More ambitious economic policies
"Less obsessive macroeconomic stabilization policies" are needed to effectively reduce poverty, argues a policy discussion paper by UNDP expert Terry McKinley. The paper analyzes economic policies in countries that are linking their poverty reduction strategies to the Millennium Development Goals (the so called MDG-based PRSPs) and focuses on fiscal and monetary policies, public spending, financial deregulation and privatization of public services. The paper, titled "MDG-Based PRSPs Need More Ambitious Economic Policies" argues for bolder more progressive economic policies while questions the persisting orthodox foundations that still permeate PRSs’ macro-economic stakes.
The document challenges the perception that PRSs are country- owned, since most governments tailor their macro-economic policies (crucial to foster growth) to satisfy donors and produce standardized documents that “share the same motivation, namely, to obtain concessional financing and debt relief”. If low income countries (LICs) are to be realistically on track to reach 2015 goals, governments should explore ‘alternative’ home grown policies: “fiscal policies should be focused on substantially scaling up public investment, financial policies gearing to channeling considerably more lending to productive private investment and monetary policies reshaped to target, not just inflation, but also real economic variables, such as increases in incomes and jobs and big reductions in poverty”, suggests the report. A summary of its findings and recommendations can be found below:
1) On fiscal policies:
Tax systems have been regarded as an inefficient way to redistribute income. However, the report suggests that the norm neo-liberal ideology of small governments and low taxes is not compatible with MDGs in LICs. Tax systems should be progressive, hence food and other essential consumption items that use poors’ income up in a bigger portion than it does for the rich should be VAT exempt. Luxury items (cars and other consumer durables) should bear a higher tax burden. Income and wealth taxes (direct taxation) are suggested, as well, as alternative reforms to be introduced in developing countries.
2) On monetary policies:
Inflation targeting has been paramount in macro-economic adjustments and rarely questioned in PRSs processes. Inflation rates have been following a downward trend, particularly in developing countries, in the last 20 years. Nonetheless, the report argues that inflation rates in the 3-5 per cent range are not good for growth and can harm the poor just as much as hyperinflation. The main monetary policy (i.e. interest rate) used to control inflation affects also investment decisions. Therefore, it has potential to harm the poor, once very high interest rates (that are supposed to keep inflation low) generate recession and amplify unemployment problems. The report recommends “that moderate inflation…between 5 and 15 per cent annually…correlates well with growth.”
3) On public spending:
Public investment in developing countries has been in decline. However, expansionary fiscal policies inject money in the economy, create demand, expand productive capacity and generate jobs. Why should it not be done through private spending? The report argues LICs cannot rely on private investment because it would not reach sectors or regions of the country where the poor are concentrated, once they are not an attractive profitable option. It is also mainly via government spending that LICs can build up infrastructure, a form of capital that impacts growth positively in the long term.
4) On financial deregulation:
Unfettered liberalization of financial markets has exacerbated developing countries’vulnerability to international crisis. However, “the financial sector is crucial to mobilizing domestic resources and channeling them to public investment”, therefore to achieving the MDGs, as the report suggests. When banks focus only on speculative short-term lending, the poor lack access to credit and small and medium enterprises will not get the necessary funding. “Microfinance alone cannot solve this problem”, the report calls for a greater regulation of the financial sector.
5) On privatization of public services:
Privatized state owned enterprises (SOEs) have had a mixed record on improved efficiency, particularly on the supply of public services such as electricity and water for poor communities. Privatizing essential public services can slow down MDG progress “unless private firms are heavily subsidized to maintain services for poor customers”. Moreover, SOEs respond for an important share of decent labor standards’ employment in developing countries. Therefore, the report asks: “What was the point of privatization?”
-->>See full report, pdf format.
-->>For more information on MDGs and poverty:
http://www.undp.org/poverty/
