PRO-POOR EXPENDITURE Where are we? Anand Rajaram World Bank, ODI Workshop May 14, 2004

2 Main messages Pro-poor emphasis of recent years driven by donor politics rather than economics Emerging concern that this is being applied in ways that may have perverse effects Need to revisit the conceptual foundations of links between public spending and growth, distribution and poverty A broad framework to link public spending to poverty suggests there are no simple answers to fundamental challenge of development

3 A Potted History of Poverty Programs In the 1970s, focus on growth with basic needs In the 1980s, adjustment and trickle down - a relative neglect of redistribution In the 1990s, social dimensions of adjustment - emphasis on targeted programs to reduce poverty and vulnerability But more recently, emphasis on pro-poor programs Loosely defined Based on rules of thumb Enforced as conditionality MDG of halving number of poor and other goals which will require effective program reach to the poor

4 WDR on Attacking Poverty Redistributing Public Spending The coercive power of the state can be a potent force supporting asset formation by poor people The most important domain for state action in building assets of poor people is the budget.

5 Features of the current pro-poor emphasis Poverty reduction as a primary development policy goal Increased efforts to identify specific policies and programs for reducing poverty Belief that public spending can be hardwired Virtual poverty funds Earmarked funds

6 Pro poor rules of thumb and policy bias Donors have contributed to a social sector bias Public spending on education and health care (HIPC review) Focus on direct benefits to the poor (ODI Review) Social spending (academic literature) Over-simplifies the poverty problem Appears to ignore the dynamic, long-term aspects of poverty reduction Risks diverting attention from more fundamental causes of poverty (Tony Killick)

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8 Uganda: Poverty Action Fund Identifies Primary Education, Primary healthcare, water and sanitation, rural roads and agriculture extension as directly poverty reducing or delivering a service to the poor Adapts budget classification to tag these items in the budget Protects PAF budgets against cuts Links HIPC and donor resources to these items PAF budgets have grown from 17 to 37 percent of budget between % of health and 63% of education budget is now designated PAF Rural roads and agriculture extension only get 11% of PAF budget

9 Uganda: Distortions due to PAF Budget implementation is biased, with cuts being borne disproportionately by non-PAF budgets Incentive to designate items as PAF Monitoring and focus on PAF detracts from overall budget Conditional grants to local governments has undermined local accountability Concern that it is promoting an unbalanced approach to the budget to detriment of both growth and long term poverty reduction

10 Cases of good judgment: Nicaragua PER Critiqued shotgun approach to identifying poverty reducing programs in PRSP All social sector programs 80 percent of capital expenditure on rural sector Recognized need to link programs with growth effects Suggested that only programs with proven record of raising capacity of rural workers to generate more income should qualify as poverty reducing Discussed issue of vulnerability of working poor to natural and economic shocks

11 Ethiopia PER While it is important to consider the poverty relevance of expenditures – there are few if any cases where a simple, direct and unambiguous connection can be established between a line of expenditure and a poverty outcome. Concludes that appropriate response should be to strengthen: Information on poverty Public expenditure management Link between the two

12 Existing guidelines for expenditure policy Existing expenditure allocation guidelines (WB, IMF, OECD) Emphasize principles of public economics (public goods, externalities, market failure, equity) Discuss equity objectives by referring to redistributive policies and methods such as benefit incidence analysis Suggests welfare economics (maximizing social welfare function) as basis for public policy decisions A pragmatic interpretation would be to focus on both growth and inequality effects of public policy to achieve development goals

13 Elements of a Framework to Link Public Policy and Poverty Reduction Foundation: Development strategy First apply public economics filter to define public-private roles Public policy tools tax policy expenditure policy regulatory policy Recognize that public policy can affect influence growth and inequality and therefore poverty Reduce income poverty headcount (P) through the impact of expenditure choices on growth of income (Y), inequality (G) and basic needs (B)

14 Regulatory Framework Tax Policy Expenditure Policy Growth and Inequality GrowthInequality Poverty Public-Private RolesDevelopment Strategy

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16 Recent literature indicates such a framework can be helpful for policy research Agenor et.al.: Ethiopia - Growth and poverty effects of spending on infrastructure, educ. health Adams and Bevan:Uganda - Impact on growth and equality of aid financed expenditure (D vs.E) Fan-Zhang- Rao – Uganda – Rural expenditure – ag.research vs. health, education, rural roads Fan-Hazell: high productivity and poverty impacts of rural roads investments in India Lofgren-Robinson – Health exp vs. agric.,transport, gives higher growth and poverty reduction in SSA Jha, Biswal et.al.- Education, health, development expenditure - higher education, has greater impact on poverty reduction in India Fan, Huang, Long – Ag.research, rural roads, irrigation, education in Vietnam