Macro policy and poverty reduction reviewed

2 November 2001

More research is necessary on the linkages between macroeconomic policy and impacts on the poor, concludes a new paper from the IMF. The paper considers whether objectives such as lower inflation, debt reduction and trade liberalisation harm the poor. However, it fails to assess whether different policy choices would have different impacts.

The report notes that the type of policies and economic structures may be important for turning growth into poverty reduction. For example, it is important to achieve growth in the agricultural sector where the poor typically work. Also, countries with lower income inequality are likely to achieve more poverty reduction via improvements in growth.

On trade liberalisation the report notes that “While there is extensive research on trade liberalisation’s impact on income distribution, the direct links between absolute poverty and trade reform are only beginning to be explored.” The report finds that “there appears to be little work on the direct relationship between external debt and poverty”. It notes the importance of considering questions such as, does high debt increase poverty and if so how? How would an aid allocation geared to meet poverty reduction criteria differ from an allocation aimed at achieving debt sustainability? And what is known about the relationship between fiscal deficits, debt sustainability and poverty?

Whilst noting that several studies find that crises worsen poverty and increase inequality, “there appears to be little or no research so far exploring how or why the extent of worsening poverty differs across crisis-hit countries.” It finds that key questions about the nature of crisis response and poverty impacts are being asked but not researched. These questions include:

  • Do certain types of macroeconomic policies associated with crises have a greater negative impact on the poor than others?
  • Do macroeconomic responses to crises that are optimal for the poor differ from responses that are optimal for the economy as a whole?

Assessing the correlation of macroeconomic policies with improvements in the UNDP‘s Human Development Index, the report concludes that, “…We have not found significant and robust evidence that any of these variables are individually associated with pro-poor (or anti-poor) economic growth. Of course, by no means does this constitute proof that these policies do not matter. On the contrary, it suggests that alternative research approaches are needed to find … evidence on the direction and strength of the effects of these variables on the poor.”

Ratna Sahay, IMF research department, will be leading new research in these areas. These must be agreed with new Deputy Managing Director, Ann Krueger.

Former World Bank Chief Economist Joe Stiglitz warned that “by naming Ann Krueger as his [Stanley Fischer’s] replacement, however, the IMF has elevated one of orthodoxy’s high priestesses, and this signals a stubborn adherence to the failed past rather than a hopeful new direction for the future.”

Macroeconomic policies and poverty reduction: stylised facts and an overview of research Working Paper 01/135

Stiglitz’s critique of Ann Krueger