Reasons for Poverty and the Role of IMF in Poverty Reduction - Term Paper Example

Reasons for Poverty and the Role of IMF in Poverty Reduction Introduction As Mahatma Gandhi aptly said, poverty is the worst form of violence. Indeed, poverty deprives entire communities of their wellbeing and security, deprives them of access to adequate food, safe water, shelter, and clothing, and also deprives them of healthcare and education. Moreover, poverty takes away people’s peace of mind, dignity, freedom, and rights, while also putting their lives danger and depriving them of a stable future (Whitman, 2011: p52). As a result, poverty reduction especially in developing nations has become increasingly important to ensuring global peace and security with major international institutions like the IMF taking the lead in tackling poverty. Poverty reduction is fundamentally dependent on the developing countries’ substantial efforts, particularly with regards to implementing reforms required to enhance economic growth. However, these countries usually lack required capacity to do this, as well as to effectively utilize potential foreign assistance. The IMF, which is a major foreign lender for developing countries struggling to end poverty, has began to play a critical role in helping poor countries develop capacity needed to achieve the Millennium Development Goals aimed at reducing global poverty (Whitman, 2011: p52). This paper discusses the reasons for poverty and the role that the IMF should play in alleviating poverty. Reasons for Poverty There are several reasons why poverty is so widespread, especially in the developing nations across the world. One of the most stated causes of poverty is colonial history of some of the poorest, developing countries in the world. Acemoglu and Robinson (2012: p66) contends that majority of the poorest nations in the world are former exporters of slaves to the developed world, as well as territories from which the colonial powers have systematically extracted resources to be used in their countries. Although some former colonies have been able to overcome this resource outflow, such as Canada, Australia, and the United States, most of the other colonies suffer from the legacies of colonialism, which have led to conditions that prevent its citizens from accessing education, capital, land, and other resources required for a society to adequately support itself. For most of these countries and territories, one of the most debilitating legacies of colonial history has been poverty and inequality. Since most colonial powers settled and developed areas from which they were extracting resources, other regions in the same colonial territory were left grossly underdeveloped and this has continued to the present day, causing widespread poverty and marginalization (Acemoglu & Robinson, 2012: p66). War and conflict has also been a major contributor to poverty around the world and, indeed, both can be linked to the legacy of colonialism. Whatever the reason for war and conflict may be, however, it is clear that security, stability, and safety are critical for economic growth and prosperity and reduced poverty levels. Most developing countries are unable to effectively harness their natural resources in the presence of war and conflict, which renders most attempts to monetize and capitalize on potential resource wealth unsuccessful (Acemoglu & Robinson, 2012: p67). In addition, war and conflict makes the enforcement of laws protecting investments, property, and rights difficult, without which potential business-owners, entrepreneurs, and farmers cannot invest in their country’s economy safely. Most importantly, it is telling that five of the world’s poorest countries, i.e. the Democratic republic of Congo, Liberia, Burundi, Eritrea, and the Central African Republic have all suffered major armed conflicts in the last thirty years that their governments have been unable to protect them and their property from (Acemoglu & Robinson, 2012: p67). As a result, the people have sunk further into poverty in the aftermath of the inequality legacy from the colonial period. National debt has also been identified as a major reason for poverty with majority of the world’s poorest countries owing significant debt loans from international financial institutions, as well as wealthier nations. Da Costa and Dias (2014: p26) note that most countries in the developing world pay at least $2.30 to service their debts for every $1 of financial aid received. While policies for structural adjustment proposed by the international lenders to aid the country’s economy for them to repay the loans end up requiring the poor nations to rapidly liberalize their markets, locking out domestic investors and businesses and exacerbating poverty. As a result of increased competition from capital-intensive foreign companies and the cheap labor available in these countries, the potential of developing economies to grow is undermined. Calls for international debts to be written off or reduced have been increasing in recent years as a way of tackling poverty, which shows that the great burden that national debt with exorbitant repayment requirements places on developing nations in their attempts to reduce poverty is being increasingly recognized (Da Costa & Dias, 2014: p26). Countries vulnerable to natural disasters, such as the Philippines and Haiti, have also suffered the effects of poverty more than most countries, especially when these countries are in the developing world (Da Costa & Dias, 2014: p27). The presence of occasional or recurrent catastrophic disasters of nature has continued to pose substantial challenges to the eradication of poverty. For instance, constant monsoon flooding in Bangladesh and parts of India, recurrent droughts in the Horn of Africa, and occasional catastrophic typhoons in Southern Philippines are all examples of how natural disaster vulnerability can be devastating to entire populations (Da Costa & Dias, 2014: p27). Such natural disasters divert funds from the development agenda to disaster mitigation, while help from the international community is often in form of aid grants that further impoverish the people as discussed above. In addition, people already living in impoverished conditions are forced to become internally displaced and lose most of their property, becoming almost entirely dependent on help from others. After Myanmar was hit by Cyclone Nargis in late 2008, it was discovered that local fishermen had accrued twice as much debt as before as the attempted to rebuild their lives. In addition, the earthquake and subsequent tsunami that struck the Solomon Islands in 2007 resulted in losses that accounted for almost the entire national budget (Da Costa & Dias, 2014: p27). These disasters have resulted in mass impoverishment of populations in the developing world. Some of the reasons for poverty are political in nature and prejudice and inequality have been blamed for poverty by various poverty think-tanks. For instance, social inequality that result from cultural beliefs concerning the worth of various social classes, ethnic groups, races, and genders have all played a significant role in propagating poverty (Bigman, 2012: p44). Ascribed inequality that places people in diverse social categories when they are born based on racial, ethnic, or religious characteristics has been used to marginalize entire populations, leaving them in a vicious cycle of poverty. The situation in Apartheid South Africa is a good example with laws at the time defining a binary caste system, according to which different social spaces and rights were assigned to on the basis of skin color, in effect determining one’s opportunities and likelihood to slip into poverty. The upper caste was able to enjoy welfare, social, and educational benefits with subsidized school fees, while the adults were given first priority in well paying jobs. In such a case, rather than channeling resources to the population that needs the resources most, governments of socially stratified societies tend to treat different social classes with prejudice, leading to collective poverty of entire populations (Bigman, 2012: p44). Political corruption and centralization of power in developing nations have also been implicated as a major reason for poverty around the world. With corruption becoming increasingly endemic in developing countries, especially with the privatization of previously state-owned corporations, there has been a systematic undermining of good governance and democracy (Bigman, 2012: p45). Corruption, where political leaders are not accountable to the population they serve, has continuously inhibited development as state funds and foreign aid for diverted to personal and political gain, rather than for development. Corruption also increases business costs and creates economic distortions, particularly by diverting public investment away from social projects and towards capital projects that offer opportunities for kickbacks and bribes. The disproportionate centralization of power in most developing countries also reduces equitable distribution of political representation, thus making one major politician, political party, or region responsible for the entire country’s economic development decision making (Bigman, 2012: p46). This, in turn, results in development issues since politicians come to decisions about regions they are not familiar with. Since these politicians do not have required knowledge about the needs of these populations and the context of their needs, they end up creating inappropriate and ineffective development programs and policies that do not address the population’s poverty. Poor governance also has a significant impact on the levels of poverty in developing countries, especially considering the manner in which those in power exercise their management of the country’s economic and social resources in development (Goldsbrough, 2014: p27). Poor governance leads to limited capacity in converting public funds to outcomes of human development, while also leading to poor legal and regulatory frameworks for functioning of capital, labor, land, and other factors of the market. Through poor governance and corruption, there is weakened economic growth, business confidence, low public service delivery efficiency, serious undermining of the rule of law and state institutions, and declining basic entitlement expenditure (Goldsbrough, 2014: p27). All of these lead to poor economic and human development, which, in turn, are reasons for poverty. Role of the IMF in Poverty Reduction The reasons for poverty given above are not exhaustive and there is no single reason or cause for poverty and neither is there a single solution for the same. However, comprehending the way that these complex forces interact to propagate and sustain poverty is critical for major international financing institutions seeking to formulate effective and comprehensive responses to combat global poverty and to improve the global economy (Blank, 2012: p29). The International Monetary Fund faces immense challenges in poor developing countries, where it has found economic development to be intricately tied to poverty. Today, the IMF’s role has radically grown from crisis management and prevention, and macroeconomic issues to more structural issues and more significant involvement in poverty reduction efforts. However, because this was not the initial role intended for the IMF, the institution has been accused of lacking expertise in institutional and policy complexities involved in poverty reduction and development with most of its expertise concerned with restoration and maintenance of financial stability and with macroeconomic policy (Blank, 2012: p29). There are several ways in which the IMF can fight global poverty more effectively and it is already taking steps towards this direction. For example, Oberdabernig (2013: p122) notes that the IMF should make the objectives of growth and poverty reduction more central to their operations as a lending institution, particularly in the poorer countries. Indeed, the design of IMF programs for developing countries has in the recent past been more accommodating towards pro-poor spending and overall higher public expenditure. As such, it is expected that the IMF’s aid to developing countries, especially in Sub-Saharan Africa, should be distributed in a manner that promotes their full utilization while also maintaining debt and macroeconomic sustainability. Although macroeconomic outcomes in poor, developing countries have increased significantly over the past twenty years, it is important to note that per capita income has remained quite low. Therefore, it is important for the IMF to support broadening of economic institutions in developing countries for sustained stability and growth, as well as to manage increased aid flows carefully (Oberdabernig, 2013: p122). To do this, IMF poverty reduction programs should be built on country-owned, comprehensive poverty reduction strategies that are prepared by state governments with the active participation of development partners and civil society. The IMF is also playing a critical role in strengthening governance in order to promote economic growth and reduce poverty. In this case, the principles of country ownership and broad participation of the public have been central to the institution’s poverty reduction programs (Payne, 2013: p51). Because the poverty reduction programs are based on nationally-owned poverty reduction strategies, these programs have tended to be more open and inclusive. As a result of the increased ownership of poverty reduction strategies, conditionality of the poverty reduction and growth programs has become more frugal. This, in turn, is more focused on the core expertise areas of the IMF. Moreover, this has resulted in limitation of the IMF’s role to poverty reduction measures with critical and direct effects on the macroeconomic objectives of their programs. The IMF has also sought to ensure that their poverty reduction and growth programs are closely reflective of every nation’s priorities for growth and poverty reduction. As long as these countries are able to maintain macroeconomic stability, the IMF has proven to be responsive and flexible to shifts in the circumstances of poor countries and priorities for poor populations (Payne, 2013: p52). During poverty reduction strategy formulation for each country, the IMF now identifies and prioritizes crucial structural reforms and policy measures aimed at growth and poverty reduction, while also assessing budgetary costs where feasible (Payne, 2013: p52). Indeed, budgets for countries partnering with the IMF for poverty reduction in the recent past are reflective of such an analysis. The flexibility of current IMF programs in poverty reduction are best exemplified by their willingness to modify fiscal targets so as to allow for poor countries to increase pro-poor spending due to aid flows that are higher than expected, as well as in response to sudden shocks like fuel and food crises. Moreover, the IMF’s poverty reduction and growth programs have begun to focus more on the strengthening of governance, mostly aimed at helping countries in their efforts to design better prioritized and targeted spending (Payne, 2013: p52). Most importantly, the IMF has also taken measures to improve public accountability, transparency, and resource management, while also paying particular attention to social and poverty impacts of fundamental measures of macroeconomic policy. Gillingham (2011: p52), however, notes that poverty reduction and growth programs initiated by the IMF must increase their focus on governance improvements, specifically as a critical underpinning for poverty reduction, sustainable growth, and macroeconomic stability. Such increased emphasis should extend across various areas of governance that are relevant to the IMF, although the primary focus must be on the improvement of public resource management, enhanced public scrutiny, greater transparency, and increased government fiscal management accountability. This could support the design, implementation, and monitoring of anti-poverty and social measures. Therefore, the IMF should seek to achieve several objectives in reducing poverty, including provision of government activity information to the public, preparation and reporting of the budget in a transparent and open manner and subjecting fiscal information to independent integrity assurances (Gillingham, 2011: p52). For countries that need more emphasis on fiscal transparency and governance, IMF poverty reduction programs should identify particular measures and appropriate monitoring. Currently, the IMF promotes good governance through the active involvement of civil society to monitor critical and relevant program aspects. Regular reviews of public expenditure have also proved to be vital instruments in monitoring the effects of anti-poverty and social spending by the IMF, although there is a need to increase technical assistance in coordination with other providers of technical assistance (Gillingham, 2011: p52). Under the IMF policy support instrument and extended credit facility, country-owned poverty reduction strategy programs have continued to play a critical role in the IMF’s relationship with developing countries. The IMF’s poverty reduction programs, especially those supported by its concessional lending facilities, include quantitative targets where possible to enhance safeguarding of priority spending consistent with the national poverty reduction strategies. To enhance the poverty reduction strategies process, Alcock (2013: p48) insists that the IMF should continue to aid countries in the designing of flexible, realistic macroeconomic frameworks that are linked to national budgets and strategies. In addition, it should also continue to closely align its program work and country operations with domestic cycles, including the poverty reduction strategies and budget. Moreover, the IMF should also continue to strengthen management of public expenditure in order to maximize public spending effects on poverty reduction. Finally, in order to effectively tackle poverty in developing countries, the IMF continues to work with other financial donors to enhance coordination of assistance and to rationalize implementation of poverty reduction strategies (Alcock, 2013: p48). Conclusion The effects of poverty on global security has made its eradication a top priority for international monetary institutions like the IMF, especially since most poor countries do not have the capacity to enhance economic growth or to use financial aid effectively in eradicating poverty. As a major foreign lender partnering with national governments to rationalize macroeconomic policies, the IMF has increasingly become central to efforts aimed at achieving the Millennium Development Goals. Poverty reduction and growth programs have mainly been designed to cover areas that are basic duties of the Fund, as well as other particular measures that have critical, direct impacts on macroeconomic outcomes and policy. In order to achieve poverty reduction goals, the IMF acts by determining domestic resource constraints and reconciliation of spending levels with macroeconomic stability by raising highly concessional loans or sufficient level of external grants. References Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. New York: Crown Publishers. Alcock, P. (2013). Understanding poverty. Basingstoke: Palgrave Macmillan. Bigman, D. (2012). Globalization and the developing countries: Emerging strategies for rural development and poverty alleviation. Wallingford, Oxon, UK: CABI Pub. Blank, R. M. (2012). It takes a nation: A new agenda for fighting poverty. New York: Russell Sage Foundation. Da Costa, C. L. P., & Dias, J. G. (2014). What do Europeans Believe to be the Causes of Poverty? A Multilevel Analysis of Heterogeneity within and Between Countries. Social Indicators Research, 3, 1, 23-32 Gillingham, R. (2011). Poverty and social impact analysis by the IMF: Review of methodology and selected evidence. Washington, D.C.: International Monetary Fund Goldsbrough, D. J. (2014). Evaluation of the IMFs role in Poverty Reduction Strategy Papers and the Poverty Reduction and Growth Facility. Washington, D.C: International Monetary Fund, Independent Evaluation Office. Oberdabernig, D. A. (2013). Revisiting the effects of IMF programs on poverty and inequality. World Development, 46, 113-142. Payne, R. K. (2013). A framework for understanding poverty. Highlands, Tex: aha! Process. Whitman, S. (2011). World poverty. New York, NY: Facts On File, Inc. Read More