Economic Reforms, Globalization, Poverty and the Environment

David Reed, Macroeconomics Program Office (MPO), WWF and

Herman Rosa, Programa Salvadoreo de Investigacin Sobre Desarrollo y Medio Ambiente (PRISMA)

Abstract: The thesis of this paper is that while economic reforms and integration of the world economy
have proceeded with unrelenting vigor during the past 20 years, policy makers continue to ignore the
parallel social, environmental and institutional reforms required to generate sustainable and equitable
improvements in the human condition. As presently practiced, institutions and social structures through
which economic reform programs are implemented and through which economic crises are managed often
exacerbate social inequities, reinforce the conditions that generate and reproduce poverty, and fuel the
poverty-environmental degradation relationship in developing countries. The ensuing concentration of
wealth and environmental assets, coupled with the deepening poverty and environmental vulnerability of
impoverished groups, has reduced policy options for policymakers, thereby sharpening the trade-offs
between economic growth, social equity, and environmental sustainability.

I. The Pressures of Globalization

The Economic Reform Package and the Washington Consensus

During the past 20 years the Bretton Woods institutions have financed hundreds of macroeconomic and
sectoral adjustment programs in over a hundred developing and transition countries. In FY 89, structural
adjustment loans totaled more than US $6 billion, accounting for 27% of the World Banks lending
operations; in FY 98, ten years later, macroeconomic and sectoral policy lending rose to over US$ 15
billion, accounting for 55% of total Bank lending, thereby more than doubling the resources invested by the
Bank policy-based lending. In the course of the past two decades, implementation of those economic
reform programs has changed national economic structures across the globe, altered international
incentives, and significantly altered the international flow of capital, goods, and services.

These economic reform programs have been constructed on a clearly articulated set of economic policies
encapsulated in what has been called the Washington consensus. Summarized below are the ten basic
propositions of the reform package that has been implemented, with minor variations, in adjusting countries
around the globe during the past 2 decades:

Fiscal Discipline

Budget deficits, properly measured to include those of provincial governments,

state enterprises, and the central bank, should be small enough to be financed
without recourse to the inflation tax.

Public Expenditure Priorities

Policy reform consists in redirecting expenditure from politically sensitive areas, which typically
receive more resources than their economic return can justify, such as administration, defense,
indiscriminate subsidies, and white elephants, toward neglected fields with high economic returns
 and the potential to improve income distributions, such as primary health and education, and
infrastructure.

Tax Reform

Tax reform involves broadening the tax base and cutting marginal tax rates. The aim is to sharpen
incentives and improve horizontal equity without lowering realized progressivity.

Financial Liberalization.

The ultimate objective of financial liberalization is market-determined interest rates.

Exchange Rates

Countries need a unified exchange rate set at a level sufficiently competitive to induce a rapid
growth in non-traditional exports, and managed so as to assure exporters that this competitiveness
will be maintained in the future.

Trade Liberalization

Quantitative trade restrictions should be rapidly replaced by tariffs, and these should be
progressively reduced until a uniform low tariff in the range of 10 percent is achieved.

Foreign Direct Investment

Barriers impeding the entry of foreign firms should be abolished; foreign and domestic firms
should be allowed to compete on equal terms.

Privatization

State enterprises should be privatized.

Deregulation

Governments should abolish regulations that impede the entry of new firms or
restrict competition, and ensure that all regulations are justified by such criteria as
safety, environmental protection, or prudential supervision of financial
institutions.

Property Rights

The legal system should provide secure property rights without excessive costs,
and make these available to the informal sector.

The Benefits of Globalization

The integration of the world economy, of which economic reform has been a powerful instrument,
stimulated a significant increase in global aggregate output that has been accompanied by an even larger
increase in international trade. The world real GDP grew from US$2 trillion in 1965 to US$28 trillion in
1995. Divided by population, the world average per capita output grew from US$614 in 1965 to US$4,908
in 1995. As regards trade, the volume of world exports grew at an annual average of 6.7 percent during
1965-1980, 4.7 percent during 1980-90, and 6.0 percent during 1990-95. The total volume of world trade
(in terms of either export or import) was over US $5 trillion in 1995 in contrast to US $2 trillion in 1980.
Despite a population increase of 1.9 billion people between 1970 and 1996, yearly per capita income
growth in developing countries has averaged about 1.3 percent.

Private capital flows to developing countries have also grown rapidly in this period. Net foreign direct
investment (FDI) increased from a little over US$2 billion in 1970 to more than US$95 billion in 1995.
Portfolio equity flows increased from nil to US$32 billion during the same period, although such flows
slipped in 94-95 reflecting the volatile nature of the equity markets. In 1992, total private capital flows
started to dominate aggregate net long-term resource flows to developing countries. In 1995, more than 70
percent of such flows came from the private sector.

The aggregate figures of global economic expansion, however, do not show the disparities across regions
and country groups. The export of East Asia and Pacific economies, for example, grew at an annual average
of 9.3 percent during 1980-90 and 17.8 percent during 1990-95. In contrast, export of Sub-Saharan Africa
during both periods was growing at 0.9 percent only. In 1995, high-income countries accounted for 77
percent of the worlds merchandise export.

Likewise, private capital flows to developing countries are highly uneven. The low and middle-income
countries as a whole, for example, received US$95 billion of FDI in 1995. More than half of this amount
flew to East Asia and Pacific economies, 18 percent to Europe and Central Asia, 24 percent to Latin
America and Caribbean, only 1.9 percent to South Asia, and 2.3 percent to Sub-Saharan Africa. In Middle
East and North Africa, there was a net outflow of FDI in the amount of US$347 million.

The Accompanying Costs of Globalization

The benefits of that economic expansion have been considerable. While these economic gains are requisites
for raising the standards of living on a global level, two fundamental problems, problems that threaten the
stability of the international economy, have continued to evolve steadily. The first of those is growing
poverty and inequality, inequality among regions of the world, among nations within regions, and among
social groups within countries. In global terms there are now over 1.3 billion people living in poverty or
approximately one third of the total human population. Although the percentage of those in poverty in
developing countries declined between 1987 and 1993 overall, the absolute number of people increased.
About 60% of the worlds poor live in India and China. Almost 80% of the worlds poor live in 12
countries: India, China, Brazil, Nigeria, Indonesia, Philippines, Ethiopia, Pakistan, Mexico, Kenya, Peru,
and Nepal. If current trends of 30% of the global population living in poverty continue, the number of
people living in poverty by the year 2015 will rise to 1.9 billion.

Developing countries as a group more than doubled their real per capita income between 1965 and 1995,
following closely the income improvements of the industrial counties. In relative terms, however, most
developing countries have failed to raise their per capita incomes toward those of the industrial countries.
Only in Asia was there a clear trend toward improvement during the past 20 years. In Latin and Central
America, Middle East and North Africa, and Africa, the gaps between relative incomes in industrial and
developing countries have widened since 1965 and especially since the mid-1970s. The average per capita
income level of African countries fell in relative terms from 14% of industrial country level in 1965 to just
7 % in 1995.
There has been a sharp decline of upward mobility of developing countries and an increased tendency for
countries to become polarized into high- and low-income clusters. Of the 108 non-oil-producing
developing countries, 52 were in the lowest-income quintile in 1965, but the number increased to 84 by
1995. Simply put, over the past thirty years the vast majority of developing countries-84 out of 108-have
either stayed in the lowest-income quintile or fallen into that quintile from a relatively higher position.
There are now fewer middle-income developing countries, and upward mobility of countries seems to have
fallen over time. Between 1965-80 and 1980-93 the number of people in countries with negative growth
increased from 200 million to almost one billion.

Over the past 30 years the global growth in income has been spread very unequally-and the inequality is
increasing, as reflected in the relative income shares of the richest and poorest 20% of the worlds people.
"The poorest 20% of the world's population now claims just 1.1 percent of global income, which the richest
20% claims 86%. Between 1960 and 1994, the ratio of the income of the richest 20% to the poorest 20%
increased from 30:1 to 78:1

The second major problem accompanying globalization of the world economy is the continued degradation
of our natural environment. Despite greater national and international-level attention paid to environmental
issues and problems, environmental degradation is accelerating in urban and rural settings and in developed
and developing countries.

Resource use: Global energy use has increased by over 70% in the past 25 years, and is expected to
undergo a 50% increase from 1993 to 2010 bringing with it increased greenhouse gas emissions from fossil
fuel use and projected increase in global warming. While developing countries hold 80% of the world
population, they only consume 33% of global energy supplies, with increases in their share in the near
future. Regional growth in energy use is likely to be significant in some regions, and in China and South
Asia, CO2 emissions from coal, and will increase given high demand.

Water: Consumption will increase and shortages are likely "to become one of the most pressing resource
issues of the 21st Century". Projections indicate that up to two-thirds of the world's countries will undergo
moderate to high water stress by 2025. The unequal distribution of water, combined with rapidly increased
demands, and increased pollution, will mean that there are serious shortages in much of the world. Some of
the most affected countries will be in rural areas with scarce water supplies and high levels of poverty.

Pollution: Rapid industrial development has led to high levels of air, water and waste pollution in many
countries. Several forms of pollution threaten both land and water. High levels of fertilizer use, combined
with fossil fuel and biomass burning and land clearing have led to significant releases of nitrogen that have,
in turn, overburdened the absorptive capacity of natural systems. The majority of human-generated nitrogen
releases result from fertilizer use, much of it concentrated in developed countries. Another source of
degradation is from acid rain (sulfur dioxide) -- in Asia, for example, emissions will triple in 20 years at
current rates. These forms of degradation, combined with CO2 and other forms of pollution, pose threats at
the global level. Yet when combined with other pollutants, particularly in urban areas, they lead to high-
levels of localized air pollution -- 1.4 billion urban residents are exposed to unsafe air. For example, in
Latin America about 25% of urban dwellers are exposed daily to high levels of air pollution which resulted
annually of 65 million days lost to illness. This has serious implications for human health, economic
development, and the environment. Water pollution is a serious problem in much of the world -- estimates
are that 2.9 billion people lack access to adequate sanitation and 1.4 billion to safe drinking water, despite
investments of over $100 billion.

Deforestation and biodiversity: The world's forests continue to be under relentless pressure; between 1990
and 1995, annual forest loss in developing countries was estimated to be at least 13.7 million hectares. In
the majority of countries surveyed by the FAO, forest loss has increased, which may be attributable to
increased access to previously remote lands. The primary pressures continue to be a combination of small-
scale settlement and conversion for subsistence and large-scale government-supported conversion to other
uses. In addition to forest loss, there is increasing concern over forest degradation caused by assaults from
fire, drought, pollution and pests. As roads are constructed to open areas, these speeds their conversion to
other uses, and results in forest fragmentation, which also leads to biodiversity loss. Only 20% of large
contiguous forest blocks, known as frontier forests, remain intact worldwide. This forest fragmentation and
loss, along with other factors, is closely associated with significant biodiversity losses worldwide. Aquatic
biodiversity is threatened as well -- 58% of coral reefs are at risk and 27% are at high risk.

Economic Change, Poverty and the Environment: The challenge of understanding

complex relationships

Admittedly, the relationships among economic change, poverty/inequality, and environmental degradation
are poorly understood. The fact that favorable increases in global aggregate output and trade are coupled
with the unfavorable deterioration in poverty indices and environmental degradation has prompted even
traditional development institutions to review their approaches and assumptions about economic reforms
and globalization. To cite but one example from the ample World Bank literature regarding the impact of
economic reforms on poverty, its 1995 study, The Social Impact of Adjustment Operations, points out that
the unfavorable outcomes associated with economic reform programs resulting from changes in fiscal
policy, an area where governments have direct discretionary control:

The Banks country reports indicate that fiscal adjustment has not resulted in more
efficient spending in most countries. In many countries, expenditure reductions have
worsened existing biases and inefficiencies. The extent of public expenditure
restructuring has been very limited during the adjustment era. In most of the countries for
which data are available, more resources were allocated to services that benefit the
nonpoor.

Other Bank studies point out that while adjusting countries have performed better than non-adjusting
countries as regards poverty alleviation, the overall gains in reducing poverty are far from the anticipated
and promised results.

Failure to achieve these desired results in alleviating poverty prompted the international development
institutions to examine its assumptions about the link between growth and distributional equity. Worsening
distributional inequalities accompanying integration of the world economy now poses direct challenges not
only to the international institutions themselves but to developing and transition country policy makers
whose stated primary objective is to improve living standards of the poor. Nancy Birdsall and Juan Luis
Londoo, economists at the Inter-American Development Bank, highlighted the correlation between
sustained growth and distributional equity in their 1997 paper, Asset Inequality Matters,

What emerges from our results is straightforward: an unequal distribution of assets,

especially of human capital, affects overall growth, and it affects income growth of the
poor disproportionately, presumably because an unequal distribution penalizes the poor. A
better distribution of assets increases the incomes of the poor, reducing poverty directly.
Also, by reducing the negative effect on growth of income inequality, it increases
aggregate growth and further reduces poverty indirectly.

In 1998, the IMF, challenged by growing distributional inequities around the globe, organized a conference
on Economic Policy and Equity, and embraced this relationship between equity and growth, noting:

Until recently, greater income inequality was thought to be a necessary

precondition for faster growth - that is, overall savings would increase,
making more resources available for investment, only if a large share of a
 countrys wealth were held by a small number of individuals. But the
consensus among conference participants was that more equity would not
dampen long-term growth but that it could indeed reinforce it. Deputy
U.S. Treasury Secretary Lawrence Summers noted the strong negative link
between a highly unequal distribution of assets and subsequent rates of
growth.

Although these outcomes may not be caused by globalization, per se, these negative outcomes indicate that
there is a fundamental failure in the process of integrating developing and transition countries more
intimately into the global market system. If this trend continues, it will affect and undoubtedly undermine
the desired growth objectives of the economic reforms in the long run, thereby weakening the very
justification for implementing the reforms in the first place. We would add, moreover, that unless income
distribution and poverty are both improved through economic reform and integration into the global market
system, the very premises of globalization will be on trial in the publics mind.

The environmental component of this complex relationship has been the subject of much criticism and
controversy but of relatively little systematic study. The twelve country studies carried out by WWF (Reed,
1992, 1996) are among the few research efforts on this theme. While embracing the need to implement
fundamental economic reforms in order to reestablish macroeconomic stability, the requisite for sustainable
environmental management, the study concluded that:

The improvement of traditional economic indicators seems to contrast with the broader
social and environmental impacts described in the country studies. As regards the social
dimension, for example, there are consistent and disturbing trend in the deepening of
poverty in rural and urban areas in virtually all countries include in the study. The
structural poor in many countries have been joined by the new poor, who lost
employment, social services, and other support systems during the adjustment process.
Not only have the ranks of the poor grown, but distributional inequalities have also
increased. The environmental impacts of the adjustment process are mixed. Some price
reforms have positive environmental impacts. Others have negative outcomes.
Downward pressures on living standards and informalization of the economy have
obliged many urban and rural poor to increase their reliance and pressures on natural
resources and environmental services just to survive.

Those results need not be the outcomes of economic reforms and deeper integration into the global
economy:

Many price corrections associated with adjustment programs hold the potential for
effective positive economic and environmental outcomes. But they often do not realize
this potential because complementary policy and institutional reforms do not accompany
price corrections. The removal of some but not all subsidies, an unwillingness to
internalize environmental costs, the failure to correct legal and land tenure problems, and
the omission of transitional mitigation programs are among the consistently disregarded
policy reforms that would strengthen the positive effects of price corrections.

Similar conclusions have been echoed in the World Banks studies on the linkages between structural
reforms and the environment.

Removal of price distortions, promotion of market incentives, and relaxation of other

constraints generally will contribute to both economic and environmental gains.
Unintended adverse side effects occur, however, when economy-wide reforms are
undertaken while other neglected policy, market or institutional imperfections persist.
A more recent analysis states, "the expansionary impacts of currency devaluation, tariff liberalization, and
reduction of real interest rates may be most directly and adversely felt in natural resource use, especially in
the forestry and fishery sectors."

Beyond the Washington Consensus

The impact of these reforms on distributional equity and the environment were largely ignored for many
years, prompting Joseph Stiglitz, chief economist of the World Bank, to state in 1998 that the Washington
consensus approach was "incomplete and sometimes misleading." That single minded approach failed to
understand the requisites for establishing well functioning markets and did not address other goals such as
"sustainable development, egalitarian development, and democratic development. In response, Mr. Stiglitz
called for: revision of the anti-statist ideology that characterized earlier bank policies; the need to identify
and address important requisites for establishing functioning markets; greater diversity in defining
appropriate development strategies, including macroeconomic policies, and; inclusion of local voices and
participation in shaping the "post-Washington consensus".

Mr. Stiglitz proposal comes, however, at a time when the negative consequences of globalization have laid
siege to what were previously heralded as the best examples of the liberalization development model, that
is, countries of East Asia. The destabilizing effects of financial collapse in the four East Asian tigers
reverberated throughout the developing world, engulfing leading developing countries including South
Africa and Brazil, not to mention wreaking havoc on Russia as well. Although international and national
policy makers may have succeeded in staving off the worst effects of the financial contagion, the social and
environmental consequences of the crisis will continue to reverberate throughout those countries for years,
if not decades, to come.

The references we have provided above regarding the social and environmental impacts of structural
reform programs coincide strongly with the social and environmental effects registered during the East Asia
financial crisis. The World Banks recent analysis of the impacts of the crisis, East Asia: The Road to
Recovery, highlights both the social and environmental consequences of the financial collapse and the
failures of the previous development model. Referring to the social impacts it states:

The crisis has brought distributional struggles into the open. Three areas are likely to be
important to tackle longer-term distributional concerns. First, a major societal concern is
unfair or corrupt gains made by the wealthy and connected. Second, there is some
evidence that the forces of global integration and technological advance target the skilled,
leading to widening wage differences between those with and without education. Third,
in the past, growth largely bypassed populations living in poor areas.

Regarding the environmental, the Banks the analysis offers this perspective:

East Asias financial crisis and environmental problems have similar roots: rapid growth
without proper safeguards, policies, and controls. In the financial sector, the capacity of
governing institutions and policies has been outpaced by the growth of capital flows and
lending. In the environmental arena, growth has outstripped both the absorption capacity
of the environment and the speed with which policies and institutions can respond to new
challenges. Collusion between segments of government and parts of the private sector
exerts pressure on agencies to provide subsidies, directed credit, and exemptions from
regulations, compromising their ability to enforce appropriate stands of prudence and
good performance.

The overarching lesson we draw from these experiences of both reform and crisis, now ranging over the
past 20 years, is that while economic reforms have proceeded with unrelenting vigor, policy makers
continue to ignore the parallel social, environmental and institutional reforms required to generate
sustainable improvements in living conditions. Without such reforms, the prevailing institutional
arrangements, usually reflecting power and privilege of the wealthy, reinforce the conditions that generate
and reproduce poverty and intensify environmental degradation. Until profound and enduring reforms are
implemented in the existing institutional arrangements of most countries, social and environmental costs
will be transmitted to the most vulnerable social groups and to future generations.

What is particularly significant about the East Asia contagion is that the crisis originated principally in the
financial sector, a sector that had received priority attention during structural reform programs. The failure
of those countries and international institutions to prepare adequately for their integration into the global
financial system, the foundation of the global economy, also sends a chilling warning about the lack of
preparation for exposing natural resources sectors of developing countries, usually relegated to secondary
or tertiary priority, to the dictates of the global economy. In short, exposure to the pressures and scrutiny of
the global market system has revealed in stark terms the shortcomings not only of current policy but, more
fundamentally, of the development strategies pursued over the past 20 years. The costs of these failures, as
we are seeing, will be paid in disproportionate measure by the poor and by future generations.

II. General Conclusions

1. Failure to implement parallel reforms

The first conclusion to be drawn from this brief overview of linkages between macroeconomic change,
poverty and the environment is that while economic reforms and the international institutional scaffolding
supporting globalization is proceeding with unrelenting vigor, policy makers continue to ignore the parallel
social, environmental, and institutional reforms required to generate sustainable improvement in living
conditions. Without such reforms, the prevailing institutional arrangements on a national level, usually
embodying the interests of the powerful and privileged, reinforce the conditions that generate and
reproduce poverty, , and intensify environmental degradation. Until enduring reforms are implemented in
existing institutional arrangements of such countries, social and environmental costs will be transmitted to
the most vulnerable social groups and to future generations.

2. The widening gap between rich and poor

Both the crises preceding adjustment and macroeconomic reforms themselves have tended to widen the gap
between rich and poor, increasing the number of poor and aggravating their economic and social situations
relative to the wealthy. The private sector, including multinational corporations, domestic producers of
export goods, commercial farmers, and medium and large corporations have been able to respond to
international markets and have benefited from the liberalization of national economic policies. These
groups have absorbed changes in relative prices, they have responded to new market incentives, they have
benefited from the removal of barriers to the flow of capital and goods and they have benefited from the
relaxation of environmental management regimes which have accompanied economic reforms.

In contrast, land-poor and landless peasants, among other groups, have not been able to respond as well to
changing prices and incentive structures and have experienced a serious erosion of their income earning
ability. Moreover, the changing relative prices for their products and rising input prices have combined with
reductions in social services, extension services, and credit and loss of marketing agencies, thereby
generating strong downward pressure on their incomes on numerous fronts. The burdens of macroeconomic
reforms have been particularly severe for poor women who, as both producers and the primary workers in
maintaining families, have suffered the confluence of these price changes and reductions in social services
more directly.

3. Reinforcing the conditions that generate and reproduce poverty

Efforts to stabilize economies beset by crisis and the ensuing economic reforms seem to have reinforced the
prevailing conditions that generate and reproduce poverty in many countries. The structures and social
relations that generated poverty prior to the macroeconomic reforms have not been fundamentally altered
as the reforms have been implemented. In fact, the increased disparity between rich and poor provides
strong evidence indicating that the social relations generating poverty have not only remained in place but
have been deepened and fortified.

This is a paradoxical outcome in that one of the underlying promises of adjustment programs was that
despite short-term negative impacts particularly on the poor, the reforms would stimulate widespread
economic growth and thereby alleviate poverty by generating employment opportunities for the poor. In
contrast, what has resulted is that the privileged have consolidated their control over the economy and
continue be the beneficiaries of the accumulation process. There is little doubt that there has been a
displacement of some wealthy groups by other rising economic sectors. This is a process of shifting power
to those economic groups, for instance, within manufacturing or marketing sectors, who are able to respond
to the new opportunities provided by the emerging international market system. But this sectoral
realignment has not altered in any fundamental way the conditions that generate and reinforce poverty.

4. Informalization of the economy

One of the results of the expansion of impoverished sectors is the informalization of the national
economies. The growing number of poor embark on productive activities not registered in the formal
economy and therefore are not subject to national fiscal regimes and regulatory controls.

This resulting informalization of the economy has particular significance for the theme of this article for the
following reason. These informal workers frequently move back forth between rural and urban settings,
seeking employment wherever possible. For instance, in African and Asian countries, when the urban labor
market expands even minimally, the unemployed move into the city seeking work; when the labor market
closes, they move back into agrarian communities. In both settings, the poor rely heavily on natural
resources in order to survive, whether through small-scale mining, catching lizards for export, producing
charcoal production, brewing home-made beer, catching rodents for food, and so on.

In this sense the poor are trapped in social relations in which they cannot ensure their means of survival in
either the rural or urban context by applying or selling their labor power. This social dynamic is all the
more disturbing in that these workers in the informal sector, be it urban or rural, support the formal sector
economy from which the privileged are able to derive their wealth and means of social well-being. The
informal sector is not disconnected from the formal sector but rather provides a broad continuum of goods
and services which enables the formal economic activities to take place. In this sense the informal sector
draws down environmental assets, often destroying its means of survival in the process, so that the formal
sector can expand and generate social wealth for the privileged.

5. The states changing functions

The fifth conclusion regards the functions of the state and its relation to the poverty-environmental
degradation nexus. The reduction of the role of the state as an economic agent, a fundamental element of
adjustment programs, has generated dislocations for many urban and rural workers. However, the states
economic functions were maintained in prior years and decades only at an extremely high and
unsustainable economic cost to individual countries. The transfer of state-owned enterprises should, over
time, generate new prospects for employment for those workers.

Of particular concern for this brief paper, however, is the impact of the changing functions of the state for
poverty and the poverty-environmental degradation nexus. The traditional government response to
economic crisis has been fiscal retrenchment characterized by a reduction in both resources and capacity to
redistribute investment and opportunity. In endorsing this approach, the state has reduced its role as a
guarantor of more equitable social relations, reducing thereby its role in altering the social relations of
poverty. In restricting its ability to provide a wide range of services, to maintain the productive and
consumption capacity of the poor, the state has ceased to be a means by which the rural poor can gain
access to productive assets needed to compete in the national market system. Not surprisingly, this shift has
been accompanied with a rising influence and prowess of the larger, more dynamic economic agents and
groups.

6. Reducing policy options

By reinforcing the conditions that generate and reproduce poverty, the prevailing approach to economic
reform and crisis management has diminished the prospects for social stability and well-being of the poor
in these societies. In the short run, this failure has led the most vulnerable groups to pursue survival tactics
based on natural resource consumption. In the medium and long terms, it implies that policymakers will
have greatly reduced options for addressing the basic development objectives of their societies. Both social
equity and environmental integrity are requisites of longer-term economic growth. Until these concerns are
placed central to the design and implementation of economic reforms and crisis management programs,
policy makers will be increasingly constrained as the cumulative effects of these failures mount in coming
years.

III. Proposed Responses

The architects of adjustment programs argued that the focus of priority of these programs was correcting
fundamental economic disequilibria. As adjusting countries integrated more deeply into the rapidly
changing international market system, however, the forces which had generated impoverished social groups
and poverty-induced environmental degradation were in general reinforced. A satisfactory response to this
contradiction, requires correcting underlying economic imbalances while focusing on altering the forces
and conditions that generate poverty.

Ultimately, design and implementation of macroeconomic reform programs that address these two issues
are the responsibility of national policymakers and planners. Their willingness to adopt a more integrated
approach depends on the political strength and will of national economic, social and military elites and,
equally, on the determination and strength of social movements seeking to alter the current balance of
power. The recommendations listed below are offered as indications of basic changes that are required to
achieve the goals or correcting disequilibria and altering the political economy of poverty.
 1. Policy makers should give priority to protecting investments and productive assets of the
vulnerable even in times of structural change and crisis management.

Structural adjustment programs as well as full-blown financial and economic crises pose extremely difficult
challenges to any national policy maker. Invariably, social unrest and political turmoil accompany the
economic crises, rendering policy change and innovation ever more hazardous. Those difficulties
notwithstanding, the underlying focus of these recommendations is that policy makers must protect the
investments and assets that support the well being of the poor. That proposition is grounded in the far-
reaching consequences of failing to protect the productive and survival assets of the poor. Regarding
immediate consequences, we need look no further than the most recent social unrest in Indonesia
originating from the failure of government to protect the poor as the country has struggled to extricate itself
from the financial crisis. Regarding the medium and longer-term implications, failure to protect the
productive capacity and investments in the poor over the past decades of adjustment today translate into
declining aggregate output and per capita incomes of scores of developing countries. Protecting the assets
and investments of the poor must include:

maintaining investment in human capital, above all in education and health for children and
women;

ensuring food security for the most vulnerable;

sustaining the purchasing power of the most vulnerable through transitional employment and
training programs, public works among other mechanisms;

1. Economic reform programs should promote more balanced economic growth

strategies whose underlying priority is to combat poverty while supporting
improved natural resource management.

The evaluation of economic performance based on overall economic growth usually masks
extraordinary imbalances and inequities among sectors, within sectors, and across regions. It also
masks the externalization of social and environmental costs. In some cases, high overall economic
growth can occur in the context of deep crisis in the agricultural sector. Conversely, high
agricultural sector growth can mask the fact that a large proportion of small and impoverished
farmers and peasants do not participate in that growth. In that sense, the pattern, quality and
inclusiveness of economic growth needs to be scrutinized far more closely, when evaluating
economic performance and in policy prescriptions. Economic reforms seeking higher growth rates
must ensure that distributional equity is strengthening and that growth is not accomplished through
the unsustainable draw down of natural capital.

2. Local and regional development initiatives should be supported and genuine

democratic decentralization efforts should be promoted.

A strong social fabric at the local and regional levels is a must for successful adaptation to rapidly
changing international and national contexts. It is also crucial for the emergence of sustainable
livelihoods strategies for the poor. Prodded by an unfavorable national and international context,
in many local and regional contexts, many initiatives tailored to local conditions are emerging that
can go a long way with external support. At the same time, aggressive decentralization efforts than
result in more resources, responsibilities and authority for local governments, in the context of
political reforms aimed at democratization, can foster local capacity development and provide an
enabling environment for local development initiatives oriented towards combating poverty and
reducing environmental degradation.
3. Risk prone regions or spatial poverty traps - regions where poverty,
environmental degradation and migration in large numbers to urban areas
are endemic need to be given a much higher priority.

This shift requires a marked change in government and donor policies, so that these areas begin to
be treated as potential contributors to national product and well being, and not just as targets of
welfare transfers. Accomplishing this requires a systematic redistribution of productive assets to
the poor, as well as institutional changes that reverse the bias against small producers and
indigenous populations of basic governmental institutions. In addition, given the magnitude of
land degradation and the scarcity of productive land in many of these areas, basic infrastructure
development and other activities that foster the creation of off-farm productive employment and
income opportunities for the rural poor is crucial. Altering forms of governance is also critical in
these areas. The antagonistic relationship that exists in many areas between government and
community, the exclusion of local communities and organizations from decisions and
consultations needs to be fundamentally altered.

4. A departure from the still prevailing anti-statist ideology is urgently

required, particularly in many post-adjustment countries with weak and
impoverished governments.

While economic liberalization and fiscal adjustment efforts were pursued aggressively in many
countries undergoing economic reform, complementary efforts to reform and strengthen the role of
the state on other areas that support the development effort have not been pursued as eagerly. In
fact, in the post-adjustment era, the reality in many countries is that of extremely weak and
impoverished governments. Instead of providing an enabling environment for local initiatives,
civil society and decentralization efforts, these governments become an important obstacle for
development and a source of social and political instability, that can degenerate into authoritarian
regimes.

The Washington Consensus recipe focused primarily on trade liberalization, deregulation,

privatization and tough fiscal adjustment measures. This recipe, and its underlying anti-statist
ideology, is still very much alive in the minds of many finance ministers, central bank presidents
and their counterparts in international financial institutions. Thus, it comes as no surprise that
while trade liberalization has reduced public revenue in many cases, fiscal adjustment tends to
concentrate on reducing expenditure, rather that on efforts to increase public revenue. This,
regardless of the fact that the tax burden in many countries is very low and has decreased after the
adjustment reforms. Similarly, efforts to reallocate public expenditure towards those areas that
support development and balanced growth in the long run are pursued only timidly.

If the state is to provide an enabling environment for development rather that

continue to be an obstacle, this situation needs to be urgently reversed. This
recommendation should not be misconstrued to imply a return to the decades of
statist authoritarianism or paternalism promoted by many countries in their post-
colonial periods. Those decades were marked by economic distortions, political
abuses, financial corruption, and resource pillaging which condemned those
societies to mismanagement and economic deterioration. What is urgently
required is a development state whose purpose, in addition to establishing a stable
macroeconomic framework, is to ensure the provision of basic public goods and
 services, guarantee basic conditions of equity and opportunity, ensure sound
management of the natural resource base.

5. International cooperation and governments should facilitate the

strengthening the social and political power of those sectors of society which
have been pushed to the margins of the economic system and society.

This is the most basic change needed to alter the forces and conditions that reproduce poverty. Stated in
other terms, it requires strengthening the many organizations and groups of civil society whose origins and
genesis reside in the economic systems externalization of social and environmental costs of growth. The
proliferation of community, womens, and civic groups, and non-governmental organizations in recent
years is a response to the social and economic marginalization experienced by many sectors. A central
element in a strategy to reverse poverty is the reinforcement of the capacity of those organizations and
groups to influence national decision making processes. The means and mechanisms for promoting that
agenda must be tailored to the requirements and interests of the local groups and requires, in most cases,
changing the priorities, accountabilities and partnerships promoted by international institutions, non-
governmental organizations, and advocacy groups.

END

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Endnotes