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Poverty will continue to grow, but can be dramatically reduced

Geneva, 18 June (Chakravarthi Raghavan) - - The number of persons living in extreme poverty in the world is under-estimated by current systems of reckoning, and, if the present trends continue, their numbers will increase, with the numbers of absolutely poor in the Least Developed Countries reaching by year 2015, at least 420 millions, the UN Conference on Trade and Development (UNCTAD) said Tuesday in a report.

In releasing the Least Development Countries Report 2002 at a press conference, UNCTAD Secretary-General, Mr. Rubens Ricupero said the main message of the report was this was not inevitable, and “there is a way to dramatically reduce the levels of extreme poverty if we give priority to economic growth and double the average house-hold incomes.”

There has been a recent trend to delink economic growth and poverty, but to reduce poverty, “we have to give a centrality to economic growth,” Ricupero said and underscored the role of both national policies as well as international policies, including doubling of official development assistance (ODA), debt reduction, an international commodity policy that would enable these countries, where poverty is linked to sharp falls in commodity prices, to get out of this ‘poverty trap.’

UNCTAD in the report has called for a seven-point, coordinated national and international policy measures to enable the LDCs to grow faster, and escape the poverty trap.

These policy changes would require a more complete transition to genuine national ownership and increased policy autonomy (in countries formulating poverty reduction strategy policies); shift from adjustment-oriented poverty reduction strategies to a development oriented one; and a more supportive international environment, including through increased aid, accelerated and increased debt relief through simpler mechanisms and revisiting and redesigning international commodity policies, and increased South-South cooperation, in the context of international policies that enable the more advanced developing countries “to move upwards and not remain in competition with the LDCs,” the report argues.

Mr. Charles Gore, UNCTAD economist and chief author of the LDC report, said the report was looking at how “current globalization” affects the more advanced developing countries and which has its effects on the LDCs.

The LDCs, he said, need growth; but it is not every form of GDP growth that helps, but one in which the average house-hold incomes and consumption increase - and this needs policies including increase in employment. The entrepreneurs in these countries must be able to focus on production, rather than making money by trade, and particularly the establishment of an investment-export nexus in the enterprise sectors. There is also need for emphasis on small-scale industries that can increase employment.

The unanswered question (in the report) perhaps is how the LDCs could achieve this in the face of constant pressure and advice to ‘liberalise’ and ‘open their markets’ to foreign competition in goods and services, with heavily subsidised agricultural and other goods coming into their countries.

At current prices, Gore said, the average consumption per capita in the LDCs is just 50 us cents a day, and when correcting for PPP, just a little more is added.

Asked a number of times, on the of policy changes are needed, Gore spoke in more general terms, pointing to past UNCTAD studies and reports (including on the East Asian models and their application to the African countries), and need for change in international commodity policies.

“It is not correct to say there are no international commodity policies, but there are perverse policies,” Ricupero commented wryly, pointing to the agricultural subsidy and price support policies in the major industrial countries, including the recently enacted US farm legislation for increasing domestic support in a counter-cyclical way (increasing support to domestic farmers and insulating them from world prices, when they fall and imports from developing countries become more competitive, but are unable to enter the market and compete).

He also pointed to the consumption levies and escalating tariffs at every stage of processing on processed commodities. This has enabled Germany, to blend import raw coffee seeds and blend, process and export them in the form of instant coffee and other ways while protecting its own markets against processed exports from the developing world.

There is also the state-aided industrial restructuring, which are basically for supply-management, that is going on - in steel, aluminium and other industries - to enable their retention in the industrial countries, Ricupero noted.

While clearly pointing in the direction of need for revisiting some of the old policies and programmes, that have been abandoned over the last two decades, in the wave of neo-liberalism and its new slogan globalization, the UNCTAD report fights shy of even teasing out the specific policies, and changes in older policies that have been abandoned by the international community.

It has to be noted that this is as much a reflection of the hesitance of the international secretariats to challenge the existing policy orthodoxies that have failed and boldly suggest new policy ideas, as of the state of the inter-governmental processes and the situations of the developing countries.

Also, while special measures of help to the LDCs, who are in the very bottom of the pit in the international system, through more solidarity, aid and more targeted aid in the context of the overall increase in ODA to reach the UN target of 0.7% of GNP (the original idea of the early 1970s, behind UNCTAD’s idea of classifying and creating a sub-group of developing countries) is feasible, it is often more difficult and even counter-productive to attempt this in the context of international economic systems (trade, money and finance and their mutual coherence), and their power-based rules and governance.

In different times, when international political and economic leaders asked the ‘why not’ questions, a Gunnar Myrdal or a Raul Prebisch could boldly point out that poverty problems cannot be isolated from overall development problems or tackled in isolation, and advocate development policies, including for reforms of the international systems.

This is not so easy when globalization has become a chant, a mantra, in policy debates.

“Analysis of the relationship between globalization and poverty is still at a rudimentary stage. Yet sweeping and simplistic policy conclusions are being drawn by the anti-globalization activists, who are arguing that poor countries are getting too much globalization and by pro-globalization zealots, who are arguing that they get too little,” says Ricupero in the overview. In the absence of a credible alternative articulated by the international institutions (within which there is now considerable pressures for secretariats to articulate a single view that is favourable to the major industrialized nations), the middle ground will continue to be lost, and more so when the anti-globalization civil society activists are able to place their finger on the malfunctioning systems and their rules, and demand an end to it.

The current international policy approaches, Gore said, recognize that most of these countries are falling behind. The assumption is that they are not integrated into the world economy. And the current effort is towards integration and getting governments out of the way. However, the issue is not more or less integration, but how these countries integrate into the world economy.

The LDCs, Ricupero told the press conference, have an export to GDP ratio of about 43 percent, a level that is not reached by many industrialized countries.  “You can’t say the LDCs are not integrated into the world markets. The problem is ‘what is the form of this integration?’ Most LDCs have gone much farther in liberalising their trade than the average developing countries.”

The problem is how to bridge the gap between macro-economic stability and measures to diversify production sectors and generate positive growth, he added.

“The world’s foremost experts on poverty find it difficult to agree on the nature of the relationship between economic growth and poverty in developing countries and its place in an overall poverty-reduction strategy The report brings out that current methods of estimating poverty - the World Bank definition of poverty as those with a daily per capita of less one dollar in purchasing power parity (PPP) terms (in Asia and Africa, and using $2 PPP for middle-income countries), and using house-hold surveys is in fact under-estimating both the number of the absolute poor and their consumption.

The report suggests using the more standardised procedures used across countries for national accounts purposes, and the annual national figures of consumption, that UNCTAD said would give more reliable estimates and trends.

The Copenhagen Summit of 1995 which called for eradication of poverty, asked each nation to define and set its own yard-stick of absolute poverty and the measures that countries should take to tackle and eradicate poverty, and the international policies to support them including more aid, lifting the debt burden of the indebted poor countries, redesigning structural adjustment programmes and opening up Northern markets to exports from the South.

After the Copenhagen Summit and its decisions and recommendations, the poverty issue was hijacked by the World Bank and the OECD, which set a measure of such poverty at a per capita of $1 PPP in the low-income countries, and $2 PPP as the more appropriate measure in the medium-income countries, and a target of 50% redaction in poverty levels by 2015.

At the Copenhagen+5 meeting in Geneva in 2000, the NGOs challenged the approach, and from their own limited data bases and resources, challenged the UN-World Bank-IMF-OECD estimations and approaches.

The UNCTAD report now has to be seen in this context: It points to the many international policy issues and problems - ranging from the ‘adjustment’ oriented macro-economic policies forced on these countries by the Fund and the Bank (and the major donor countries), the collapse of the international commodity arrangements and policies, and other ills that is increasing the marginalisation of the LDCs.

Citing Simon Kuznets’ writing (1955), about increasing income inequalities in the early stages of economic development and subsequent decline, and Kuznets’ caution that policies to help the poor that are the “product of imagination unrestrained by knowledge of the past,” are likely to be “full of romantic violence,” Mr. Ricupero says in his overview that the LDC Report 2002, aims to avoid romantic violence and there is “a major, but currently under-estimated opportunity for rapid reduction in extreme poverty in the LDCs through sustained economic growth.”

The report looks at how ‘globalization’ affects the more advanced developing countries and in turn affects the LDCs, Gore said. There has to be a process of globalization, different from now, that can enable the more advanced developing countries to move upward and vacate the field for the LDCs, he said, pointing to the experience of the first and second tier Asian NICs.

The report notes that the $1 and $2 a day poverty lines are generally based on house-hold surveys that use questionnaires to estimate house-hold consumption expenditure for a representative sample of national population.

It makes out a case for using the more reliable national accounts data, since almost all countries in the world have national income and product accounts, and serve as a basis for estimation of gross domestic product (GDP) and gross national product (GNP). These generally include macro-economic aggregates such as private and public savings, gross domestic investment and private consumption.

The report calculates the incidence and depth of poverty in each LDC, by combining average private consumption per capita from national accounts with estimates of distribution of among individuals and households by using household survey data.

However, this method too is not without problems either.

In India, where the system of national accounts is certainly more advanced and sophisticated, even by the late 1950s and early 1960s, these were found inadequate to estimate and deal with poverty. The system of periodic national sample surveys was used to conduct house-hold surveys to get at consumption patterns and standards. The received wisdom from planners and statisticians was that properly designed house-hold surveys, though having subjective errors of surveyors, still brought out more clearly poverty and consumption at bottom levels.

While throwing up poverty data and deprivation, these NSS surveys about aggregate household consumption were always found to be lower than that derived from national account. One reason for this was the “under-estimation or rather under-reporting” by households in upper-income groups that did not want to report consumption accurately. A mechanical solution adopted was to extrapolate NSS consumption, at all levels, by the same proportion to equate it with national accounts-derived consumption - net of wastage, exports, and expenditures in hotels etc where there is both a cash (unreported) and recorded transaction.

This increased and brought up the consumption estimates at upper levels, but so did it increase poverty level consumption. And as, current controversies in India over poverty levels (and claims of ‘reforms’ reducing poverty) has shown, the attempts to reconcile national accounts and NSS have ended up in under-estimating poverty, and policies being challenged.

The LDC report itself makes the point that the actual numbers themselves do not matter, but the national accounts based estimations clearly bring out the worsening poverty levels.

However, in a sense the estimates and numbers do matter, as the ‘donors’, in aid disbursals, out of a rather constant total aid budget, reallocate and distribute the aid on various considerations, but also claim to be doing so on basis of poverty levels. A similar argument is also used in preferential trade arrangements.

The report brings out that four out of every five in the LDCs were living on less than $2 a day in 1995-1999, with average private consumption above the $1 a day poverty-level at just $1.03 a day.

Poverty is particularly severe in African LDCs - which number 34 of the 49 in the group. The share of their population living on less than $1 a day rose from 56% in the second half of 1970s to 65% in the second half of the 1990s, while their average daily consumption fell from 66 cents to 59 cents a day over the same period.

In the second half of the 1990s, almost nine out of 10 people in African LDCs were living on less than $2 a day, and their average consumption just 86 cents a day, compared to $41 a day in the US.

Asian LDCs have been doing better, with the share of their people living on less than $1 a day falling from 36% to 23% in 1995-1999, and their average daily consumption rising from 85 cents a day to 90 cents a day. And in the second half of the 1990s, two-thirds of the population of the Asian LDCs were living on less than $2 a day, and their average consumption was $1.42 a day.

The UNCTAD report calls for a new approach to the Fund-Bank Poverty Reduction Strategy Policies (PRSPs) that are supposed to be ‘nationally owned and designed’, but in actual fact when the national policies do not fall in line with the ‘adjustment policy approach’ of the IMF/World Bank and thus may or may not get through these institutions and their support, the ‘nationally-designed’ policies get modified and the IFI’s PRSPs become nationally owned.

UNCTAD argues on the need to make sure that the central insight of the PRSP approach, namely more effective poverty reduction will not come about by donor imposed policies, but only by allowing countries to formulate and implement their policies is the right one.

However, says the report, the initial experience of the PRSPs in the LDCs show that the creative potential of the new approach is not being realized and like the old adjustment programs, the emerging PRSPs too give priority to short-term macro-economic stabilization over long-term development, with tight credit ceilings and restrictive fiscal policies.

“Indeed it is possible,” says UNCTAD, that with these new strategies, countries, will end up with the worst of all worlds. The new policies will increase exposure to intensely competitive global markets, but without facilitating the development of the productive and supply capacities to compete.

“At the same time, there will be increased aid dependence through arm’s-length international guidance on social welfare.”

In arguing for increased and accelerated debt relief, the UNCTAD report notes that civil society movements that had kept up the pressures for debt relief appear to have eased, as their attention has become focused on trade.

[A recent analysis (SUNS #5128) by the Washington-based “Fifty Years is Enough” network has brought out that having made promises to get 20 countries into the program by year 2000, the Fund and the Bank institutions have let the other shoe drop, by saying that at least nine of them will be off track on their existing IMF programs, and thus ineligible for interim relief added to the HIPC.

[Many of the HIPC countries will not also attain ‘sustainable’ debt levels by the World Bank’s own very constricted standards once they have gone through the program, the NGO said. And Uganda has now, for the second time, seen its debt reach ‘unsustainability’ because of projections about coffee prices.]

According to the LDC report, under the enhanced HIPC (Heavily Indebted Poor Countries) Initiative, the annual debt service relief in 2003-2005 for the 20 LDCs that have qualified for debt relief will be only 5.5% of net ODA disbursements to those countries in year 2000.

The forecasts of a sustainable exit from the debt problem through the initiative are systematically and simplistically over-optimistic. With falling commodity prices, the enhanced HIPC initiative is on a knife-edge and the fledgling PRSPs will be derailed if debts and arrears accumulate again, UNCTAD warns. - SUNS5142

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