Al-Ahram Weekly Online   23 - 29 December 2004
Issue No. 722
Economy
 
Published in Cairo by AL-AHRAM established in 1875

Kinder, gentler structural reform?

In an exclusive interview, World Bank Chief Economist François Bourguignon spoke to Sherine Abdel-Razek about poverty, and what appears to be an official change of heart towards some of the bank's previously prescribed reform policies

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François Bourguignon

During his first official visit to Egypt since his appointment as the World Bank's senior vice-president and chief economist, François Bourguignon had a busy schedule. He not only met four ministers and the Central Bank governor to discuss the ongoing progress in Egypt's economic reform programme, but also -- as the author of extensive research on poverty, inequality, and growth -- spoke at several seminars about these issues, shedding particular light on Egypt's case.

After 30 years of international economic development initiatives led by the World Bank, how do you see worldwide poverty today? And how do the uneven growth rates in different parts of the world affect poverty reduction programmes?

Poverty has been declining in the world during the past 30 years, with the last figures we have indicating that the number of people living in extreme poverty, which we define as less than $1 a day, having decreased by half between 1981 and 2002. This is because of the rapid economic growth in particular parts of the world, especially China and India, and especially in the case of China, as no country has maintained such a high rate of growth for so long.

However, poverty has not been declining by that rate everywhere in the world. In some countries in Africa, not only has the absolute number of poor increased, but the proportion of poor people to the population has been increasing as well. This is because of the average negative growth rates achieved by certain economies in the sub-Saharan continent.

Furthermore, when we extend the trends to the next 30 years, we can say that poverty will more and more become an African problem, and less and less an Asian problem, as was the case at the beginning, back in 1960, when development policies were adopted.

So in general, poverty is decreasing in certain parts of the world, but on the other hand it is increasing in other parts, and in countries that were already poor.

However, I think it is feasible to reduce the 1990 poverty figure by half by 2015, which is one of the eight Millennium Development Goals (MDGs) approved by 189 nations in 2000.

In fact, based on 1990 figures, if we measure poverty by per capita income then we almost achieved the goal, but if we measure poverty using other criteria like education or access to healthcare, that is another story. MDGs include reducing child mortality by two thirds, and achieving compulsory primary school education worldwide, and we know that this will be very difficult to achieve everywhere in the world.

Recent statements and reports by the World Bank and the IMF show some retreat from their previously promoted structural reform programmes. Why is that, and does it signify that those programmes have proved ineffective?

Yes, during the 1980s and the 1990s, the bank promoted and recommended reform programmes which were based on liberalisation, privatisation, openness and deregulation of the economies, or what is known as structural adjustment programmes aiming at achieving better growth rates, and improving macro-economic environments. However, after several years, we got mixed results. While macro- economic stability was achieved in many countries (if we use certain criteria like health, as we see a drop in malnutrition rates), other expected results -- like the automatic trigger of growth due to structural adjustment programmes -- were disappointing. We realised later that there were institutional problems in some countries, which negatively affected the programmes. Take privatisation for example -- it did not bear the expected fruits since what happened was just the transformation of public monopolies to private ones.

Privatising would have been a good thing, had it happened with the presence of strong regulatory authorities guarded by legislation to make sure that these authorities are functioning well.

Another element that explained what happened is that when the structural reform programmes were negotiated, international agencies and donors imposed a set of reforms on developing countries. Now we realise that this kind of imposing reform from outside was not right; in some cases countries were not able to adhere to the World Bank's measures, as they are unpopular, and there was strong local opposition to the policies.

Our new approach is different. This is not so much in terms of the basic principles, since we keep saying that countries need to have macro-economic stability, sound monetary policy, reliable fiscal regimes, and a wider role for the private sector. [But] now we understand that for a better functioning private sector, we need to give the government and its authorities a wider role than we used to recommend. And that there are certain things that you can't get out of the private sector, unless you have a well functioning public sector.

In the 1960s, everything related to development was the responsibility of planning agencies and the government, and in the 1980s everything was to be liberalised. Moving from one extreme to another in such a brutal way was not right. We must be much more specific and much more careful in the analysis we do of each country.

So what is the core of your new approach?

The basic way of intervening in countries, and especially poor countries, is through poverty reduction strategies, where we are asking the countries to set and build their own strategies, and then we have meetings with officials, and try to find the best way we can help them to implement these strategies.

What is the main purpose of your current visit to Egypt?

It is a courtesy visit. I have been in my current position for a year now, and I have not visited Egypt. The visit also comes at a time when everyone has high hopes and expectations due to the improvements in economic reforms. I am meeting different officials to [find out] how we can help. For example, when I met the investment minister, we discussed the outcome of a study that was undertaken by the Investment Ministry, the World Bank, and the American University in Cairo about the investment climate in Egypt. We discussed problems facing companies investing in Egypt, and ways of getting rid of these problems. With the minister of finance I will be covering other aspects.

The "growth-inequality-poverty triangle" was the topic of a lecture you gave at the Egyptian Centre for Economic Studies; would you please shed more light on the relation between the three?

Poverty reduction in a given country and at a given point in time is fully determined by the rate of growth of the mean income of the population, and the change in the distribution of income.

Over the medium-run, distributional changes may be responsible for sizeable changes in poverty. In some instances, these changes may even offset the favourable effects of growth. Taking Egypt as an example, we find that poverty affects 17 per cent of the population. With an average growth rate in income of three per cent, and no change taking place in the distribution of income through the population, and with a simple application of the [equation] linking poverty reduction and growth, we find that: poverty would be reduced by around eight percentage points over the coming 10 years. If, during the same 10 years, we brought the level of inequality in income distribution, measured by Gini [the standard measure of inequality], from the current 0.38 to 0.41, for instance, this will result in a mere six percentage point drop in the number of poor people.

You also spoke about distortions that might be caused by income redistribution techniques like taxes and subsidies; would you please shed more light on this point as well?

If we want to reduce poverty, one way is to transfer income or purchasing power from rich people to poor. This can take place through taxes or food subsidies. Food subsidies can be seen as a way of redistributing income that benefits poor people -- [as in], since they spend more money on food, then they are getting more benefits than rich people.

But instead of this, we can transfer the capacity to generate the income to them. Thus, it is better to make sure that these people have access to micro credit, have access to schools, etc. The second point here is that subsidies are not the perfect way of distributing income. When you subsidise food, rich people also benefit, as they consume food, which also represents a substantial share of their budgets.

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