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Ethiopias Interim Poverty Reduction Strategy Paper (IPRSP):
Some Preliminary Observations on the Macroeconomic Issues
Alemayehu Geda, PhD, Macroeconomist at ISS-KIPPRA project
The Kenya Institute for Public Policy Research and Analysis
Thanks to the recent World Bank emphasis on medium term planning strategy and associated budgeting framework, such as Medium Term Expenditure Framework (MTEF), most African countries are in the process of moving from crisis management to medium-term strategy and from incremental budgeting to at least three years budgeting. Concrete efforts in this direction are being made in Uganda, Kenya and Ethiopia, among others. In this short article, we will critically examine the macroeconomic-related issues of the Ethiopian IPRSP. When necessary, a comparison with Kenya's IPRSP, which is at an advanced stage, will be made. The modest objective of the article is to enrich Ethiopias IPRSP by pointing out some of its weaknesses. Again the focus is on the macroeconomic aspect leaving the other issues to other colleagues at FSS.
The IPRSP document prepared by the Government of Ethiopia (GoE) is an interesting document that sets out the major intents of the GoE and its effort to combine the Bank-inspired IPRSP program with its own Agricultural Development Led Industrialization Strategy (ADLI). It is also interesting to note in the document the various gains in terms of social and infrastructure development indicators. If a sustained and vigorous effort is made, it wont be difficult to envisage a huge social capital gain in about a decade or so. Moreover, the cautious approach pursued at financial sector liberalization noted in the document (See Also Addison and Alemayehu 2001) is a plus for the GoE. The task in this paper is not only to praise the government (although it is important to do so when it is deserved) but also to critically examine its strategy so as to positively contribute to policymaking. In line with this, the following major weakness of the IPRSP in relation to the macro framework adopted, are outlined.
Less Emphasis and Lack of clarity about the Source of Macro Instability: The strategy emphasizes the centrality of macro stability such as low inflation, sensible public deficit and debt profile, sustainable balance of payment and conservative monetary policy as well as healthy banking sector. Notwithstanding the importance of such policies, the major sources of macro instability in Ethiopia are external shocks: terms of trade, external resource inflow and vagaries of nature as well as regional security (see Alemayehu 2000 for detail). Neither an explicit acknowledgement of these issues nor a concrete strategy of addressing them including financing when needed is provided in the document.
Identification of Source of Growth and Macro Stability. The IPRSP notes that apart from the positive effect of social sector gains, macro stability is thought to be the source of growth through positively influencing savings and investment as well as through interest rate effect on access to credit. The first point to note is that various macro indicators noted in the document could vary depending on which year the analysis started from, as failure to do so might erode the credibility of the figures reported. Second, and most important, the expected effect on savings and investment seems weak in Ethiopia. It is pretty obvious that investment is still constrained by land, bureaucracy and infrastructure problems. So is savings owing to low level of income. Probably the most important task to ensure the practicality of the strategy is to design a growth strategy that could go beyond the ADLI in making the latter a concrete program. Such an effort, for instance, underway in Kenya. The task also requires the examination of the source of growth from different angles such as growth accounting, sectoral analysis, the role of markets and institutions as well as the political economy of agents involved (See Alemayehu and Befekdau 2001).
Weakness in Using of Existing Poverty Studies to Design Poverty Reducing Strategy. Fortunately the country is rich in terms of poverty-related data owing to the efforts of, among others, the Statistical Authority, the Welfare Monitoring Unit of MEDaC and the Department of Economics of AAU. The IPRSP document seems to draw its understanding of poverty more from measurements of poverty than analytical studies. The latter are in particular important in identifying determinants and profiles of poverty and quantification of such issues (See for instance Abebe, Berket and Bigsten 2000). Such analytical studies are central for prioritization of budgetary expenditure destined for poverty reduction.
Expectation about the Agricultural Sector and the Extension Program. The ADLI strategy seems to put a lot of weight on the role of its extension program. Although it is quite encouraging to see the impressive increase in the coverage of the program it will be worth examining the dropout rate from the program and most importantly the sustainability of the program. This requires investing on R&D on which no explicit emphasis and linkage is made in the document. Second, and relate to this, the IPRSP program seems to envisage raising the competitiveness of the agricultural sector to an international level. This doesnot seem to be a sustainable strategy in view of the subsidization of agriculture throughout the world (it is estimated that half of European Union budget is spent on agricultural sector). The issue for IPRSP thus may not only be competitiveness but also subsidization with all its budgetary implications.
Lack of a Macroeconometric Model for Concretizations of IPRSP through Medium Term Expenditure Framework. Concreter realization of the IPRSP requires translating the strategy in a concrete budgetary framework. The evolving approach in most African countries is to use the MTEF for this purpose. The MTEF however requires projection of major economic aggregates (for at least three years ahead) with fairly disaggregated fiscal variables. This can best be handled using a macroeconometric (as opposed to Computable General Equilibrium, CGE,) model with an elaborate fiscal block. The Kenyan Institute for Public Policy Research Analysis, in collaboration with the Treasury, has developed such a model and the use of this model for MTEF as well as for policy analysis is quite promising. To my knowledge the GoE has no such instrument (pace the two rudimentary models at MEDaC). The challenge for GoE is not only to develop such a model but also to make an explicit and quantifiable link between the growth strategy (such as ADLI), the IPRSP and MTEF. The model could be developed from the nucleus of a macro model developed in academic institutions in Ethiopia.
Finally, for comparative purposes, a brief look at the Kenyan IPRSP is in order. The Kenyan IPRSP is tied to the three years Medium Term Expenditure Framework budgeting approach. The latter in turn is linked to a fiscal outcome, growth target and development in the world economy. Thus, at macro level, policies geared towards these issues are presumed to be instruments in addressing the poverty issue. In Kenya, the IPRSP has the following major strategy components that are identified as imortant fundamentals for reducing poverty. These are: accelerated economic growth, governance and security, raising the ability of the poor to raise their income, improving the quality of life, as well as equity and participation of the poor. In a sense, this list of measures fundamentally concur with the strategy outlined in the recent World Bank Report on poverty that suggests addressing poverty reduction through three pronged measures: promoting opportunity, facilitating empowerment and enhancing security (World Bank, 2000/2001).
The Kenyan IPRSP identifies landlessness and lack of education, the prevalence and incidence of ill health (in particular the response to sickness), declining levels of school attendance (which is identified to be influenced by the cost of education), low productivity, inequitable access to land and capital and vulnerability (especially womens vulnerability to poverty) as major problems. The identification of these factors, although an important task, needs to be complemented by empirical analysis however. Empirical analysis, such as the one I noted above in the case of Ethiopia, helps not only to examine the validity of factors noted as determining poverty, but also their relative importance in determining the state of poverty. It might also lead to identification of other factors that are not explicitly addressed in the strategy. Identifying such relative importance is crucial for policy prioritization. This is an important lesson that Ethiopias policy makers need to learn when designing the final PRSP.
After identifying these poverty related characteristics in Kenya, Kenyas IPRSP has outlined in detail the components of the strategy aimed at addressing the poverty problem. For the purpose of this paper, these components could be classified in to two broad categories. The first comprises: Economic growth and macro stability, ability of the poor to raise their income, improving quality of life and the issue of equity. The other component relates to governance and sectoral policies. Such concretization of the strategy is important in the preparation of the GoE's IPRSP.
To conclude, it is hoped that the GoE will take the suggestions noted above so as to be able to design a strong PRSP as well as mobilize the requisite technical capacity to realize such strategy on a sustainable basis.
Abebe Shimles, Berket Kebede and Arne Bigsten (2000) Poverty, Income Distribution and Labour Market in Ethiopia (Research Report, African Economic Research Consor tium, Nairobi, Kenya).
Addison, Tony and Alemayehu Geda (2001) The Financial Sector In African Transition Economies in T. Addison (ed.).
Transitions and Reconstruction in Sub-Saharan Africa (Oxford: Oxford University Press, forthcoming) Alemayehu Geda (2000)
Macroeconomic Performance in Post-Reform Ethiopia (Paper Presented at Symposium on the Performance of the Ethiopian Economy in Post-Derg Period, Inter Africa Groups, ECA, April 26, 2000).
Alemayehu Geda and Befekadu Degfe (2001) Explaining African Economic Growth: The Case of Ethiopia (forthcoming, African Economic Research Consortium, Nairobi, Kenya).
Government of Ethiopia (2000) Ethiopia: Interim Poverty Reduction Strategy paper 2000/01- 2002/03, Addis Ababa, Ethiopia..Government of Kenya (2000). Interim Poverty Reduction Strategy Paper (IPRP) for the Period 2000-2003. Nairobi: The Government Printer.World. Bank (2000/2001). World Development Report 2000/2001: Attacking Poverty. Wahington DC: The World Bank.
Article republished with permission from Professor Dessalegn Rahmato, Manager, Forum for Social Studies, Addis Ababa, Ethiopia.