Committed to PEOPLE'S RIGHT TO KNOW
Vol. 5 Num 31 Sun. June 27, 2004  
   
Editorial


Budgets: Correcting or creating poverty?


The words poverty alleviation appears so frequently in Finance Minister Saifur Rahman's budget speech as to incline one to wonder why. According to the proposed budget, 62 percent of the development budget and 42 percent of the non-development budget are meant for reducing poverty, directly or indirectly. This is not new however; all the budgets in recent times are but narrating the same thesis.

The statistics on poverty quoted in the budget documents could also appear confusing. Incidentally, human poverty -- deprivation of human beings of basic amenities of life such as safe water, sanitation, vaccination etc -- has declined in Bangladesh from 50 percent in the early 1990s to 40 percent at the turn of the last century. Income poverty, measured in terms of the number of people earning less than a dollar a day, has declined during the same period from 59 percent to 50 percent. While human poverty fell on average by three percent annually in the 1990s, income poverty declined by less than one percent. The finance minister is proud of the figures, as if they can be attributed to his expertise in making budgets.

In order to reduce poverty further, the finance minister wants, among others, to implement efficiently the Poverty Reduction Strategy Paper (PRSP). The latter refers to a document which the government readied earlier to be able to borrow funds from the IMF.

It may be noted that during the closing years of the last century, the world's development agents -- the World Bank and the IMF -- began to find their very existence irrelevant in the face of growing criticisms over, inter alia, poverty rising instead of falling. The number of least developed countries more than doubled to forty nine in about two decades. Many of those countries were facing bankruptcy. Governments in those countries began to face bitter criticism; people would brand them as collaborators of the foreign masters.

At that juncture, the IMF's strategy for its own survival included, inter alia, inventing the so called Poverty Reducing Growth Facility (PRGF). The latter replaced the earlier versions of the IMF's lending facilities, namely, the SAF, ESAF, etc. Under the new facility a country can borrow a certain amount of funds against successful preparation of a paper called Poverty Reduction Strategy Paper (PRSP). PRSP is the operational framework for the Fund's support to low-income countries under the PRGF. According to the IMF, "[A]lignment of the PRGF (and other donor-supported programs) with the PRSP will only become truly effective when the PRSP itself is closely aligned with the budget process in each country."

PRSP thus is the guide to the budget makers in countries that qualify for PRGF loans. The IMF states that PRGF-supported programmes are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners.

But critics argue that the content of the PRGF loan appears no different than past ESAF loans: "The standard macroeconomic targets and structural adjustment conditions make no reference to poverty reduction needs."

Honduras, for example, was given a PRGF loan without reference to a PRSP. There has been no discussion by the Honduran government with members of the civil society to prepare a PRSP.

Bangladesh has been granted a loan of $52 crores under the PRGF in June 2003. In order to qualify for the loan, Bangladesh had to prepare its PRSP. While doing so, the government also religiously fixed the macroeconomic indicators, such as, current account position, external reserves, etc. It may be noted that current account showed deficit every year between 1998 and 2001. Afterwards current account began to show surplus; it is doing so until now. Also foreign exchange reserve rose from just over $1 billion in 2001 to $2.6 billion now.

In the IMF's own evaluation: "Bangladesh's economic performance has strengthened in the first year of implementation of the government's PRGF-supported economic program. Economic growth has picked up, inflation is in check, and the external position has improved more than expected. The key macroeconomic targets have been achieved."

There is however one misleading assessment about inflation in the quotation; inflation actually rose remarkably while the assessment was published.

One conspicuous aspect of the above IMF assessment is that it is all about macroeconomic targets. In other words, although the government borrowed under the PRGF against a PRSP, what it practically had to do is realise the familiar set of macro targets. Critics already have argued that the PRGF is but a new name for the now infamous ESAF. As long as the macro targets are met the IMF will approve loans to its client, reserving lip service for poverty alleviation.

In case of Bangladesh, the GOB's fulfilment of the macro targets plus promises to go ahead with such agenda as tax reform, reforming the nationalised commercial banks, and establishment of Independent Anti-Corruption Commission, etc. were enough for qualifying for funds.

And it is under this background that one will have to scrutinise the finance minister's proposed scheme.

The finance minister wants to engage the poor section of the countrymen in income raising activities to reduce income poverty. In conformity with the so called Millenium Development Goals of the United Nations, the government is implementing a three-year plan (PRSP) of economic growth, poverty alleviation, and social development. In order to reduce poverty by fifty percent within 2015, the country's economy has to grow seven percent annually. It is as a step toward that goal the government has planned to spend as much as 62 percent of the development budget and 42 percent of the non development budget in order to reduce poverty directly, through relief, and indirectly via employment creation for the poor.

All the sectors of the economy -- education, health, agriculture, etc-- will be covered by the finance minister's poverty reduction strategy. Rural development will find more special attention than was given earlier. The issue of social security will find enormous extra care.

The means to the end in sum is the following:

Allowances for the old, widows, divorced women, and poor freedom fighters, are to be raised. All the existing relief programs, such as, VGD, VGF, Food for Works, Cash for Works, test relief, etc will receive enhanced allocations.

Expansion of the micro-credit system through enhancing allocation among them is the other means with which poverty will be reduced. Activities of organisations like PKSF, NGO-foundation, Karmasangsthan Bank, Bangladesh Agricultural Bank, etc. will be expanded with the aim to create employment facilities among the rural poor, and also create small and medium entrepreneurs in rural areas. Agricultural subsidy will be doubled to Tk 6 billion and agricultural loans will become cheaper.

According to the budget speech, credit flow to the rural area will double as a result of the new provisions in the budget, and employment facilities will also flourish in a commensurate manner.

It seems that the finance minister presupposes the existence of an automatic mechanism in the rural economy that will translate the proposed credit flow into employment. Also inherent therein is the expectation that there exists as much idle capacity in the credit distributing machinery as can handle instantly the delivery of the various funds among the rural people. One could be legitimately curious to have an impression as to what, if any, the PRSP's position is about this very issue, i.e., delivery of public service in the rural economy.

It must be too much to expect that by the next ten years income poverty will decline on average by two and a half percentage points yearly owing to these measures. Of course the finance minister himself does not base his expectations on these measures alone.

He expects to find support from the rest of the economy too. An export processing zone and industrial area will be established in the now deserted sites of Chittagong Steel Mills and Adamjee Jute Mills. Over 0.9 million new jobs will be available as a result. Reduced interest rates on bank lending and lower duties on imported raw materials will stimulate private investment, which in turn will create jobs. There will follow six or seven percent rates of GDP growth. The latter, together with the large list of poverty alleviation measures will ensure achievement of the Millenium Development Goals.

It may be remembered that the decade of the 1990s was one of global economic boom. The world's largest economy was doing exceptionally well by posting growth rate over three percent annually on average. Europe too was doing nicely; average growth rate during the said period was 2.1 percent per year. Things have changed for the worse since; both US and Europe are in much lower growth paths. The US and Europe, incidentally, buy the lion's share of our exports. Also, Bangladesh, where textiles and related goods comprise over 80 percent of total annual exports, will soon enter the post-MFA era. So the prospect of the external sector looks rather bleak.

Developments in the Middle-East, by pushing petroleum prices up, could prove to be another drag on the economy. The finance minister cannot be held responsible for developments beyond his control. But there should have been his concern expressed in the budget to this effect.

One will also wonder if the minister has exercised in an appropriate manner his judgement over factors that are supposed to be within his control. It is worth noting that in keeping with tradition, the proposed budget lowered tariffs on import. Research findings show that employment consequence of Bangladesh's trade liberalisation is generally negative. In the decade of the 1990s, the observed growth in the manufacturing sector has been due to growth in the garments and pharmaceutical industries; trade liberalisation as such did not have much to do about that. Again, the import promotion that followed those tariff reductions ruined many previously existing industrial units in terms of output and employment. Researchers also find that there followed a significant decline in employment in the informal manufacturing industries consequent upon the rampant tariff reduction in the last decade.

Another unfortunate consequence of Bangladesh's excesses about tariff reduction is that she can expect to benefit least by joining South Asian Free Trade Arrangement (SAFTA). As a member of the WTO, Bangladesh will have to accord its lower tariff facilities to the members while the latter will reserve their right to bargain with Bangladesh on the basis of respective higher tariff structure.

Again, not unlike in the past, import promotion will put its pressure on foreign exchange reserves, which under the ongoing system of economic management will only necessitate further belt tightening. Public investment will become the number one casualty. Already, the size of the proposed ADP is the lowest ever in real terms. The current fiscal year's ADP had to be slashed. Studies show that cuts in public investment unnerve private investors. The proportion of private manufacturing investment has reportedly fallen lately.

What will be the employment consequence of all these? Will poverty thus be corrected or created? It is only unfortunate that while the finance minister is meeting the IMF's demands no matter what the consequences may be, he also wants to assert that the same exercise is the best of all possible alternatives that the nation can expect.

Nitai C. Nag is Professor, Department of Economics, University of Chittagong.