Week 8: Poverty Reduction Strategy and Capital Solution

“Successful plans to fight poverty require country ownership and broad based support from the public in order to succeed. A PRSP contains an assessment of poverty and describes the macroeconomic, structural, and social policies and programs that a country will pursue over several years to promote growth and reduce poverty, as well as external financing needs and the associated sources of financing. They are prepared by governments in low-income countries through a participatory process involving domestic stakeholders and external development partners, including the IMF and the World Bank” -Definition of Poverty Reduction Strategy Papers from the International Monetary Fund 

The poverty reduction strategies addressed by Jeffery Sachs in The End of Poverty were implemented in 1999 by the World Bank and the International Monetary Fund. The Poverty Reduction Strategy Papers approach (PRSP) attempts to provide an intermediary between nations, donors, and the Millennium Development Goals. The core principles of this approach are identified as country-driven participation of civil society, result-oriented and comprehensive outcomes, and partnership-oriented development (IMF). By providing realistic plans and governance reforms, the PRSP approach has had an impact one hundred and twenty-seven times in predominately low-income countries.

Sach’s provides both Ghana’s Poverty Reduction Strategy (GPRS) and Uganda’s Poverty Eradication Action Plan (PEAP) as examples of notable quality in Africa. He highlights that many times the strategies are underfunded and as a result may lack in areas, such as public investment.

Ghana’s Poverty Reduction Strategy (source: http://politics.myjoyonline.com/pages/news/201309/113802.php)

Ghana’s Poverty Reduction Strategy (source: http://politics.myjoyonline.com/pages/news/201309/113802.php)

Ghana’s Poverty Reduction Strategy

  • Discusses current social and political aspirations
  • Existing goals of development policy
  • Acceleration of economic growth will permit the implementation of the MDGs
    • Educational targets (basic-level)
    • Human rights
  • Need for rapid transformation of the structure of internal production and foreign trade
  • Serve the rising needs of a growing population
  • Allocation of budgetary resources to basic pro-poor services
    • Primary education, water access, public health

Uganda’s Poverty Eradication Action Plan

A transformed Ugandan society from a peasant to a modern country within thirty years

  • Continued GDP growth rate of about 8%
  • Decrease the proportion of people living below the poverty line to 24.5% in 2014/2015
  • Address the structural bottlenecks that accelerate socio-economic transformation for prosperity
    • Create jobs, raise income, improve labor force, raise HDI
  • Private sector will remain the engine of growth and development
    • Quasi-market environment
  • Encourage foreign investors
  • Promote institutional and regulatory framework that promotes public-private partnerships

In both the Kenyan and Ugandan PRSPs, the emphasis on partner-oriented development is evident. The broad consultation with development partners (WTO and IMF staff) and member countries to create the reduction strategy papers provides realistic and flexible frameworks to help struggling nations achieve the MDGs (WTO).

Cover of Dead Aid

           Cover of Dead Aid

Moyo provides insight on capital solution in light of the bonds issued to international capital markets in order to finance development programs. This includes:

  • Infrastructure
  • Education
  • Healthcare
  • Government expenditures
    • Military, civil service, trade imbalances

In order to access the bond market and issue a bond, countries must get a rating, assessing the risk that a country may or may not repay its loans. They must also examine the emerging bond market’s return. Emerging market bonds returned some 35% and JP Morgan’s EMBI+ index of such bonds performed better against American government bonds by 15%, according to Moyo. South Africa is a good example, for when it declined international bonds, its position in the league tables will fall. Some countries do not appear on any lists or charts because they might have left the bond market willingly or as they mature they reduce the number of bonds they issue in favor of domestic savings and tax. A country’s rating is not only important for its ability to issue debt, but the ratings for companies within its borders.

Emerging Market Bond Index in Sub-Saharan Africa (source: qz.com)

Emerging Market Bond Index in Sub-Saharan Africa (source: qz.com)

A credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Kenya thus having a big impact on the country’s borrowing costs (Trading Economics). Kenya has a stable. B+ rating on the Standard & Poors index. More information on S&P, Moody’s, and Fitch ratings are found on Trading Economics.

FDI Inflow (source: kariobangi)

FDI Inflow (source: kariobangi)

In order to receive foreign direct investment (FDI), Moyo suggests that a country receive a credit rating, find and convince investors, and make a plan to repay the loan. The global flow of FDI to Sub-Saharan Africa have increased in recent years, with capital flowing from new investors such as China and India. In Kenya, investor opportunities and investment capital are limited by exploitation of mineral resources and bilateral political policies. On the other hand, Kenya is a desirable investment destination because of its educated and skilled workforce, a relatively strong infrastructure, and membership in regional trade blocs (The Republic of Kenya).

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