14 January 2002

IMF's K・ler on Poverty Reduction Strategies

Trade is best defense against aid dependency, he says

The success of poverty reduction strategies depends on poor countries' commitment, capacity and sustained efforts to establish peace, democracy and good governance, International Monetary Fund (IMF) Managing Director Horst K・ler said.

In opening remarks at the January 14 International Conference on Poverty Reduction Strategies in Washington K・ler said that the sustainable growth necessary to reduce poverty can be achieved through sound economic and structural policies, healthy institutions and investment in human capital and infrastructure.

This, he added, requires an economic climate that encourages private sector investment and facilitates integration of less-developed economies into the global marketplace.

K・ler said that poor countries' self-help efforts must be boosted by more decisive, faster broader support from the international community.

But he noted that poverty reduction strategies can succeed only if poor countries themselves lead the creation of these strategies.

Cautioning against aid dependency that, in his view, undermines self-confidence and the development of healthy national institutions in less-developed countries, K・ler said that the best guard against it is trade.

Creating trading opportunities for these countries is "a win-win proposition for all," he said.

"Thus, in my view, the true test of the credibility of wealthy nations' efforts to combat poverty lies in their willingness to open up their own markets and phase out trade-distorting subsidies in areas where developing countries have a comparative advantage," K・ler said.

He pointed to agricultural subsidies, in particular, as harmful to wealthy and developing nations alike.

"It is unconscionable for the United States, Japan, and the European Union spend hundreds of billions of dollars on maintaining marginal activities for the benefit of a few of their citizens, while devastating agricultural sectors that are central to peace and development in poor countries," he said.

Following is the text of K・ler's remarks as prepared for delivery:

Opening Remarks by Horst K・ler
Managing Director, International Monetary Fund
at the International Conference on Poverty Reduction Strategies
Washington, D.C.
January 14, 2002

It is a pleasure to welcome representatives from 60 developing countries, donor agencies, international institutions, and civil society to this international conference on poverty reduction strategies. We want to listen closely to what you have to say, and to use this conference to help prepare for the upcoming Executive Board reviews of the PRSP [Poverty Reduction Strategy Papers] process and the IMF's Poverty Reduction and Growth Facility (PRGF). Your experiences, insights, and recommendations will be a very important input to the Board's decisions.

During my first months at this institution, I traveled to developing countries in Africa, Asia, and Latin America, to seek their help in defining the future role of the IMF. Without exception, our members said that they wanted the IMF to continue providing advice, technical assistance, and financial support to poor countries. At the same time, they saw a need for changes in the way we do business. They stressed that countries themselves know much more about the problems they face than do international financial institutions, and that success in the fight against poverty requires, first and foremost, their own commitment, capacity, and prolonged effort. That is why it can succeed only if poor countries themselves lead the design of their poverty reduction strategies.

Today the IMF's work with poor countries is already in a process of change. Over the past year and a half, we have been working to streamline IMF conditionality, to make room for true national ownership of reform programs. Listening and dialogue defines, more and more, our relations with member countries and civil society. And nowhere has the pursuit of national ownership more central than in the PRSP process.

In my recent discussions with political leaders, business persons, and civil society, I have gotten the impression that the PRSP approach is increasingly embraced as a promising way to design poverty reduction strategies that command broad support within a country, and among its external development partners. In many low-income countries, the PRSP process has helped to galvanize a healthy public debate that has led to better-informed decision making. The first full set of PRSPs has deepened understanding of economic fundamentals and social impacts, and helped to identify priority areas for action to promote sustained growth and reduce poverty. I am also encouraged that many donors are moving to align their assistance programs with the priorities identified in PRSPs and to streamline and harmonize their administrative procedures.

At the same time, it is clear that the PRSP approach is still evolving, and that everyone involved is learning by doing. That is why I think it is critical that we take this opportunity, two years into the process, to ask how it can be improved in the light of the early experience. We are looking to the ongoing review of the PRSP, and especially to this conference, for frank discussions and practical ideas. Together, we should weigh the achievements and reflect on suggestions that have been offered in 50 detailed studies and written contributions submitted to us by governments, donors, academics, and civil society groups. It is particularly important that we draw on the views and experiences of the PRSP countries themselves, as well as their development partners.

In assessing the PRSP approach, we should be aware that there are inherent tensions: -- We want to promote broad-based participation, but how can we best do this without undermining the role of existing democratic institutions?

-- How do we reconcile country ownership with the priorities and constraints under which donor agencies operate?

-- How can countries and their partners best cope with limited institutional and analytical capacities, to enable implementation to move forward while building national capacities and country ownership?

-- And how should countries strike a balance between the time needed to prepare high quality and comprehensive strategies, and the desire to move quickly in using them as a basis for external assistance and debt relief?

As we deliberate these and other issues over the next few days, we need to be ambitious in our objectives but realistic in our methods. There is no question that everyone involved needs to step up and focus their efforts to develop and support national poverty reduction strategies. But building national institutions, promoting sustained economic development, and reducing poverty take time and sustained effort. We should not risk overburdening the process with unrealistic expectations that condemn it to a perception of failure even when countries are on the road to success.

Ladies and Gentlemen, there is no question that world poverty is the immediate and urgent challenge of the 21st century. The United Nations Millennium Development Goals are indeed ambitious, but they are achievable with concerted and sustained action by poor countries and their development partners.

Poverty reduction efforts will be successful if they are based on "self help"-the efforts of poor countries to establish peace, democracy, and good governance at home. The prospects for sustained, strong growth-which is indispensable for reducing poverty-depend on the ability of these countries to unlock the creative energies of their people. This requires investment, not least in human capital and infrastructure, as well as the right macroeconomic and structural policies and healthy institutions. It requires, especially, an economic climate that encourages private sector investment, and facilitates integration into the global marketplace. The greatest asset we have in fighting world poverty is the political will and determination in developing countries to tackle these issues. I see this reflected very concretely, for instance, in the New Partnership for Africa's Development (NEPAD).

But countries with so many hurdles to overcome need a helping hand, to ensure that progress is rapid and sustained. Their self-help must be reinforced by more decisive, faster, and more comprehensive support from the international community.

The IMF, in close cooperation with the World Bank, is committed to the success of the HIPC Initiative, and is currently mobilizing extra efforts at capacity building in the Fund's core areas of responsibility. I am a strong advocate for increased official development assistance. And I do think that the achievement of the UN target of 0.7 percent of GNP, with a greater concentration on low-income countries, should be seen as a concrete measurement of solidarity between wealthy nations and the world's poorest citizens. I am saying this with a clear understanding that, at the same time, both donors and recipient countries need to take steps to increase the efficiency of official development assistance.

Still, the best form of help for self-help is trade. The review of the PRSP process and the PRGF cannot be separated from this issue of strategic importance in the fight against world poverty. The opportunity to build prosperity by expanding and diversifying exports and attracting foreign direct investment is the best defense against aid dependency, which undermines self-confidence and the development of healthy national institutions in poor countries. Moreover, creating better trading opportunities for the poor is a win-win proposition for all. Thus, in my view, the true test of the credibility of wealthy nations' efforts to combat poverty lies in their willingness to open up their own markets and phase out trade-distorting subsidies in areas where developing countries have a comparative advantage-as in agriculture, processed foods, textiles and clothing, and light manufactures. An honest commitment to the UN development goals can be measured by the headway the world makes on the difficult issue of agricultural subsidies. It is unconscionable for the United States, Japan, and the European Union to spend hundreds of billions of dollars on maintaining marginal activities for the benefit of a few of their citizens, while devastating agricultural sectors that are central to peace and development in poor countries.

I am confident that this conference will be an important step forward in strengthening the core of the effort to reduce world poverty-self-help and country ownership. As I said earlier, we may not have all the answers. But one thing we all must do is to keep asking the same question: what is the effect of our actions on the poor? If we do not like the answer, then we must change what we are doing. I wish you well in your deliberations and I look forward to hearing the results of your work later this week.

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