, the Fund has undertaken a series of reviews

of the PRGF and the related poverty reduction strategy papers (PRSPs)—which are

supposed to provide the context in which poverty reduction and growth will occur—even

though, in its current form the facility has only existed since 1999.2 Moreover, the Fund’s

new Independent Evaluation Office (IEO) has chosen to examine the PRGF and PRSPs as

one of its earliest projects, thereby reflecting the importance attached to the issues

involved.

The purpose of this paper is not to resolve these issues; that would be a vastly over-

ambitious and unrealistic objective. Instead, and much more modestly, it seeks to explain

briefly how we arrived where we are, examine the problems we encounter, and investigate

how best to proceed. The paper shows how institutional developments have moved the

Fund into areas when there is a lack of scientific consensus. Current reviews of the PRGF

have tended to focus on the details of the ‘process’ and have examined lessons from

experience based on relatively few individual cases; they have not focused on the

underlying and fundamental problems created by the Fund’s shift towards a stronger

involvement in poverty reduction and growth. This paper attempts to redress the balance.

The principal point that emerges from the analysis is that, in the context of the PRGF, there

is a much wider gulf between the design of policy and the degree of scientific agreement

on the issues with which policy is trying to deal. Until this gulf is narrowed the polar

extremes exhibited in the debate about the PRGF are likely to remain. However,

strengthening the scientific consensus depends on securing a better understanding of the

factors that affect economic growth and poverty in poor countries. This represents a

daunting challenge. A quicker route to a stronger consensus may be to acquire enough

information concerning the track record of the PRGF to allow objective statistical analysis

to be undertaken. Has the PRGF actually had the effect of reducing poverty and enhancing

growth? However, there are problems here too, since the evaluation of IMF programmes

involves severe methodological difficulties. A scientific consensus is therefore unlikely to

emerge in the near term. In these circumstances what is the appropriate policy response? It

is not necessarily to do nothing. Thus, another purpose of this paper is to consider how to

conduct policy and how to design the PRGF when there is likely to remain scientific

disagreement and uncertainty. Is the IMF moving in the right or the wrong direction?

The layout of the paper is as follows. Section 2 explains briefly the sequence of events

that culminated in the establishment of the PRGF and provides summary information

about which countries have used the facility. The section also endeavours to relate these

developments to changes in economic ideas and the relative dominance of the different

economic paradigms. Section 3 then briefly reviews the state of play regarding our

scientific understanding of the issues that the PRGF is attempting to address. Section 4

goes on to examine the existing evidence relating to the effects of PRGF loans, but

emphasises some of the methodological problems in reaching anything close to a

1This theme crops up in a number of reports that have examined the role of the IMF (Council on ForeignRelations, 1999; Overseas Development Council, 2000; and International Financial Institution AdvisoryCommission, 2000). While the reports differ in a number of ways they are reasonably united over the ideathat mission creep has occurred to an undesirable extent. While the IFIAC would discontinue the PRGF, the ODCTask Force argues that the World Bank is a more appropriate base for the facility.2See IMF (2000a,b,c). These reports are summarised by Gupta et al. (2002). A summary of the PRSP approachmay be found in Ames et al. (2002).

622 G. Bird

Copyright # 2004 John Wiley & Sons, Ltd. J. Int. Dev. 16, 621–636 (2004)

watertight conclusion. Section 5 discusses the future evolution of the PRGF and the

institutional division of labour between the IMF and the World Bank. Section 6 offers a

few concluding remarks.

2 BACKGROUND AND EVOLUTION

In particular following the second major increase in oil prices at the end of the 1970s, a

view evolved that developing countries needed to fundamentally adjust their economies.

Extra financing on its own was insufficient. The notion of structural adjustment was born.

This covered not only macroeconomic stabilisation but also microeconomic efficiency and

openness. It covered not just aggregate budgetary balances but extended to the structure of

government expenditure and taxation. It incorporated industrial structure and institutional

capacity. Initially it was the World Bank that introduced structural adjustment lending, but

by the middle to late 1980s the IMF had established first of all, its Structural Adjustment

Facility and then in 1987 the Enhanced Structural Adjustment Facility (ESAF). Conven-

tional macroeconomic conditionality was augmented by structural conditionality. As a

consequence the average number of performance criteria attached to IMF loans increased

quite sharply (Bird, 2001a). It is not coincidental that the move towards structural

adjustment coincided with the pre-eminence of the so called Washington Consensus

concerning policy design. This consensus provided an apparent justification for broader

conditionality.

However, during the 1990s two things happened. First, the Washington Consensus lost

some of its initial appeal. An increasing number of questions began to be asked about some

of its fundamental tenets. More scepticism began to be expressed about the gains from

market-related policies in general and from economic liberalization in particular. Priva-

tization that merely changed ownership without changing the degree of competition

became viewed as deficient. Rapid and inappropriately sequenced liberalization of both

the domestic and international financial sectors became recognized as potential sources of

financial instability. Even trade liberalization could create fiscal problems for countries

that embarked on it and could be associated with deteriorating balance of payments

performance.3

Second, and on top of these doubts, conditionality became perceived as excessive and as

damaging the country ownership of IMF programmes. Evaluations of ESAF were critical

of these dimensions of the facility. The metamorphosis that it underwent in 1999 was

largely a response to these criticisms. The new PRGF attempted to put economic growth

and poverty reduction centre-stage. Macroeconomic stabilization was more clearly

presented as serving these longer-term goals. Conditionality was ‘streamlined’. The

number of conditions per programme was reduced and structural conditions were

presented as necessary to facilitate the attainment of macroeconomic conditionality.

Perhaps more significantly, the PRGF and the related PRSP approach focused on

increasing country ownership by involving a wider range of civil society in the

decision-making process. The logic was that if programmes were ineffective because

they were not implemented, and furthermore if they were not implemented because they

were not domestically owned, the PRSP process and the PRGF would improve the track

3 A more measured account of what happened to the Washington Consensus during the 1990s may be found inBird (2001b).

Growth, Poverty and the IMF 623


record of the IMF in poor countries. Alongside this, a macroeconomic paradigm shift

away from new classical macroeconomics towards a new Keynesian approach justified

more aggressive government intervention and was consistent with a slightly more

jaundiced view of economic liberalization.

While, in some respects, the PRGF was a natural evolutionary response to the perceived

deficiencies of the ESAF, by introducing it the IMF encountered a dilemma. If economic

growth and poverty reduction were to be genuinely centre-stage, did this not also mean

that the Fund had to take a position on what determines economic growth and poverty. If,

on the other hand, the Fund’s position was to be that macroeconomic stabilization was a

pre-condition for economic growth, and that economic growth was a precondition for

sustained poverty reduction, the PRGF stood in danger of simply becoming a route by

which the Fund could revert to conventional macroeconomic stabilization. It might then be

viewed as a backward rather than a forward move. Moreover, what if there was a short-

term conflict between macroeconomic stability and economic growth? The conundrum

became that of dealing with this dilemma.

But how many countries are we talking about? Table 1 provides a list of the countries

that are eligible to draw resources from the IMF under the PRGF. While the size of lending

under the PRGF is small relative to total IMF resources, this reflects the small economic

size of poor countries. The Table shows that over 40 per cent of the IMF’s member

countries have a direct interest in the design of the PRGF.

3 UNDERLYING ANALYTICS

In economics it is difficult to claim that there is one universal view on anything. It is

sometimes suggested that five economists will have at least ten opinions. Having said that,

there are some things about which there is a stronger consensus than others. Thus, there is

a reasonably strong consensus that rapid inflation has deleterious consequences; that large

and persistent fiscal deficits and related monetary expansion are likely to lead to inflation;

and that the currency appreciation that will tend to be associated with relatively rapid

inflation will lead to overvaluation, a loss of competitiveness and an unsustainable current

account balance of payments deficit. In effect, there is a consensus that macroeconomic

instability and disequlibrium is bad, and that stabilization is good. There is also broad

consensus over the policy ramifications of this; avoid prolonged and large fiscal deficits,

avoid excessive monetary expansion and do not allow the exchange rate to become

severely overvalued. This consensus forms the scientific foundation for conventional IMF-

backed stabilization measures. So far so good.

But what about the causes of economic growth, the causes of poverty, the implications of

economic growth for poverty, and the effects of openness on growth and poverty? All of

these issues are exceedingly complex and difficult and each has its own large and growing

literature. It would take a brave or foolhardy person to claim that at present there is a firm

academic consensus on any of them, (not that economics as a discipline is without its share

of both brave and foolhardy people). Take economic growth. The basic accounting is

blissfully simple. Output depends on the quantity of inputs and the level of output per unit of

input. Growth therefore depends on factor accumulation and the growth of total factor

productivity (TFP). Beyond this things get more complicated. Neo-classical growth theory

tells us that increasing the savings rate will have a temporary effect on growth for as long

as it takes for output to adjust to a new level. However, sustained growth depends

624 G. Bird


Table 1. Countries eligible for the IMF poverty reduction and growth facility (PRGF) as ofSeptember 2002

1 Afghanistan 40 Lesotho

2 Albania 41 Liberia

3 Angola 42 Macedonia, F.Y.R

4 Armenia 43 Madagascar

5 Azerbaijan 44 Malawi

6 Bangladesh 45 Maldives1

7 Benin 46 Mali

8 Bhutan 47 Mauritania

9 Bolivia 48 Moldova

10 Bosnia and Herzegovina 49 Mongolia

11 Burkina Faso 50 Mozambique

12 Burundi 51 Myanmar

13 Cambodia 52 Nepal

14 Cameroon 53 Nicaragua1

15 Cape Verde1 54 Niger

16 Central African Republic 55 Nigeria1

17 Chad 56 Rwanda

18 Comoros 57 Pakistan

19 Congo, democratic Republic of 58 Samoa1

20 Congo, Republic of 59 San Tome and Principe

21 Cote d’Ivoire 60 Senegal

22 Djibouti 61 Sierra Leone

23 Dominica1 62 Solomon Islands

24 Eritrea 63 Somalia

25 Ethiopia 64 Sri Lanka

26 Gambia, The 65 St. Lucia1

27 Georgia 66 St. Vincent and the Grenadines1

28 Ghana 67 Sudan

29 Grenada1 68 Tajikistan1

30 Guinea 69 Tanzania

31 Guinea-Bissau 70 Togo

32 Guyana 71 Tonga1

33 Haiti 72 Uganda

34 Honduras 73 Vanuatu1

35 India 74 Vietnam

36 Kenya 75 Yemen, Republic of

37 Kiribati 76 Zambia

38 Kyrgyz Republic 77 Zimbabwe

39 Lao, P.D.R.

1An exception to the GNP per capita operational cutoff for IDA eligibility (US$875 for FY02) has been made forsome small island economies; these countries continue to be eligible for PRGF and IDA assistance,notwithstanding their per capita income levels.

Terms of the PRGF:

* As of September 2002, 77 low-income countries are eligible for PRGF assistance.* Eligibility is based principally on the IMF’s assessment of a country’s per capita income, drawing on the cutoff

point for eligibility to World Bank concessional lending (currently 2001 per capita gross national income of$875).

* Loans under the PRGF carry an annual interest rate of 0.5 percent, with repayments made semiannually,beginning five-and-a-half years and ending 10 years after the disbursement.

* An eligible country may borrow up to a maximum of 140 percent of its IMF quota under a three-yeararrangement, although this may be increased to 185 percent of quota in exceptional circumstances. In eachcase, the amount will depend on the country’s balance of payments need, the strength of its adjustmentprogram, its pervious and outstanding use of IMF credit.



on improvements in productivity that are exogenous. Endogenous growth theory has

subsequently, and perhaps with rather limited success, attempted to endogenise productivity

growth.

What about the empirical evidence? A classic reference is Barro (1991) who claims that

growth is positively related to initial human capital and negatively related to the initial level

of real per capita GDP. Growth it appears is inversely related to the share of government

consumption in GDP (but insignificantly associated with the share of public investment)

and positively related to political stability and the absence of market distortions.

Subsequent work has questioned the econometric estimation procedures used (Lee et al.,

1997) as well as the idea of so-called beta convergence, that poor countries will grow faster

than rich ones; something implied by the neo-classical growth model but doubted by

endogenous growth theory. Others have found that increased savings rates can have more

enduring effects (Bernanke and Gurkaynak, 2001). Up until the 1990s, growth in East Asia

was frequently presented as something of a miracle, but Young (1993) claimed that it was

quite consistent with neo-classical theory and was the outcome of rapid factor accumula-

tion rather than exceptional productivity growth. At much the same time, Mankiw et al.

(1992) were claiming that the evidence in general was consistent with the neo-classical

model once an allowance was made for the accumulation of human capital as well as

physical capital, although Cohen and Soto (2002) suggest that poor countries are at a

disadvantage in terms of the incentive to invest in human capital because of low life

expectancy, implying that investment in health may be a precondition for growth.

In the period since the early 1990s there has been a series of studies which have further

examined the empirical evidence relating to the sources of economic growth. Some of

these have been produced from within the IMF. Sarel (1997) finds the growth of TFP to

have been important in Singapore, Thailand and Malaysia; a finding shared by Crafts

(1999) and Iwata et al. (2002) for a wider group of Asian countries and using different

econometric techniques. Hu and Khan (1997) had earlier discovered that the growth in

TFP made a significant contribution to growth in China especially during the period of

reform. Other studies which have focused on developing countries have emphasised the

importance of market friendly institutions (Dhonte et al., 2000), increasing returns to scale

stemming from positive externalities in physical and human capital (Ghura, 1997) and the

importance of the composition of investment (Hugo, 1999). Research into the determi-

nants of TFP have emphasised both domestic research and development—innovation—

and trade with countries which have a high level of R&D- imitation (Bayoumi et al.,

1996). In similar vein, Coe et al. (1997) find empirical support for the claim that

developing countries can raise TFP growth via R and D spillovers associated with

increasing trade, and in particular by importing intermediate products and capital

equipment embodying foreign knowledge. This effect is found by Hakura and Jaumotte

(1999) to be stronger in the case of intra-industry trade where it is easier to absorb foreign

technology. The links between trade and TFP growth are confirmed by Jonsson and

Subramaniam (2001) in the case of South Africa. In a broader study, Senhadji (2000) finds

that initial conditions, institutional factors and macroeconomic variables explain most

differences across countries in the level of TFP.

In a series of studies Sachs and colleagues have found that, in addition to openness and

economic liberalization, health and geography make a significant difference to growth

(Sachs and Warner, 1995a,b, 1997; Sachs, 2001; Gallup and Sachs, 1998; and Gallup et al.,

1998). Land-locked states, and countries in the tropics as opposed to temperate zones, tend

to grow less fast. Economic liberalization is sometimes claimed to account for the more

626 G. Bird


rapid growth observed in Latin America in the first half of the 1990s, although this became

more difficult to sustain as a uni-causal explanation once growth slowed down in the mid

to late 1990s. To some, the explanation lay in institutions. Economic liberalization may

have a short-term positive effect but this is only sustained if there is significant institutional

reform. Major studies that attempt to empirically test explanations based on geography,

trade, institutions and macroeconomic policy include Rodrik (2000), Rodrik et al. (2002)

and Easterly and Levine (2002). Rodrik et al. claim that the evidence shows that when it

comes to growth ‘the quality of institutions trumps everything else’. They find that when

they control for institutions, geography has a weak effect on income, and trade has an,

albeit insignificant, negative effect. Elsewhere Rodriquez and Rodrik (2000) challenge the

more conventional view of the trade and growth relationship. This seems to be at odds with

the conclusion reached by Dollar and Kraay (2001) that, after allowing for changes in

other policies and after dealing with the potential problem of endogeneity, trade has a

strongly positive effect on growth, a conclusion broadly shared by Frenkel and Romer

(1999), although they point out that trade will reflect geography and not necessarily policy.

The emphasis placed by Rodrik et al. on institutions is shared by Easterly and Levine

(2002). Again they test various explanations of growth against the evidence and ‘find

evidence that tropics, germs and crops affect development through institutions’. They find

no evidence that endowments affect country incomes directly other than through institu-

tions; nor do they find any evidence of policies (including trade policies) affecting

development once institutions are controlled for. A similar emphasis on institutions may

be found in Acemoglu et al. (2001, 2002).

Whilst hopelessly inadequate as a survey of the recent empirical growth literature, this

brief review helps to make the point that is it difficult to identify a clear consensus on the

sources of economic growth. The strength of this conclusion would probably be increased

by a more complete survey of the literature. Thus, for example, the connections between

financial liberalization and economic growth have been found to be complex (Khan and

Sanhadji, 2001).

Much of the research reported above was either conducted within the Fund or has been

presented at Fund seminars so might be expected to have an impact on policy design. What

policy conclusions should the Fund draw from it? It is difficult to discern a simple message

that is informed by the evidence. Easterly and Levine (2002) imply that both the Fund and

the World Bank have misinterpreted the message since their policy recommendations

incorporate the view that it is sound macroeconomic policies, openness to trade and free

capital mobility that foster long-run economic success. But can we be certain that the

evidence supporting an institutions explanation provides a sufficiently robust foundation

for reorientating policy advice? Also relevant in this context is the literature that explores

the effects of IMF programmes. Although few of these studies focus on the PRGF or its

predecessor there is a significant amount of evidence to suggest that ‘conventional’ IMF

programmes have at least a short term and possibly enduring adverse effect on economic

growth.4We return to this issue later.

A not dissimilar degree of ambiguity is created when we turn to poverty. Will growth

ensure poverty reduction? If not, what other policies are needed? Will improved openness

4Studies that show at least a short-run negative effect on economic growth include Conway (1994), Killick(1995), Hutchison (2001), Przeworski and Vreeland (2000) and Barro and Lee (2001). A more general review ofthe effects of IMF programmes may be found in Ul Haque and Khan (1998) with Bird (2001c) offering a ratherless sanguine interpretation. Studies that focus more specifically on the ESAF are discussed later on.



designed to encourage growth be pro-poor? If not, what policies need to accompany trade

liberalization?

If anything, the debate surrounding poverty and poverty reduction is even more

complex. First of all, there are significant problems of measurement and no universally

agreed indicator of poverty. Deaton (2002) demonstrates that these problems can result in

contrary claims as to whether poverty is rising or falling. In a related vein, Wiegand (2001)

claims that many studies into the causes of poverty involve problems of misspecification

so that the results are insecure. An influential recent study by Dollar and Kraay (2001)

claims that growth is good for the poor, and that the poor benefit from growth as much as

anyone else. They also conclude that the poor benefit from openness to trade, the rule of

law and fiscal discipline. Reducing a high rate of inflation they claim is ‘super pro poor’,

since high inflation is more harmful to the incomes of the poor than to GDP overall.

However, they also find no evidence to support the claim that democratic institutions or

public spending on health and education have systematic effects on the incomes of the

poor. They stress, in conclusion, that ‘we know very little about what systematically

causes changes in the distribution of income’. In a related study mentioned earlier,

however, they argue that trade contributes to growth and thereby helps to alleviate poverty.

This theme is echoed by Berg and Krueger (2002), although they also acknowledge that

‘openness is not a magic bullet’. Other studies suggest that not all groups from amongst the

poor benefit from growth (Demery, 2000), with a similar conclusion being reached by

Rajan and Bird (2002) in terms of openness and trade liberalization.

Again where does this leave us in terms of policy design? There appears to be no

universal blueprint for poverty reduction. Growth and openness may help, but what if we

do not understand the causes of growth, and if openness is as much to do with geographical

location as trade policy.

It is on top of these insecure analytical foundations that the IMF constructed the ESAF

and the PRGF. The acid test is ‘have these facilities worked?’

4 EVIDENCE-BASED ASSESSMENT

A superficially straightforward way of assessing the Fund’s connection with growth and

poverty would be to evaluate the effects of IMF programmes on these variables. But things

are not that easy. There are serious methodological problems; the basic one being to know

what would have happened in the absence of the Fund. All evaluative studies have to

wrestle with this counter-factual problem. For IMF programmes in general there are now a

relatively large number of studies, and indeed a number of systematic reviews of the

evidence (Killick, 1995; Bird, 1994; 2001c, Haque and Khan, 1998). While the consensus

is that IMF programmes tend to be associated with some improvement in the balance of

payments, they apparently have little significant impact on inflation and seem to have a

negative impact on investment and economic growth (Conway, 1994; Killick, 1995;

Przeworski and Vreeland, 2000; Hutchison, 2001; Barro and Lee, 2001).

The modalities through which IMF programmes may affect poverty are very complex

and it is therefore difficult to generalize, but, given the analysis contained earlier in this

paper, the lack of a counter inflationary effect that would be ‘super pro-poor’ combined

with a negative impact on growth is bad news for poverty. What is going on here? One

explanation is that IMF programmes typically focus on securing a reasonably rapid turn-

around in the current account of the balance of payments. This may rule out supply-side

628 G. Bird


adjustment and imply that Fund programmes will have to concentrate on reducing

domestic aggregate demand. It is this that then reduces economic growth. At the same

time, the deflationary effects of demand compression are offset by the inflationary effects

of devaluation so that the net effect on inflation is neutral. This analysis implies that there

will be a trade off between macroeconomic stability and economic growth that is in some

sense built into IMF programmes. A question is whether PRGF programmes are different.

Do they circumvent this trade off? Are they able to better sustain domestic aggregate

demand and secure balance of payments adjustment by raising aggregate supply,

achieving adjustment with growth? What does the evidence on PRGF programmes tell

us? Have they been able to protect or enhance economic growth?

Once more there are severe methodological problems. Not only is there the ever-present

counterfactual issue, but also the PRGF has not been going long enough to give us the number

of observations on which statistical analysis may be undertaken. To get more observations we

need to go back over the ESAF era; but, of course, the PRGF is supposed to be different from

the ESAF. Unfortunately problems do not end here, since there are considerable differences

in the results of the evaluative studies of ESAF that have been conducted.

Early internal reviews were generally positive (Schadler et al., 1993). However,

outsiders criticised the methodologies used and the conclusions drawn (Killick, 1995b).

An external review commissioned by the Fund was also critical of the design of the ESAF

(Botchway et al., 1998) and members of the review team went on to offer further critical

assessment (Collier and Gunning, 1999) arguing that the ESAF had had little impact on

poverty reduction and had tended to result in a tapering out of foreign aid. The difficulties

in assessing the track record of ESAF are nicely captured by a recent investigation that

shows that while by using a modified control group to model the counterfactual, results are

generated that suggest statistically significant beneficial effects of ESAF programmes on

output growth and the debt/service ratio over the period 1986–1991, diagnostic tests cast

doubt on the reliability of the estimates (Dicks-Mireaux et al., 2000).

Further evidence on the effectiveness of ESAF conditionality based on control group

comparisons is offered by Bird and Mosley (2003). The results they report compare the

performance of a sample of countries that received ESAF credits from the Fund in the mid

1990s with a control group selected to be similar apart from their lack of Fund

involvement. Economic growth is found to be higher in the ESAF group with the

difference in the sample means being significant at the 1 per cent level. This appears to

confirm one of the findings in the study by Dicks-Mireaux et al. for an earlier period

reported above. Bird and Mosley also explore the association between ESAFs and the

distributional stance of macroeconomic policy, as an indicator of the extent to which

economic reform might exacerbate social conflict, and the Observer Human Rights Index,

as an indicator of the government’s ability to manage social conflict. Countries with ESAF

programmes are found to have a more ‘pro-poor’ mix of stabilization policies and greater

‘social capacity.’ Government expenditure on health and education seems to be more

protected and regressive tax policies less likely. The effects of stabilization on income

inequality are thereby moderated. Whatever the causal relationship, ESAF programmes

seem, according to the data presented by Bird and Mosley, to have been associated with

measures that minimize social conflict by avoiding regressive policies, and also with the

creation of the social capacity required for managing structural reform and facilitating

macroeconomic stabilization. Although not in any way claiming it to be definitive, they

suggest that this evidence is consistent with the argument that the ESAF was associated

with effective pro growth policies and policies which helped create an economic and



political environment in which adjustment and stabilization may be achieved on a long-

term basis.

This broader political economy assessment of the ESAF which goes beyond the

conventional criteria for evaluating success and examines the social and therefore

the political environment in which economic adjustment is to be pursued may suggest

that the facility made a positive contribution.

Up until now, reviews of the PRGF have only been conducted within the Fund and have

not been subjected to tests of statistical significance, (IMF, 2000a,b,c). However, the

evidence is consistent with some of the observations made above about the ESAF. PRGF

countries have in general exhibited a superior record in terms of economic growth when

compared to non-PRGF countries although it does not necessarily follow, of course, that

there is a causal relationship.

In the main, however, the reviews of the PRGF have concentrated on ‘process’ and

design rather than outcomes. The Fund’s own assessment seems to be that progress has

been positive but that there is more to be done. Where does the Fund argue that there has

been progress? The reviews claim that first, there has been an increase in the resources

allocated to pro-poor spending both as a percentage of government spending and GDP and

that this has been better targeted. Second, there has been greater ‘fiscal flexibility’ so that

there has been ‘an increase in poverty-reducing spending where additional resources are

available’. Third, governance has been strengthened by improved management of public

expenditure, with more than half of these measures being part of conditionality. While

some of the measures attempt to strengthen auditing procedures, and are designed to

reduce corruption, most are reported as designed ‘to keep expenditure within the limits set

by the budget’. Fourth, the macroeconomic conditionality within the PRGF programmes is

linked to and ‘essentially identical’ to those underpinning PRSPs. Fifth, the reviews claim

that there is evidence of ‘streamlining’ with a reduction in and redirection of structural

conditionality. Finally, about one third of the PRGF programmes involve formal poverty

and social impact analysis (PSIA) with ‘in some cases’ this resulting in policies being

modified because of concerns about the poor. About two thirds of the PRGF programmes,

it is claimed, include ‘measures designed to offset the potentially adverse short-term effect

of external shocks or macroeconomic or structural reforms on the poor’. The reviews

acknowledge that ‘there is scope for a more systematic application of best practices’,

involving more systematic discussion and analysis of the macroeconomic framework and

policies, continued improvements in differentiating between the roles of the IMF and the

World Bank, further effort to improve the quality and efficiency of government expen-

diture, a clearer attempt to set the PRGF within the context of overall poverty reduction

and related PRSPs, increased focus on the sources of growth, more extensive and effective

communication, further capacity building, and a greater recognition of the diverse

circumstances of low income countries.

The reviews are very much of the ‘half full/half empty’ variety. But there are certainly

some causes for concern. First, although the PRSP approach has appeared to widen the

debate about policy, it is too early to judge whether this is sufficiently inclusive, whether it

will increase ownership and implementation and whether it will lead to programmes that

are discernibly different. Observations that communication needs to be more extensive and

effective strike at the core of the PRGF. Second, it may be misplaced to assume that an

increase in government expenditure on health and education necessarily has pro poor

effects (Killick, 2004). Third ‘fiscal flexibility’ is still tightly constrained by resources.

Without extra resources it must therefore be rather limited. Fourth, striving for good

630 G. Bird


governance is a laudable goal but it is one of those phrases about which it is difficult to be

precise. Almost by definition elimination of corruption remains a major challenge. Fifth,

observations that the PRGF needs to be more firmly linked to poverty reduction and that

there needs to be ‘increased focus’ on the causes of growth could be seen as quite damning

indictments of an instrument which has these objectives in its title. Moreover, has the

supposed orientation towards growth and poverty reduction really changed the nature of

the underlying macroeconomic framework? While the Fund has reduced its structural

conditionality, has conditionality overall declined? The next question is where do we go

from here?

5 THE DESIGN OF POVERTY REDUCTION AND GROWTH PROGRAMMES:

THEIR FINANCING AND THEIR INSTITUTIONAL LOCATION

In terms of the forgoing analysis a number of modest conclusions emerge about the design

of PRGF programmes and the general approach of the Fund to growth and poverty. First,

the pursuit of macroeconomic stabilization remains central. Growth and poverty reduction

will not be facilitated by abandoning macroeconomic stability. Fiscal policy and exchange

rate policy are still fundamental to this exercise and these fall squarely within the terms of

reference of the IMF. However, at least in the short run, stabilization may have a negative

effect on economic growth. There is therefore an important role for aid donors to play in

cushioning living standards against a decline in output, conditional on the pursuit of

appropriate policy. The role of the Fund in this context is to set the macroeconomic

constraints, and to focus on the macroeconomic consequences of alternative growth-

enhancing and poverty-reducing policies. The Fund then needs to actively persuade aid

donors to provide resources to fill budgetary gaps.

However, when it comes down to the details of the policies designed to foster growth

and reduce poverty the Fund should adopt only an advisory role. There is insufficient

scientific consensus to justify many aspects of mandatory structural conditionality. It may

be that the World Bank has a more significant part to play but ultimately the design of

policy relating to growth and poverty reduction, subject to the macroeconomic constraints

set by the Fund, should be lodged with governments. There may be no unique answer, and

discretion may be the better part of valour. It is in this regard that ‘ownership’ is central.

The Fund may, of course, have opinions about appropriate policy based on its interpreta-

tion of the current state of knowledge and should voice these as part of the process by

which policy is formulated, but again, while the Fund may have the authority to set the

macroeconomic framework, governments should retain the right to choose policy within

this framework. In many ways this is entirely consistent with current developments in

terms of streamlining conditionality and in terms of PRSPs and related PRGF loans. The

Fund, therefore seems to be moving in the right direction. A key question, however, is

whether the reforms, as articulated in IMF documentation, will actually be implemented.

Will IMF actions match IMF words? Will missions in the field operationalize the intended

reforms?

As important, however, is another question. Where keeping within macroeconomic

constraints will involve pursuing policies likely to have a negative effect on growth and

poverty reduction, will the IMF be able to persuade aid donors to provide the necessary

short-term finance to cover budgetary costs. In this respect the success of the Fund’s

involvement in growth and poverty will as much depend on its relationship with aid donors



as with poor countries themselves. Will foreign aid enable countries to get through the

time period during which stabilization might have a negative impact on growth and

poverty, before the longer-term benefits for growth may be attained? If not, the whole

PRSP and PRGF experiment could fail, since the short run costs will make it more difficult

for governments to continue to implement appropriate long term policy changes.

Reform along these lines could be pushing at an open door. Evidence suggests that IMF

programmes are positively associated with aid flows (Bird and Rowlands, 2002) and IMF

conditionality provides a way of dealing with the moral hazard that would be associated

with unconditional aid. There is then a mutuality of interests between governments, aid

donors and the IMF. Each has its role to play and the roles dovetail with one another.

But what if aid is unforthcoming? In these circumstances there might be an argument

for making additional allocations of Special Drawing Rights (SDRs) to poor countries in

support of the PRSP/PRGF approach. This is not the place to explore this possibility in

detail but it could have certain attractions.5 It would be a way of ensuring that adjustment

was appropriately financed and would therefore increase the probability that economic

reform would be implemented. It would enable countries to cushion the short-run costs of

stabilization. It would enable the Fund to underscore its role as a monetary institution. It

would counteract the likelihood that low income countries could be squeezed as private

capital markets become more tightly regulated and begin to adopt higher prudential

standards and as risk aversity grows. It would circumvent some of the political economy

impediments to expanding conventional flows of foreign aid since it would avoid the

budgetary, although not the real resource, costs. Indeed, it could contribute to ensuring

global political and economic stability. At a time when many aid donors face increasing

fiscal pressures this could be important. However, it would not damage the integrity of the

SDR or threaten to increase global inflation.

There is also the point that the Fund’s support of the Heavily Indebted Poor Country

(HIPC) initiative is channelled through the PRGF. This leads on to the related question of

whether debt relief, as currently organised, is the best mechanism for providing financial

support to low income countries; but this question is not explored here, (see instead Bird

and Milne, 2003; Ranis and Stewart, 2001; Killick, 2004).

A remaining issue is whether anything is gained by relocating the entire PRSP/PRGF

exercise more exclusively within the World Bank? The logic behind this is that the Bank

has a comparative advantage in areas of growth, development and poverty. However, there

are counter-arguments. If there is a lack of scientific consensus about what determines

growth and poverty reduction, this applies to the Bank as well as the Fund. PRSPs and

PRGF programmes must continue to address macroeconomic stability and here the Fund

holds a comparative advantage. Moreover, the Fund may be in a stronger position to exert

fiscal discipline, and IMF conditionality may have a stronger impact on official flows (Bird

and Rowlands, 2002) Moreover, there is always the argument that it may be beneficial to

have some degree of ‘competition’ between the institutions. It is not clear that govern-

ments would prefer to deal with just one of them. The danger of course is that the Fund and

Bank may give conflicting advice; their input therefore needs to be co-ordinated. This is

what the PRSP approach is seeking to achieve and there seems little to be gained from

changing institutional arrangements until the policy of closer Fund-Bank collaboration has

been given a chance to prove itself.

5For a much fuller analysis of whether a link between SDR allocations and aid should be resurrected, see Bird(1994).

632 G. Bird


6 CONCLUDING REMARKS

Economic stabilization is relatively easy. There is a reasonable degree of scientific

consensus on the underlying theory and therefore broad agreement on the required

policies (at least qualitatively). However, stability can easily be achieved at a low level

of economic activity. Economic growth and poverty reduction are the ultimate objec-

tives. As issues, these are much more challenging, largely because there is limited

scientific consensus on their causes and therefore on the appropriate policies needed to

help achieve them. This is not to say that there are no ideas. There may be too many.

Over time a stronger consensus may well emerge. The problem is that policy cannot

wait. The Fund has accepted that balance of payments adjustment needs to be placed in

the context of growth and poverty reduction, not least as a way of making it more

palatable. Since 1999 the Fund’s instrument for achieving this has been to formulate a

blueprint in the form of PRSPs and to provide financial support and related condition-

ality via the PRGF.

Given the fundamental nature of the problems involved, it is unrealistic to expect the

PRGF to transform the development landscape. It is also reasonable to assume that there

will be a learning period. The analysis contained in this paper suggests that the Fund’s

approach is moving in the right direction. As an international financial institution the IMF

should not withdraw from seeking to assist low-income countries. However, while, the

rhetoric has changed, it will take time before we can see whether the reality has changed as

well. The Fund’s approach needs to be firm on macroeconomic stability but accommodat-

ing in terms of the policies designed to foster growth and development. The Fund can play

a role in helping to create the sound economic environment in which aid has been found to

exert a positive impact. But for the PRSP and PRGF approach to be successful it is also

important that the Fund does more to secure the financial support necessary to accom-

modate appropriate adjustment. If aid donors are reluctant to supply this via normal

channels, and there is a reluctance to increase conventional IMF lending, an alternative

would be to reactivate an SDR aid link. Without adequate financial support, the change in

language runs the danger of becoming largely meaningless and a source of potential

frustration. Discussions about the details of PRSPs and the PRGF, important as they are,

should not obscure the more basis message. While the PRSP and PRGF initiatives may

create a procedural framework within which countries, the Bank and the Fund can seek to

foster growth and poverty reduction by adopting a combination of sound macroeconomic

policies and a sensible strategy for economic development, the initiatives will be thwarted

if they are starved of the necessary resources.

ACKNOWLEDGEMENTS

I am grateful to David Goldsbrough for his comments on an earlier draft of this paper and

discussions with him of the issues it raises. He is, of course, exonerated from any

responsibility for the final version.

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