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Journal Article

IDS Bulletin Vol. 39 Nos. 2

Economic Policies for Growth and Poverty Reduction: PRSPs, Neoliberal Conditionalities and ‘Post-Consensus’ Alternatives

Published on 1 May 2008

This article focuses on economic policies and judges their success based on their impact on growth and poverty reduction.

The Millennium Development Goal of halving extreme income poverty by 2015 expresses the consensus of the international development community that poverty reduction is of overriding importance. There is also consensus that national poverty reduction strategies, and Poverty Reduction Strategy Papers in particular, are the primary vehicle for focusing national policies on reducing poverty.

Beneath this apparent consensus, there are, however, significant differences. This article ‘swims against the tide’, so to speak, in arguing that such differences are healthy and should be encouraged, and, moreover, that achieving international consensus is not a desirable goal. In this respect, this article ‘steals’ at least one idea from neoliberal thinking, namely, that a ‘marketplace of ideas’, in which there is competition among conflicting views, should be promoted.

Ironically, there is not a great deal of space for such a stance in the current climate. Despite their poor performance in the last quarter century, neoliberal policies – which include deregulation, privatisation, macroeconomic interventions that focus exclusively on price stability, and, in general, development strategies that subscribe to the belief that free markets maximise wellbeing – continue to occupy a hegemonic position in economic policymaking and the development discourse.

Compared with the performance of post-colonial policymaking in developing countries, roughly from the 1950s through to the mid-1970s, neoliberal conditionality-based policies have performed poorly, in terms of (1) slow economic growth, (2) greater economic instability, (3) rising inequality, (4) widening underemployment and (5) persistently pervasive poverty. If one questions, for example, the statistical anomaly of a dramatic reduction in poverty in China from 1993 to 1996 (a very short period of time), one is hard pressed to argue that the proportion of the population in extreme income poverty in the world declined in the 1990s.

Of course, neoliberal policies are not without their critics. Within mainstream economics, there has been a recent stream of prominent critics – such as Joseph Stiglitz, Jeffrey Sachs, Nancy Birdsall, Ravi Kanbur and William Easterley – who have broken with particular neoliberal approaches in one form or another. In practice, however, the bulk of external recommendations on economic policymaking being supplied to developing countries remain neoliberal. More importantly, these recommendations are tied to binding conditionalities. Even if national policymakers disagree with the recommendations, they are bound to implement them if they wish their country to receive debt relief or continue receiving concessional lending, or even grant-based technical assistance.

More ominous has been the encroachment of conditionalities across a wide gamut of national policymaking, including social policies and governance as well as economic policies. In the early days of structural adjustment, the lives of national policymakers were simpler: economic policies were imposed on them by international financial institutions but they had, at least, some degrees of freedom in how they picked up the pieces thereafter.

At first, conditionalities just applied to macroeconomic policies, but soon they were applied to broader structural issues, i.e. structural adjustment. In short order, national policymakers found that they had no real ‘ownership’ of their own economic strategies and their overall development strategies were soon forced to tail after their economic strategies, or relegate themselves to irrelevance.

As was well documented in the late 1980s and early 1990s (cf. UNICEF’s Structural Adjustment with a Human Face and UNDP’s Human Development Reports), structural adjustment imposed heavy social costs in the countries on which it was imposed. In order to foster greater ‘national ownership’, international financial institutions extended their assistance to constructing social safety nets in order to help mitigate the consequences of adjustment. But since the adverse impact of adjustment continued to be pervasive through the early 1990s, constructing nets was no longer regarded as adequate. By the mid-1990s, these social safety nets were well on their way to being upgraded to national poverty reduction strategies (cf. The 1995 World Summit for Social Development). By 1999, the World Bank and IMF agreed to tie their assistance, and their conditionalities, to the national adoption and ‘ownership’ of Poverty Reduction Strategy Papers.

Several serious problems remain, despite the shift from structural adjustment to PRSPs. One is the glaring inconsistency between economic policy conditionalities, which continue to be based on neoliberalism, and the social focus of Poverty Reduction Strategy Papers. Reconciling these two approaches has proven to be difficult. Social policies remain ill equipped to undo the detrimental effects of neoliberal economic policies, e.g. economic stagnation, growing underemployment, increasing vulnerability, intensifying insecurity and widespread poverty.

Even when growth occurs in some developing countries, it is often not reaching the poor. This has raised the importance in the international development community of identifying policies that can foster ‘pro-poor growth’. This is growth that not only can improve the ‘absolute’ conditions of poor households (by raising their level of real incomes) but also can enhance their ‘relative’ conditions vis-à-vis non-poor households (by reducing inequality between the poor and non-poor). This is difficult enough to accomplish under normal capitalist patterns of development but doubly difficult when the governing economic strategy is neoliberal.

In most cases, growth has been too slow and too pro-rich. One might expect the more enlightened rich to remain unsatisfied with such an ambivalent outcome – namely, a larger share of a more slowly expanding pie. There are bound to be diminishing marginal returns to self-aggrandisement under such a scenario. This is, no doubt, one of the factors fuelling the emerging differences within mainstream economics.

In consideration of some of the factors outlined above, UNDP has in recent years begun to critically examine the impact of orthodox economic policies on growth, human development and poverty reduction. It has been motivated by three major concerns: (1) trying to determine, practically, how ‘pro-poor growth’ can be achieved; (2) trying to reconcile the seeming inconsistencies between neoliberal economic policies and Poverty Reduction Strategy Papers (PRSPs); and (3) trying to promote a broader and healthier policy dialogue on these issues by helping create a larger menu of viable economic options and alternatives.

‘Pro-poor growth’ is an unlikely outcome unless economic policies and PRSPs are mutually consistent and this consistency is unlikely, in turn, as long as economic policymaking is wedded to economic orthodoxy. In addition, insofar as neoliberalism remains dominant, there is little room for meaningful dialogue and debate on economic policies.

These are the initial lessons from UNDP’s support to an array of national studies on Economic Policies and Poverty Reduction in the Asia region (see, for instance, McKinley 2003, 2004; Pasha 2003).

In the following sections, the article concentrates on seven interrelated issues: (1) the links between participation and economic policy dialogue; (2) the ambiguities of ‘national ownership’ of PRSPs, especially of pro-poor economic policies; (3) the ‘small-government’ bias of neoliberalism; (4) the need for pro-active, public-investment based fiscal policy; (5) the roadblock of restrictive inflation targeting; (6) the adverse impact of financial deregulation on poor households; and (7) the adverse impact on the poor of privatisation, particularly privatisation of public services.

Related Content

This article comes from the IDS Bulletin 39.2 (2008) Economic Policies for Growth and Poverty Reduction: PRSPs, Neoliberal Conditionalities and ‘Post‐Consensus’ Alternatives

Cite this publication

McKinley, T. (2008) Economic Policies for Growth and Poverty Reduction: PRSPs, Neoliberal Conditionalities and ‘Post?Consensus’ Alternatives. IDS Bulletin 39(2): 93-103

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Authors

Terry McKinley

Publication details

published by
Institute of Development Studies
authors
McKinley, Terry
doi
10.1111/j.1759-5436.2008.tb00450.x

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