An Essay by Trushna P. Patel
Part 1: New Directions at the World Bank
Introduction
Poverty Reduction
Strategy Papers
How Successful
Has the Bank Been at Poverty Alleviation?
Part 2: A Case in Point: Is Uganda the Model for Africa?
Introduction
Footnotes
Useful links and References
Part 1: New Directions at
the World Bank
Introduction
The World Bank emerged as part of the response to the economic
destruction of World War II. Along with the Marshall Plan, the Bretton
Woods Institutions (the World Bank and the IMF1) were
created to rebuild the war-torn economies of Europe. After European
reconstruction, the Bank and the IMF turned their attentions to
other developing countries. Today the World Bank's mission is much
broader, declaring "our dream is a world free of poverty".
The World Bank Group is actually comprised of five agencies2
but the International Bank for Reconstruction and Development (IBRD)
and the International Development Association (IDA) are the principal
vehicles for development financing. While both IBRD and IDA provide
loans for development projects, IBRD, established in 1945, lends
to middle-income and creditworthy poor countries. Interest rates
on IBRD loans are slightly below commercial rates, providing the
borrower country with more favourable terms than it could have negotiated
independently in world financial markets. Created in 1960, IDA provides
highly concessional loans to countries that have per capita incomes
of less than US$885 and lack the ability to borrow from IBRD. IDA
loans are interest free, charging only a transaction fee of 0.75%
with a ten year grace period on principal repayment, and thirty-five
to forty year maturities. While IDA is funded by contributions from
donor governments' aid budgets, IBRD raises most of its funds from
international financial markets.
In its early years, in the 1950s and 1960s, the Bank engaged in
project-based lending. The dominant view at the time was that the
major obstacle to development was the scarcity of physical capital.
In order to help developing countries "take off" foreign aid would
fill the finance gap3 enabling the developing country
to accumulate enough capital to achieve the necessary levels of
investment for growth. However, by the 1970s, under Robert McNamara,
the Bank shifted to programme-based lending aimed at poverty reduction
and rural development. This shift in focus was aimed at accounting
for the shortcomings of earlier development approaches. In the 1980s
the Bank's governing ideology changed yet again, this time adopting
a neo-liberal approach of "getting the prices right", bringing the
Bank closer to the IMF. During this period aid was provided through
structural adjustment loans to support the process of implementing
structural changes in the economy (reducing deficits and fiscal
spending, privatisation, deregulation and liberalisation) believed
to be the reason why previous development efforts had failed. Recently,
in part as a response to criticism of the human costs of adjustment,
the Bank has shifted focus again with poverty alleviation prioritised
as well as attention to governance issues.
Back to
top
Poverty Reduction Strategy Papers
In September 1999, the World Bank and the IMF declared that their
concessional lending programmes and Heavily Indebted Poor Country
Initiative debt relief should be based on poverty reduction strategies
developed by developing countries themselves through participatory
processes. In this approach, developing country governments must
produce a Poverty Reduction Strategy Paper (PRSP) which outlines
a nationally-owned policy agenda for tackling poverty arrived at
through consultation with civil society and the private sector.
The Poverty Reduction Strategy Paper must be approved by the Bank
and the IMF in order for the country to reach a HIPC decision or
completion point, receive IDA concessional lending, or approval
for an IMF Poverty Reduction Growth Facility programme.
Since its introduction, the Poverty Reduction Strategy Paper approach
has been adopted in 60 low-income countries. These countries are
putting poverty reduction at the centre of their development agendas
and Poverty Reduction Strategy Papers have helped to foster a more
open and inclusive dialogue on policy initiatives. While for most
countries the process of implementing PRSPs has been a process of
"learning by doing" (Review of PRSP, 3) it has also resulted in
a more efficient use of public resources and more informed decision-making.
As the joint World Bank and IMF review of PRSPs states, there is
a general consensus on the four main successes of the approach.
Firstly, a growing sense of ownership among developing country governments
over their poverty reduction and development strategies. Second,
there is now a freer dialogue within governments and certain sectors
of civil society. Third, poverty reduction has taken a central place
in policy debates. Finally, the PRSP approach has generally been
accepted by the wider donor community.
Many non-governmental organisations4 and developing
countries government officials have expressed concern that the need
for Bank and IMF approval limits the extent to which Poverty Reduction
Strategy Papers can truly be nationally owned as governments will
be tempted to write programmes they know the Bank and Fund will
approve even if these conflict with the results of the consultative
process. Additionally several non-governmental organisations are
worried that the quality of the Poverty Reduction Strategy Paper
and the level of participation will be sacrificed in order to expedite
debt relief. There has also been some criticism levelled at the
Bank and IMF for ostensibly confining participation from civil society
to examining the scope and causes of poverty and identifying more
efficient means for implementing programmes rather then engaging
in a true policy dialogue (Wood, 2000).
Back to
top
How Successful Has the Bank Been
at Poverty Alleviation?
Some progress in poverty reduction has been made: the number of
people living on a dollar a day or less fell slightly from about
1.3 billion in 1990 to 1.2 billion in 1998 while the poverty rate
fell from 29 percent to 24 percent. Social indicators for developing
countries have improved. Infant mortality rates have fallen from
107 per 1,000 live births in 1970 to 59 in 1999. Since 1970, life
expectancy has risen by four months each year, on average. Food
production has increased faster than population. Educational outcomes
have improved with higher primary school enrolment rates and adult
literacy rising, from 53 percent in 1970 to 74 percent in 1998.
Yet, nearly 1.2 billion people still live in poverty. Moreover,
poverty alleviation has been extremely uneven with East Asia, which
accounts for over a third of the population of the developing world,
experiencing the largest fall in poverty. East Asia saw its poverty
rate almost halved, with the number of people earning US$1 a day
or less reduced by 174 million.
In contrast, South Asia, which accounts for over a quarter of the
developing world's population, saw only a modest 4% decline in poverty
rates while poverty rates were relatively constant in Sub-Saharan
Africa, Latin America, and the Middle East and North Africa. The
transition economies of Eastern Europe and Central Asia however
have seen poverty double (Assessing Globalisation, 2002). Clearly
poverty reduction efforts have yielded unsatisfactory outcomes in
these regions, despite progress in some countries such as Uganda.
A recent World Bank report, Strategic Compact Assessment, reviewed
the Bank's progress in implementing President James Wolfensohn's
reform initiative which, among other things, promised greater efficiency
and effectiveness in achieving the Bank's main goal of poverty reduction.
Perhaps the most telling finding of this review was the view of
many of the Bank's clients that "while the Bank is relatively effective
in assisting countries in strengthening their policies and structures
for economic growth, the Bank is not perceived as being strong in
its main mission of poverty reduction." (CA, 10). Another finding
was that only 33% of borrower government officials found the bank
to be effective at helping to reduce poverty.
A study by Paul Collier and David Dollar on the allocation of aid
and poverty reduction finds that actual aid allocation is not poverty-efficient,
in other words the current allocation of aid is inconsistent with
the goal of maximising poverty reduction. They estimate that the
present allocation of aid lifts about 30 million people out of poverty
annually while a poverty-efficient allocation would more than double
the impact of aid on poverty reduction with an additional 51 million
people affected. A major problem they identify is that "aid is being
tapered out with reform when it should be tapered in with reform"
(Collier and Dollar, 1999, 4), and thus there are many unexploited
opportunities for poverty reduction. Collier and Dollar observe
that aid increases the benefits of good policy while good policy
increases the impact of aid. However, aid allocation does not take
advantage of this relationship and instead allocates fewer resources
in those good policy environments that maximise aid effectiveness.
Many other studies have highlighted the importance of a good policy
environment for aid effectiveness. William Easterly suggests that
debt relief can only be effective at promoting development and poverty
reduction if the recipient government is committed to reform and
stops "eating the future"5. A study by Dollar and Svensson
determined that the effectiveness of adjustment lending depends
on domestic political economy factors of the developing country.
They conclude that the role of the World Bank is to identify reformers,
not create them.
Another study by Burnside and Dollar found that when aid happened
to coincide with good policies, it had a strong positive effect
on growth; otherwise it seemed to result in unproductive government
consumption. Overall many recent studies seem to suggest that aid
is most effective when used to reward good policy. Thus a key factor
for increasing World Bank lending's impact on poverty reduction
would involve channelling more aid to those countries that show
a commitment to pro-poor policies.
However, many have criticised the World Bank's focus on growth
and poverty reduction for being too narrow and ignoring the issue
of equity. Robert Wade has often asserted that the Bank ought to
focus on inequality, not just poverty. Wade observes that inequality
is rising across the globe pointing to what he calls the "missing
middle" - the fact that there are relatively few countries with
average incomes between $5,000 and $11,500 in purchasing power parity
(PPP) terms (PPP measures income in terms of the purchasing power
it provides over a common bundle of goods and services thus taking
into account differences in the cost of living across countries,
e.g. considering that a hair cut in Kampala will cost less than
one in London). Instead most countries fall at either of the two
extremes with no evidence of convergence between the incomes of
the rich and poor.
While there has been much debate on the extent to which inequality
has been rising worldwide, irrespective of the figures used, there
is no evidence that shows inequality to have fallen across countries.
UN statistics show that the incomes of the richest 20% were 11 times
bigger than incomes of poorest 20% in 1960 and 15 times bigger in
1997 in PPP terms. However, a recent article in The Economist
points to a study by Xavier Sala-i-Martin which states that substantial
growth in China (and to a lesser extent India) has resulted in rapidly
rising incomes. The article goes on to suggest that "inequality
measured across all the people of the world, therefore, may very
well be falling" thus even if you see divergence across countries
there may be convergence across people.
A World Bank study by Dollar and Kraay also points out that growth
in China, India and East Asia has contributed to narrowing the gap
in their populations' living standards with the developed world.
Furthermore, when examining the relationship between overall gross
domestic product (GDP) and aggregate growth rates and the incomes
(and growth of income) of the poorest 20% of the distribution for
80 countries covering a period of 4 decades, they find that during
periods of significant growth the incomes of the poor increased,
approximately one for one, with the overall growth in mean income
implying that substantial benefits from growth were reaching the
poor. What is more, Dollar and Kraay observed that during periods
of "crisis", or negative overall growth, the incomes of the poor
do not fall disproportionately.
Back to
top
Part 2: A Case in Point: Is Uganda the Model for Africa?
Introduction
In 1986 when Uganda's current President, Yoweri Kaguta Museveni,
took office the country's economy, infrastructure and health and
education systems were in ruin after years of devastation by civil
war, corruption and gross mismanagement. Since then, Uganda has
made a remarkable recovery in its transition to peace and restoring
growth. Initially Museveni's government pursued economic policies
divergent with IMF and World Bank advice, such as attempting to
freeze and then raise the value of the Ugandan shnds
to shift to a multi-party system which they considered to be detrimental
to national unity. For the NRM "its politics were not negotiable.
Economics was quite another matter, or very quickly became so once
the NRM's initial economic policies went seriously awry" (ibid,
8). Thus while Uganda's political system has emerged as a contentious
"Movement system" formed wholly by the NRM, its economic policies
reflect, to a large degree, the advice and influence of the World
Bank and other donors. Furthermore this partnership for economic
reform is widely viewed as a success, so much so that in a recent
report evaluating Uganda's recovery Paul Collier and Ritva Reinikka
assert that "Uganda exemplifies successful African economic liberalization"
(Collier and Reinikka, 15) and represents "the main model of successful
post conflict recovery in Africa" (ibid, 15).
Uganda has consistently shown itself to be one of the region's
most robust economies with growth in real gross domestic product
averaging 5-7% over the past decade and inflation brought under
control (Collier and Reinikka, 2001). It has also witnessed what
appears to be a dramatic reduction in poverty, almost halving its
poverty rate to 35% in 20016. National income accounts
do not tell the whole story as they have little information on major
sources of income like non-export agriculture or informal activities
and also say little about how income is distributed.
Figures for consumption are much better for understanding poverty
and in Uganda a large-scale household survey programme began in
1992 - the integrated household survey. One of the key findings
regarding poverty of the survey was that for 1992-1997/8 growth
in average per capita consumption matched the growth in national
income accounts. Not only were households at all points of the income
distribution better off in 1998 that in 1992, but consumption and
living standards grew more at the lower points of the income distribution
than at the middle. This implies that inequality, as well as poverty,
was reduced (Appleton, in Collier and Reinikka 2001, p. 84-85).
Furthermore, although poverty reduction was not uniform across regions
- "poverty fell the most in the central region and least in the
eastern region … poverty did fall in every region between
1992-1997/98" (Appleton, 85; emphasis added).
There has, however, been some debate as to whether the benefits
of growth actually translated into measurable improvements in the
living standards of the majority of people. The Uganda Participatory
Poverty Assessment Project (UPPAP) found that "Through the analysis
of long-term trends in poverty, many local people felt that poverty
was worsening in their communities … Local people reported more
movement into poverty that out of it" (Government of Uganda, 1999,
p. 10)7. This could imply that people's perceptions of
their own poverty may change with time or a change in their situation,
for example, as they are able to consume more. Their propensity
to consume might also increase and so increase their sense of deprivation,
or people may become more aware of their deprivation. The Uganda
Participatory Poverty Assessment Project may be reflecting this
changing sense of deprivation as well as experienced poverty.
The World Bank has been heavily involved in supporting Uganda's
reconstruction with a total commitment of over $1 billion today8.
Uganda was the first country to be eligible for and receive debt
relief in the World Bank and IMF Heavily Indebted Poor Country (HIPC)
Initiative in 1998 and was the first to reach its completion point
for enhanced HIPC debt relief in 20009. There has, however,
been some controversy surrounding this debt relief as at the time
the government had been organising private financing to purchase
a presidential aircraft. In the end the relief was granted and the
Ugandan Government has agreed to reduce its defence and non-wage
expenditures to offset the payments for the aircraft10.
In 2001 Uganda became the first country to receive a Poverty Reduction
Support Credit of US$150 million to support the implementation of
its PRSP11 and most recently in July 2002 the World Bank
approved a second Poverty Reduction Support Credit for Uganda12.
Uganda has made significant progress in implementing its Poverty
Reduction Strategy Paper with considerable support from the World
Bank.
However, this is not to say that there have not been failures or
that there is no room for improvement. Poverty, despite recent progress,
remains acute. The early years of Bank supported structural adjustment
programmes failed to achieve adequate improvements in the social
sector, particularly in health and education, and despite recent
progress there is a continued need for improving service delivery.
Even Uganda's robust growth is threatened unless the Government
continues to promote export growth and diversification and attract
higher investment (Collier and Reinikka, 2001).
Corruption, as in much of the developing world, remains an obstacle
to poverty reduction and development, eating away at scarce resources.
The political system, particularly the restrictions on political
parties, remains a thorny issue with proponents claiming that the
"movement system" is a local solution to participatory and democratic
government while opponents deride it as being a thinly veiled "one-party
state" that denies people their right to change government and thus
lacks a vital check against the abuse of state power. Finally, although
Uganda is now free of large-scale internal conflict, Uganda is far
from being at genuine peace. Ugandan troops continue to be involved
in conflicts in neighbouring countries while rebel groups continue
conflict in northern areas. These concerns need to be acknowledged
and addressed lest they jeopardise all that Uganda has achieved
thus far. Uganda's progress has been remarkable and should serve
as a positive model for other developing countries in Africa, particularly
those emerging from conflict. However, the international community
should be equally diligent in confronting and redressing its faults
and shortcomings.
Back to
top
Footnotes
- International Monetary Fund.
- In addition to the International Bank for Reconstruction and
Development (IBRD) and the International Development Association
(IDA), there are the International Finance Corporation (IFC),
the Multilateral Investment Guarantee Agency (MIGA) and the International
Centre for Settlement of Investment Disputes (ICSID). The IFC,
established in 1956, promotes the private sector investment by
financing projects, helping private companies in developing countries
to mobilise international finance and providing technical assistance
and advice. MIGA, established in 1988, offers political risk insurance
to lenders and helps developing countries attract and retain investment.
The ICSID was established in 1966 and helps mediate investment
disputes.
- The "finance gap" model of growth, also know as the Harrod-Domar
model, is a variant of a growth model derived in a 1946 paper
on US business cycles by Evesy Domar. Under this model economists
would calculate the "required investment rate" for a particular
growth target to then determine the amount of aid necessary to
supplement actual investment. Although largely discredited, this
model is still occasionally used by international financial institutions
(IFIs) to relate investment and growth (Easterly, 2001).
- See Wood, Angela: "The ABC of the PRSP"; The Bretton Woods Project.
- Easterly argues that many of the developing world's corrupt
or predatory governments have high discount rates against the
future, valuing present consumption over future growth or "eating
the future". In this situation government preferences dictate
that they will borrow as much as they can (i.e. debt relief would
simply lead to new borrowing) or will decumulate assets and extract
as much as possible from the private sector (through high taxes,
inflation, corruption, overvalued exchange rates or financial
repression). Unless these preferences change and governments lengthen
their time horizons debt relief is unlikely to have much positive
impact for growth, and in fact we could expect to find debt relief
associated with new borrowing and worse policy environments (Easterly,
1999 and 2001).
- World Bank Press Release, 2001.
- Source: Collier and Reinikka, 2001 Chapter 4: Changes in Poverty
and Inequality by Simon Appleton, p. 83.
- World Bank Country overview, 2000.
- World Bank Press Releases, 1998, 2000.
- World Bank News Release 2 May 2000.
- World Bank Press Release, 2001.
- Ibid 24 July 2002.
Back
to top
Useful links and References
Collier, Paul and David Dollar: "Aid Allocation and Poverty
Reduction" Policy Research Working Paper, 2041, January 1999
Collier, Paul and David Dollar: "Can the World Cut Poverty
in Half?", Policy Research Working Paper, 2403, World Bank,
July 2000
Burnside, Craig and David Dollar: "Aid, Policies and Growth",
Macroeconomics and Growth Division, Policy Research Department,
Working Paper No.1777, World Bank, June 1997
Dollar, David and Aart Kraay: "Growth is Good for the Poor",
World Bank, 2000
Dollar, David and Jakob Svensson "What explains the success
or failure of structural adjustment programmes?", The Economic
Journal, World Bank, 2000
Easterly, William: The Elusive Quest for Growth, the
MIT Press, 2001
Easterly, William: "How did highly indebted poor countries
become highly indebted? Reviewing two decades of debt relief",
World Bank, 1999
Hansen, Holger Bernt and Michael Twaddle (eds.): Developing
Uganda, James Currey Ltd, Oxford, UK; 1998.
Wade, Robert: "Winners and Losers" in The Economist,
28 April 2001
Watkins, Kevin and David Dollar and Aart Kraay: "Making Globalisation
World for the Poor" Point/Counterpoint, World Bank,
2002
Wilks, Alex: "Success or Failure? Wolfensohn's reforms at the
World Bank", Bretton Woods Project, April 2001
Wood, Angela: "The ABC of PRSP", Bretton Woods Project, April
2000
"Assessing Aid: What Works, What Doesn't, and Why", World Bank,
2002
"Assessing Globalisation: Does More International Trade Openness
Increase World Poverty?", www.worldbank.org,
2002
"Convergence, Period" Economics Focus in The Economist,
pg. 70; 20 July 2002
"Poverty Reduction and the World Bank: Progress in Operationalizing
the WDR 2000/01", World Bank, 2002
"Review of Poverty Reduction Strategy Paper (PRSP) Approach:
Main Findings", IDA and the IMF, 15 March 2002
"Strategic Compact Assessment", World Bank, 15 March 2001
World Bank Press Releases 1998-2002
Back to top
