Debt relief and poverty reduction

The HIPC Initiative and its strategy papers

Are "poverty reduction strategies" just old wine in new bottles, as critics(1) complain, or are they a practical tool for the fight against poverty and for bringing about fundamental economic, political and social change? The answer is: it's too early to tell. But PRSPs are more than just strategy papers. "PRSP is a process, not an event", says the British Institute for Development Studies (IDS)(2). The implementation of the papers will show whether the strategy and the process are viable.


Origin of the PRSP concept

PRSPs are the fruit of linkage –linkage between the international development goal of halving world poverty by 2015 and the debt relief initiative for highly indebted poor countries (HIPCs). The seeds of that union, however, were also sown by and coincided with a variety of other developments. The debate on the effectiveness of development cooperation (DC), selectivity (should "good performers" be given preference when funds are distributed?) and DC impact monitoring and “measurement” was conducted in the 1990s against a backdrop of ebbing ODA. Donors realised they had to focus their funding and deploy it to better effect. At the same time, because partner countries were hopelessly overstretched trying to meet the different requirements of different donors it became clear that donors needed to cooperate more closely with one another and coordinate their work more effectively. The International Monetary Fund (IMF) and World Bank found themselves the brunt of harsh but justified criticism because of the developmental impact of their long-running structural adjustment programmes.

In many countries, the scale of debt had reached a point where it could no longer be dealt with by the normal rescheduling and relief mechanisms put in place by the donors of the so-called Paris Club. Multilateral debt was a particular source of concern. The only way to get the developing countries out of the debt trap was by the bi- and multilateral donors making a joint effort. After an insufficient first attempt with the HIPC I initiative launched in 1996, the world's most powerful industrial countries at the Cologne G7/G8 summit in June 1999 and the annual assemblies of the World Bank and IMF three months later gave their backing to HIPC II – also largely thanks to some vigorous urging by Germany. HIPC II debt relief is available to countries which qualify for World Bank loans on preferential terms (IDA-Only-Status) and have debts amounting to more than 150% of their exports or more than 250% of government revenues. What's more, the country needs to have an export-to-GDP ratio of at least 30% and a government revenue-to-GDP ratio of at least 15%. So far, 27 of the 38 countries classified as HIPCs have been granted debt relief, which will reduce their present debts from 77 billion to 26 billion US dollars.

One of the conditions for debt relief under HIPC II rules (a proviso not found in Paris Club's rule book) is that countries must agree to develop and implement a poverty reduction strategy (PRS) with broad public participation. Debt reduction – an instrument once confined exclusively to the financial markets – thus received a developmental fundament. Where a participative PRS was put into effect, donors additionally agreed not only to cancel debts but also to furnish urgently needed new funds. Even credit facilities at World Bank and IMF were extended in pursuit of the goal of reducing poverty by PRS. Today, both organisations report a rise in poverty-reducing spending in the 27 HIPCs whose debt burdens have already been lightened under the HIPC II initiative(3).


PRSP between conditionality and ownership

The new concept is an answer to the scant success of the myriad conditionalities that partner countries found built into the structural adjustment programmes of the IMF and World Bank. That lack of success prompted a re-think placing more responsibility on partners' shoulders. The strategy a partner develops needs a broad public base, needs to be produced in a participatory process. This process is considered just as important as the product itself. The conflict between the time required for a participation process to be completed and the need to receive debt relief fast was resolved by the introduction of what is known as Interim PRSPs. These enable partial debt relief to be granted before the Full PRSP is completed; the participation and scope required are correspondingly less.

The crucial difference between PRSP and participatory strategies developed in the past is that the World Bank and IMF are also on board; they helped set up the PRSP system and stand behind it with their financial resources. With PRSs, the principles of a "Comprehensive Development Framework" (CDF) established by World Bank President James Wolfensohn could be translated into practice:
– a long-term and holistic vision and strategy,
– more responsibility shouldered by countries for their own development (ownership),
– strategic partnerships between the actors concerned and
– accounting for the results of cooperation on the basis of medium- to long-term poverty reduction targets.
The World Bank and IMF, after the battering they had received for their structural adjustment policy, found that embracing the international development goal of poverty reduction catapulted them to the front row of international reformers. James Wolfensohn and (later) IMF managing director Horst Köhler comported themselves in such a way that their actions could not be dismissed as mere manoeuvring. They also used the new approach to reform their own organisations, making them more cooperative and transparent. All preferential loans granted by World Bank subsidiary IDA were made conditional on the preparation of a PRS.

The dilemma persists, however, that PRSs can be perceived as an external imposition dictated by Washington. At the same time, and in contrast to this, there exists a political expectation of "ownership" – of recipient countries taking responsibility for their own development – even though, in the early days especially, the most that was conceded in many cases was consultation. The transition from donorship to ownership is a long process. Nevertheless, it is apparent that even many partner governments have come to see poverty reduction strategies as more than just a requirement for HIPC debt relief. The process has created scope for discussion between populace and government. The challenge consists in preserving that scope and creating more opportunities for participation.


Qualitative requirements for PRS

Whether the PRSP presented by a country meets the minimum requirements for debt reduction and IDA funding is decided without a fixed checklist by the boards of the World Bank and IMF. However, assessment of the participation process is a key factor. In addition, PRSPs are required to contain an analytical section identifying the nature of the poverty, the obstacles to eliminating it and the scope for poverty reduction and growth-fostering measures. Possible policy options need to be listed. The paper should set out primary long-term poverty policy objectives, policy measures, medium-term budget planning, the kind of external help required and the way it should be coordinated as well as statements on implementation, monitoring and verification processes.


Present state of the process

With PRSPs now a requirement for IDA countries, the scope of the original HIPC-focused initiative has been significantly extended. So far, some 70 countries have signalled a willingness to prepare a PRSP. 32 countries have produced a full PRSP and presented it to the World Bank and IMF boards; by October 2003, nine of them had already submitted their annual PRSP progress report. Another 21 countries have prepared an Interim PRSP (figure to mid-July 2003). Every two to five years, PRS countries are required to fundamentally review their strategy papers.

The PRS concept has also prompted more cooperation on the donor side and between donors and partners. The country assistance strategies (CASs) of the World Bank and EU Commission are now seen as plans designed to define contributions to PRS implementation. The pressure on donors is growing to show whether they are willing to participate in joint donor initiatives based on PRSs. The same applies to pooled financing, because it not only relieves the burden on partners but also provides greater security that crucial steps are taken to implement PRSs. The fact that German development policy also supports this development is apparent from the Action Programme 2015 launched by the German government in April 2001: "The Federal Government supports the efforts of developing countries to produce and implement national, participative poverty reduction strategies .... and will gear its bilateral cooperation accordingly."


Conclusion and outlook

The PRS approach is now firmly embedded in the international development policy debate and has considerable implications for the work of all actors. At the same time, lots of forces are tugging at its anchor line because PRS offers plenty of targets:
– expectation of ownership vs. dependence on donors;
– high expectations of impact on poverty vs. difficulties in measuring it;
– broad-based strategic thrust vs. need to prioritise;
– time required for PRSP preparation and implementation vs. need for fast results;
– weakness in partners' democratic structures vs. expectations of participation and transparency;
– national orientation vs. regional/international dimension (e.g. trade and agricultural subsidies).

A final verdict cannot yet be delivered. The PRS approach is neither just "the latest incarnation of a structural adjustment process" (to quote an NGO)4; nor has it yet been shown to lead to sustainable improvements in partners' policies and the poverty-oriented support of DC donors. The next major review of the PRS approach is scheduled for 2005 and needs to be constructively used by German institutions. PRSP is not a miracle cure but it offers a number of levers and possibilities for progressing towards poverty reduction targets and implementing and coordinating DC to better effect. It will not be easy to find a better anchor for reformist debate soon.

1) W. Eberlei / T. Siebold: Armutsbekämpfung in Afrika: Neue Ansätze oder alte Konzepte? (Fighting poverty in Africa: new approaches or old concepts?) INEF Report 64, Duisburg University 2002

2) Participation page, Issue No. 6. Institute of Development Studies, University of Sussex, Brighton, April 2001

3) Cf. latest HIPC Initiative progress report,
published on September 12, 2003, at www.worldbank.org/hipc

4) Gerster Consulting: Evaluation of SDC's Bilateral Engagement in the Poverty Reduction Strategy Paper (PRSP) Process, October 2002


Literature:
www.worldbank.org/poverty/strategies/index.htm
www.worldbank.org/hipc/
www.prspsynthesis.org
www.prsp-watch.de
www.ids.ac.uk/ids/particip/research/pprs.html
www.gtz.de/forum_armut/
www.aktionsprogramm2015.de
www.bmz.de/themen/erfolgskontrolle/fachinfo_zep/instrumentenevaluierungen/EvalBericht336/index.html



Ronald Meyer formerly at BMZ, assumed the post of head of cooperation at the German embassy in Maputo (Mozambique) on September 1, 2003.
germancoop@tvcabo.co.mz

All opinions expressed in the article are the personal views of the author.