A Paper Submitted by IFAD
to the United Nations International Conference on Financing for Development The International Conference on Financing for Development (FfD) is the first major opportunity since the Millennium Summit for the international community to review the implications, and help mobilize the resources, to realize the commitments world leaders made at that summit. The commitment to reduce the proportion of those in poverty by half by the year 2015, together with the other Millennium Development Goals, represent historic affirmation by world leaders on the imperative of overcoming mass poverty, perhaps the most critical challenge facing human society. The events of 11 September and their aftermath have underlined the interlinkages in our globalized world and have brought forward a new realization of the importance of shared human values and goals. In the light of these events, the FfD conference assumes an even greater significance than when it was planned. The main task of the Mexico conference is to begin the process of translating the vision of the Millennium Summit into funding for programmes and policies that make a real difference in the daily lives of the 1.2 billion human beings that struggle for existence on less than one dollar per day. The International Fund for Agricultural Development (IFAD) has maintained, throughout its quarter century of operations, an exclusive focus on poverty, particularly rural poverty. In the light of this, IFAD's Governing Council, the annual meeting of its Governors held in February 2002, was organized on the theme of Financing Development - The Rural Dimension. This present paper was prepared as the main theme document for the Governing Council. The paper highlights that the large majority of the poor live in rural areas and depend on agriculture and related activities for their livelihood. It further brings out that even as the political commitment to reduce poverty has strengthened in recent years, official development assistance to the rural sector has dropped sharply, by nearly 50% from 1988 to 1999. Declining external assistance for rural development has been paralleled by reductions in domestic public investment as well. The paper argues that there is a fundamental inconsistency between the direction of development assistance - whose primary goal is now poverty reduction - and where the bulk of the poor actually are, the rural areas. At the Council Session where His Excellency President Obasanjo of Nigeria was the keynote speaker, many Governors representing the Fund's 162 Member States reflected on these ideas in their statements. There was also an interactive dialogue, with a set of panellists with deep experience in development practice and policy, in which a large number of Governors took active part. At the conclusion of their deliberations, the chairman of the Council, the Governor for Indonesia summed up the discussions on behalf of the Council. In his statement, the chairman of the Council said, inter alia: Governors noted that the present rate of poverty reduction must be accelerated substantially in order to achieve the target. Further noting that the large majority of the poor live in rural areas where agriculture and related activities are the main source of livelihood, Governors also emphasized the importance of increasing the rate of rural and agricultural development. This is critical in order to step up overall national growth rates and create the conditions in which the rural poor can work their way out of poverty. One Governor underlined "the centrality of agricultural development in alleviating poverty among the world's poorest citizens, most of whom live in rural areas". In this regard, our guest of honour, His Excellency President Obasanjo, stressed that "Rural poverty reduction must remain at the centre of the global development agenda". Governors also noted the very sharp decline in external development assistance for rural development, which has taken place over the last decade and which has been paralleled by substantial falls in domestic resource allocations for the rural sector. Again, to quote President Obasanjo, "We may ask what has happened? What has gone wrong and what remedial action must we take." Governors also emphasized the importance of policy coherence in development, trade and systemic policies to create an enabling international environment for achieving the Millennium Summit poverty goal. This would complement and reinforce domestic governments in their effort to build enabling national environments for rapid poverty reduction and development In closing, the chairman of the Council had the following to say: May I express my own hope that the heads of delegations at the Monterrey conference will incorporate strong references to the importance of rural poverty reduction and the imperative of greater support, priority and resources for agricultural and rural development to achieve the Millennium Summit goals. I would add my own hope that this document helps delegations at the Financing for Development conference reflect on these issues, which we in IFAD believe are central to addressing poverty. Lennart Båge
1. Still today, more than one fifth of humanity live in conditions of extreme poverty, struggling for survival on less than one dollar per day. Recognizing that this is neither acceptable nor inevitable, world leaders at the United Nations Millennium Summit in September 2000 made a commitment to reduce extreme poverty by half by the year 2015. 2. IFAD for its part, throughout nearly a quarter century of operations, has focused on rural poverty and on developing innovative approaches to help poor men and women to raise their incomes and output and to work their way out of poverty. This is reflected in IFAD's mission statement "Enabling the rural poor to overcome their poverty" and inspires the new Strategic Framework for IFAD 2002-2006. 3. IFAD's Rural Poverty Report 2001 highlights that the majority of the extremely poor live in rural areas and depend on agricultural and related activities for their livelihoods. Although international development cooperation is increasingly giving priority to poverty, it has not yet fully focused on reaching the poor where they live - in rural areas - and on providing them with the means to strengthen their sources of livelihood. As this document emphasizes, international support for agriculture has in fact fallen sharply over the last decade, and overall development assistance itself has declined substantially. It is time to recognize that if poverty is to be reduced substantially, the problem has to be addressed where it is, and the volume and direction of development cooperation adapted accordingly. 4. The United Nations International Conference on Financing for Development (FfD), to be held in Mexico in March 2002, will provide the first major opportunity after the Millennium Summit to bring together the different components of financing and evolve a consensus on the resources required to achieve the Millennium Development Goals (MDGs). In this regard, it is important not only to address the volume and effectiveness of financing for development, but also to look at the key strategic areas where attention and resources need to be channelled. Given the centrality of rural poverty in the overall 'poverty problematique', and the importance of agriculture as a source of employment and livelihood in poor countries, the rural sector should be one of the focal areas of the strategy to accelerate development and poverty reduction. It is for this reason that the theme "Financing Development - The Rural Dimension" was chosen for the 2002 Governing Council of IFAD, which met on 19-20 February. 5. Given current trends in official development assistance (ODA) and private financial flows, and recognizing that development has to be based on domestic resources and capacities, this document looks at how enhanced international development cooperation could support a wide-based development process and more rapid poverty reduction. In this connection, it argues that for many poor countries, channelling external support and domestic investment to the rural sector constitutes one of the most effective ways to promote faster economic growth and sustainable development, as well as being the most direct means to reduce poverty, eradicate hunger and conserve the environment. During the Governing Council meeting, Governors representing the Fund's Member States addressed these themes and emphasized the relevance and importance of the rural dimension in financing development.
II. Ending Poverty and Hunger - A New Context after Millennium Summit 6. More than one fifth of the world's population live in extreme poverty. Some 1.2 billion people live on less than one dollar a day. About 75% of the poor, or 900 million people, live in rural areas and depend on agriculture and related rural crafts, trade and services for their livelihoods. Among the poor, women and households headed by women are the most vulnerable and account for a growing majority of the extreme poor. This 'feminization of poverty' is deeply worrying for the well-being of future generations. 7. At the Millennium Summit, the international community took up the challenge to halve poverty and hunger by 2015. In September 2000, world leaders at the Millennium Summit undertook to "halve, by the year 2015, the proportion of the world's people whose income is less than one dollar a day and the proportion of people who suffer from hunger". Low consumption is only one dimension of poverty: it is linked to other dimensions such as malnutrition, illiteracy, short life expectancy, insecurity, powerlessness and low self-esteem. Aware of the multi-dimensionality of poverty, Member States of the United Nations adopted a multi-targeted approach, including development, education and health goals in the United Nations Millennium Declaration, the apex of which is the poverty-reduction goal. 8. Achieving the MDGs requires more rapid, broad-based economic growth. The rate of poverty reduction during the last decade was substantially lower than that achieved in the previous two decades. In fact, it was less than one third the rate needed to halve extreme poverty worldwide by 2015 - and in sub-Saharan Africa, six times less. In the case of the latter, an estimated rate of gross domestic product (GDP) growth of 7% a year is needed to achieve the Millennium poverty target. In many low-income countries, given the importance of the rural sector in employment and output, the best - sometimes the only - way to raise the overall rate of economic growth and promote broad-based and sustainable development is through more rapid rural development. 9. Reaching the MDGs will require sound policy and governance and additional financing on highly concessional terms. Development must come from within the countries themselves, based primarily on domestic capacities and resources mobilized through a self-sustaining process of production, savings and investment. In this context, the role of national policies cannot be overemphasized. Yet an increasingly interdependent world requires enhanced collaboration among, and coordinated action by, all stakeholders, private and public, to foster a sustainable growth process and address the long-term challenges of financing development. Halving poverty and hunger by 2015 will require establishing a policy framework that encompasses, on the one hand, domestic policies that allow poor groups full and fair access to opportunities opened up by reform programmes and, on the other, international policies that improve access to export markets, enhance resource transfers to developing countries and promote international monetary and financial stability. 10. The FfD conference comes at a particularly opportune time to focus world attention on an agenda for action to attain the MDGs. The FfD conference is a major opportunity for the international community to translate the political commitments made at the Millennium Summit into concrete action. How best to mobilize the resources necessary to achieve the goals and determine the priority areas for allocating these resources should be at the centre of the FfD conference's deliberations. A key aspect in this regard is how to enhance the impact of development cooperation so as to reach the poor, where they live, and to mobilize greater support for their own efforts to earn a viable livelihood and thus work their way out of poverty. III. Looking at the Numbers and Beyond - The Poor and the Challenges Faced 11. Most of the world's poor live in Asia and Africa, but there is significant poverty elsewhere. Of the 1.2 billion people living in extreme poverty, more than two thirds live in Asia and the Pacific; South Asia alone accounts for nearly half of this group. About one fourth live in sub-Saharan Africa, where people in extreme poverty account for about half of the population. Poverty, life expectancy and related social indicators have actually worsened in sub-Saharan Africa in recent years under the assault of civil strife, the AIDS pandemic and natural disasters. There are also serious pockets of poverty in Latin America and the Caribbean and in the Near East and North Africa, especially in uplands and other marginal areas in the former, and in semi-arid zones in the latter. 12. Some 75% of the world's poor currently live in rural areas, and rural poverty is likely to predominate for decades to come. Countries use different national consumption/poverty thresholds and rural-urban borderlines to estimate poverty. Taking these considerations into account, IFAD's Rural Poverty Report 20011 and World Bank studies, such as its 1997 Rural Development - from vision to action,2 estimate that about three quarters of the extreme poor currently live in rural areas. Even under high assumptions of economic development and rural-to-urban migration, 60% of the extreme poor are likely to be in rural areas in 2020 and 50% in 2035. 13. Who are the poor and what challenges do they face? Most of the poor are smallholder farmers, landless agricultural labourers and other poor rural groups such as artisans, fisherfolk and forest dwellers. Rural women, tribal and indigenous peoples and populations living in dryland, resource-poor zones prone to degradation are particularly vulnerable to both chronic and transient poverty. The Rural Poverty Report 2001 underlines that the lack of access of poor groups to assets such as land and water, technology, equitable markets, financial services and supportive institutions are among the main elements entrenching poverty. Moreover, while enhancing the poor's access to productive inputs is essential, creating the conditions in which they can participate in local decision-making, what is sometimes called the empowerment of the poor, is crucial to enabling them to become agents of change themselves. 14. In Asia and the Pacific, where over 800 million people are poor, poverty is mainly concentrated in rural areas. Nearly 40% of the rural poor are found in less favoured areas - remote uplands and mountains, marginal coastal areas and drylands. The most common feature of the rural poor is lack of access to productive assets. Major constraints facing small and marginal farmers include lack of access to appropriate technology for rainfed and marginal areas and to financial and other support services. About 70% of the world's indigenous peoples, many of whom are particularly vulnerable, live in Asia and the Pacific. Women run an especially high risk of being extremely poor, often facing great difficulties in raising their incomes and lifting themselves out of poverty. Improving women's ownership and control of assets, reforming the property and usufruct rights of marginalized minorities and indigenous peoples, and expanding the capabilities of the poor and the vulnerable are essential to reduce rural poverty in the region. 15. In Africa, there are 290 million poor, the large majority of whom live in rural areas. In Western and Central Africa, poverty is mostly concentrated in the drought-prone Savannah agro-ecological zone, which depends on cereals, cotton, groundnuts and livestock. Poverty is related to household size, education and the sex of the household head. The poorest households are subsistence food growers without livestock. In Eastern and Southern Africa, the incidence of poverty is highest among smallholder farmers, herders and fisherfolk. Nonetheless, the growth potential of smallholder agriculture is quite high, providing that measures are taken to ensure more equitable access to land and water, and the development of market linkages and infrastructure. 16. In Latin America and the Caribbean, according to the World Bank poverty assessment methodology, there are 78 million poor, whereas poverty estimates from the Economic Commission for Latin America and the Caribbean (ECLAC), using a different methodology, place the number of poor at 211 million, with 77 million in the rural areas.3 Indigenous groups and peasant communities constitute the largest groups of the rural poor. Smallholder farmers in arid and semi-arid regions and landless workers throughout the region are other substantial poor groups. Some 64% of the rural population in the region live below the poverty line. Rural impoverishment is strongly associated with the gradual loss of productive land, reflecting abuse, discrimination, civil strife and limited information regarding property rights. Other factors affecting rural poverty are low public investment in education and health in rural areas; lack of investment in rural infrastructure; insufficient delivery of agricultural support services; and failures in dealing with heterogeneity, gender and ethnicity in rural areas. 17. In the Near East and North Africa, where there are 55 million poor, the incidence of poverty is higher in rural areas. The major groups of the rural poor include rainfed farmers, artisan fishermen, pastoralists and wage labourers. The highest incidence of poverty is found among displaced persons, woman-headed households and ethnic minorities. Inadequate access to land and water and the negative effects of droughts and floods have a major impact on the livelihoods of the rural poor. They face such challenges as water and land constraints, small farm size, technological constraints, and the lack of informal or community-level financial institutions. Low population density makes it more difficult to market output and to provide access to education and health services. Civil-society institutions (marketing cooperatives, savings and credit associations and local resource management committees) that allow interaction with modern political, administrative and economic institutions are underdeveloped. 18. In the transition countries of Central and Eastern Europe, where there are between four and 12 million poor, depending on the poverty line parameters chosen to account for the characteristics of some middle-income countries, there is significant poverty in all countries in rural areas - especially among pensioners and farmers who cannot produce enough food for self-sufficiency. The rural poor are mostly small-scale farmers, wage earners, woman-headed households and displaced persons, with the most severe poverty found in upland and mountainous areas. Poor farmers are characterized by small farm size, fewer livestock, and irrigation or water control on only a small proportion of their land. Since there are few off-farm income opportunities in upland areas, most of the men migrate, leaving women, the elderly and children on the farms. The breakdown of institutions has been at the root of poverty at the household level, particularly in rural areas, where there is less access to medical care and education than in urban areas. However, in most of the transition countries, literacy rates are high, as is life expectancy. Moreover, child mortality and population growth rates are well below the developing-country average. 19. In all regions, defending the environment requires improving the asset base of the poor and developing effective community-based institutions. Experience demonstrates that the alleged conflict between poverty and the environment is a false problem. Improved access to and control of different types of assets enables the poor to use resources more sustainably, raise their output and reduce their vulnerability. Equally important is developing effective community-based institutions for the management of common resources. Creating the conditions that allow the poor to identify their problems and develop their own solutions, enabling them to become agents for change, is the key to environmentally sustainable development and poverty reduction. Evidence from Africa, Asia and Latin America shows how communities can strongly influence the environmental impact of economic activities located in their areas.
IV. The Millennium Development Goals and the Financing for Development Conference 20. Six main themes have been agreed on for the FfD conference. These are: (i) mobilizing domestic financial resources for development; (ii) mobilizing international resources; (iii) integrating developing countries into the world trade system; (iv) increasing international financial cooperation; (v) promoting debt reduction and viability; and (vi) enhancing the coherence of the international monetary, financial and trading system in support of development. While the Conference concentrates on these separate themes, its focus of course should be on the attainment of the MDGs. The fact that the bulk of the poor live in rural areas, and will do so for the near future, underlines the centrality of rural poverty and rural development in the 'poverty problematique'. The financing and policy requirements of the rural sector thus merit specific attention and priority. Indeed, "Financing Development - The Rural Dimension", the theme of the Governing Council, will become increasingly crucial as the international community seeks to implement the commitments made at the Millennium Summit. 21. Agriculture and the rural sector, as a source of food, raw materials, employment and markets, have crucial backward and forward linkages with virtually every other part of the economy. In fact, the poorer the country, the larger the share of agriculture in GDP, total employment and exports. Promoting agriculture and rural efficiency and eliminating the bottlenecks that these sectors face in such countries should therefore be at the core of a development strategy that bases poverty reduction on national assets and capabilities. Yet, paradoxically, even as the international focus on poverty has strengthened over the last decade, the share of ODA going to agriculture and the rural sector, where the bulk of the poor live, has decreased, while total ODA itself has declined significantly. Consequently, ODA for agriculture has fallen sharply, from DAC countries for example, by nearly 50%, from USD 4.9 billion in 1988 to USD 2.5 billion in 1999.4 In parallel, domestic resources for agriculture and other productive activities of the rural poor have dropped in many developing countries. In sub-Saharan Africa, for example, government expenditure on agriculture has fallen from 6.2% of total expenditure in 1990 to 3.9% in 1998; in South Asia, from 8.4 to 5.4%; in Latin America, from 3.2 to 1.9%; and in the Near East and North Africa, from 4.1 to 1.1%.5 22. These declining trends in investment in agriculture and the rural sector - domestic and external - must be reversed for the Millennium Summit poverty goal to be achieved. Together with appropriate policies that encourage savings, investment and output, substantially greater resources must be mobilized to finance the development efforts required. As noted earlier, in the medium run, sustainable development has to be - and can be - based on growing domestic savings and investment, especially private investment. Nonetheless, external resources have often played a significant part in launching the development process in many countries. One example is provided by the United States in the nineteenth century, when British long-term capital financed the growth of the railway system and helped to open up the farmland of the Midwest. Such external resources can come from foreign direct investment (FDI), trade exchanges and development assistance. However, FDI, like its domestic counterpart, requires a certain level of human skills, transport, communications, power and other physical infrastructure, together with a supportive policy and legal environment. The skewed geographic distribution of FDI underlines this point. Rapid growth of exports, on the other hand, requires better market access, and growing domestic supply capacity to take advantage of such access. 23. Development cooperation in the form of ODA, used imaginatively and effectively, can play a crucial catalytic role. ODA, unlike FDI, is within the realm of government decision-making. Used properly, ODA can leverage and combine with domestic investment to help foster the institutional and physical infrastructure necessary to attract private investment and thus jump-start a sustainable and dynamic process of private investment and growth. It has to be underlined in this context that the role of ODA is not to substitute private resources, whether national or international, but to contribute to creating the policy and material conditions in which they can be mobilized and used effectively to promote sustainable development. In IFAD's experience, microfinance and other rural financial institutions are particularly important in this context. Such institutions can mobilize very substantial domestic resources for the productive activities of the poor - including the resources of the poor themselves. They can also serve as a cost-effective means to channel assistance to the poor (see Box 2).
24. In spite of the critical role that ODA can play in launching development, ODA to developing countries actually decreased in real terms by some 22% between 1991 and 2000. Against the United Nations target of 0.7% of the gross national product (GNP) of the donor countries for ODA, in 2000 ODA as a percentage of the GNP of the 23 donor countries forming the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) was 0.22% (about USD 53.7 billion). Moreover, this declining ODA flow had to be shared by a growing number of recipient countries, due to the emergence of new countries in transition during the 1990s. In fact, Eastern Europe and Central Asia received 23.5% of ODA in 2000 as against 3.5% ten years earlier. The brunt of the reduction in ODA flows fell on sub-Saharan Africa, whose share over the 1990s fell from 37.2 to 27.2%, while that of South Asia fell from 12.2 to 10.1%.6 Thus, the two regions with the largest concentration of poverty saw significant reductions in ODA flows. 25. Achieving the MDGs will require a doubling of ODA. The International Monetary Fund (IMF)/ World Bank Development Committee has estimated that an additional USD 54 billion per year would be required to achieve the MDGs (see Box 3). This would mean approximately doubling the present ODA levels to about 0.45% of DAC member countries' GNP, which is still far below the international 0.7% target. Recently high-level representatives of some G-8 countries have called for the effective doubling of ODA. Progress in this regard would provide a strong and welcome sign of global solidarity at a time of considerable uncertainty in the international economy and polity. The current global economic downturn is affecting developing countries harshly just when poverty reduction has been given a new international focus. In this context, it would be a sad commentary on the strength and character of international financial cooperation if developing countries were forced to tighten their belts further in the face of recession while industrialized countries adopted expansionary policies to support their employment and growth. To achieve the MDGs, it is also necessary to extend gender equality and women's empowerment with necessary budgetary allocations for mainstreaming in financial resources and development. Of similar importance is the promotion of women's participation in financial institutions.
26. International assistance for agriculture and rural development has fallen sharply. As noted earlier, the volume of DAC bilateral ODA for agriculture fell from USD 4.9 billion to 2.5 billion between 1988 and 1999. The share of agriculture in multilateral development bank lending has also declined. World Bank lending to agriculture, two decades ago over 25% of its total lending, has now declined to about 7%, or about USD 1.1 billion in 2000. Lending to agriculture from the regional development banks has also fallen substantially. In fact, except IFAD, all other multilateral financial institutions have reduced lending to agriculture.7 27. Financing for agricultural research has been one
of the victims of declining ODA flows. Global public goods, like their
domestic counterparts, tend to be underfunded. Agricultural research is
a particularly important example. Funding for the research institutions
of the Consultative Group on International Agricultural Research (CGIAR),
for instance, fell steadily through the 1990s and at the end of the decade
was some 10% lower than at the beginning. As a consequence of the decline
in publicly financed research, agricultural research is now increasingly
in the hands of private corporations, which respond to market demands
rather than to the needs of poor farmers who have limited purchasing power.
Thus, their focus is on the crops and animals of rich farmers in temperate
zones, and not on those of poor farmers in dryland conditions. This is
especially true with regard to the new research methods provided by biotechnology,
which are directed largely towards crops grown in the richer countries.
In parallel with this decline in resources for research, growth rates
in crop yields of cereals, roots and tubers, which provide the bulk of
food to poor people, have declined quite substantially. In the case of
cereals, for example, rates have fallen from 2.8% in 1971-1981 to 1.6%
in 1991-1998. 29. A number of innovative mechanisms for concessional resource transfers to developing countries have been explored in recent years. One example is the Italian Debt Swap initiative, under which Italy has cancelled official debts in countries like Egypt, and the local resources released are to be used for poverty eradication and social sector investments. Other mechanisms are also being explored and need to be reviewed carefully. (See Box 4).
V. Foreign Direct Investment - Its Role in Capital Inflows and Technology Transfer 30. FDI has become a major element of external financing. Notwithstanding the fall in ODA, external financing to developing countries has doubled over the last decade. This increase was entirely due to the fourfold increase of private flows, which overshadowed the reduction in ODA. FDI to developing countries rose dramatically during most of the 1990s, from USD 35 billion in 1991 to USD 185 billion in 1999, before falling back to USD 176 billion in 2000. The share of FDI in the GDP of developing countries jumped from less than 1.0% to about 2.5% over this period. However, FDI went largely to the more advanced middle-income developing countries, which, according to World Bank data, received nearly 93% of FDI in 2000. 31. Low-income countries failed to participate in the surge in FDI flows. While FDI to low-income countries rose from USD 3 billion in 1991 to USD 12 billion in 2000, their share of total FDI fell to 7%, substantially below the 1991 proportion. Least-developed countries (LDCs) received only an estimated USD 4.5 billion in FDI in 2000. Moreover, the bulk of capital flows to LDCs went to five countries that attract FDI for extractive industries such as petroleum and minerals. As noted earlier, FDI will go to countries that provide the appropriate physical and policy environment. For low-income countries, ODA and public investment can play a critical part in helping to create such conditions. Enhanced ODA flows should therefore be seen as a complement to private flows to low-income countries, in fact almost as a precondition. 32. Sub-Saharan African countries have had particular difficulties in attracting FDI. Their difficulties reflect insufficient market size, poor infrastructure, political uncertainty, the quality of governance and restrictive policy regimes towards foreign investment. However, several African countries have recently improved the environment for FDI by easing restrictions on FDI inflows, entering into international agreements involving investment guarantees and dispute settlements, and concluding bilateral investment treaties to protect foreign investors' interests. These reforms have led to some diversification of FDI inflows towards activities outside the resource-based sectors that have traditionally dominated FDI to sub-Saharan Africa. Countries that are not major exporters of oil or minerals received about half of FDI inflows to sub-Saharan Africa from 1995-2000, compared with only 24% in 1991-94. For example, Lesotho, Mozambique, the United Republic of Tanzania and Uganda (countries that receive the bulk of their FDI in agriculture, light manufacturing and utilities) saw sharp increases in FDI flows. African countries over the last year have taken the initiative to establish the New Partnership for Africa's Development (NEPAD). This initiative, originating in Africa itself, provides the opportunity to create the conditions to attract investment (including foreign investment), raise savings and launch the region on a process of sustained development and more rapid poverty reduction. It has been widely welcomed by the international community and merits sustained external support. 33. There are some areas in which FDI could play an important role in helping poor groups. The provision of agricultural services linked to input supplies and marketing services are important examples. Manufacturers of fertilizers, pesticides and other inputs have shown interest in helping to set up distribution systems and in providing information on the use of these inputs, much as they do in their home markets. Similarly, international food processing companies are already providing marketing services for certain types of crops. Under proper conditions and with full information about prices, these services could grow to the mutual benefit of both poor farmers and the companies. Another area of interest is agro-processing. Agricultural businesses are already active in some countries in agro-processing activities; and here again, under proper conditions and balanced agreements, investment in agro-processing could generate employment for the rural poor while providing remunerative markets for smallholder production. Horticulture and vegetable and fruit processing are examples of areas in which such activities have already started and could expand. 34. FDI can boost technology transfer, but technological
levels are not likely to converge without substantive actions by all stakeholders
to bridge the technology or 'digital divide'. Increasing return-to-scale
properties of innovation, relevance of the size of the market in providing
incentive to innovate, and the need for a complex system of supporting
institutions to encourage innovations make the technology levels in the
North and the South less likely to converge. Enhanced policy coherence
across the North and the South and complementary actions by all stakeholders
are necessary conditions to boost FDI inflows, spur knowledge diffusion
and enable all developing countries to develop and bridge the technology/digital
divide. Developing countries have the primary responsibility to adopt
policies that attract and expand the benefits of long-term private capital
inflows. This includes improving the investment climate, human skills
and social and physical infrastructure, and promoting regional integration.
Industrialized countries are responsible for establishing codes of conduct,
emulating best practices, disciplining investment-diverting and monopolistic
behaviour - including expanding consumer protection - and ensuring that
comparative advantage is the predominant determinant in the deployment
of FDI flows. Development and financial institutions are responsible for
providing technical assistance for capacity-building, advisory services
for information-sharing and financial leverage for investing in human
capital, connecting marginalized regions, promoting production and export
diversification, and catalysing public and private funds for investment-enhancing
development programmes. VI. Towards a Development Round of Trade Negotiations 35. International trade has long been recognized as an engine for development, but to play this role, developing countries need better market access for products of interest to them and support in expanding capacity. The agreement reached at the Fourth World Trade Organization (WTO) Ministerial Conference in Doha, Qatar, (November 2001) to launch a new round of trade negotiations creates the expectation that the international trading system will be significantly improved. The hope is for a Development Round that will truly stimulate development worldwide, benefiting both industrialized and developing countries. 36. Trade openness enhances growth and welfare by improving production efficiency through specialization based on comparative advantage. Trade openness also stimulates investment efficiency, due to increased market size and greater access to capital goods. It further helps raise productivity, as a result of the diffusion of technological advances and faster knowledge growth and allocative efficiency arising from stronger competition. But to benefit fully from trade, developing countries need to establish appropriate institutions and policies and the necessary infrastructure and services that encourage growing export production capacity.
37. The comparative advantage of many developing countries lies in labour-intensive production such as agriculture and low-technology manufactures. Textile quotas are to be abolished by 2005, but tariff barriers remain high. High tariffs for agriculture commodities and continued subsidization of agriculture in many OECD countries have detrimental effects on agriculture exports and world commodity prices, and severely affect developing countries' export earnings and growth possibilities. The application of phytosanitary requirements can serve as an additional barrier. Such obstacles are particularly difficult for small-scale producers of export crops and labour-intensive manufacturers since they have less access to market information and less assistance to attain the required standards. Special measures are needed to help such producers benefit more fully from greater market access. 38. Reducing tariffs for agriculture commodities and eliminating OECD agricultural subsidies and trade barriers against agricultural and textile products will be part of the forthcoming WTO negotiations. These subsidies and other measures are estimated to amount to USD 324 billion annually (i.e. more than six times the amount of ODA flows) and ought to be eliminated. Their elimination, however, could increase prices of food and other agriculture commodities. In the transition period, this may adversely affect vulnerable groups in poor, food-deficit countries. In this context, greater technical and financial support is essential to stimulate the production response from higher prices. At the same time, additional food aid may be needed during the transition period. 39. Some industrialized countries are starting to provide tariff-free access to the products of LDCs. In the "Everything but Arms" initiative, the European Union is offering tariff-free access for LDC exports. If similar measures were adopted by other OECD countries, it has been estimated that the benefit would be equivalent to a significant proportion, perhaps as much as one fourth, of the net annual ODA flows to LDCs.8 If measures were accompanied by adequate technical and financial support to promote a strong supply response, this would constitute a solid base for building a trade-oriented development strategy and validate the courageous reforms that many LDCs have introduced in recent years. 40. Enhancing the supply response of developing countries to trade opportunities is essential. Multilateral and bilateral financial and development institutions should complement national efforts to remove supply-side constraints, improving trade infrastructure, diversifying export capacity, strengthening institutional development, and enhancing overall productivity and competitiveness. Multilateral assistance is also needed to stabilize the export revenues of countries that still depend heavily on commodity exports, e.g. activating the IMF Compensatory Financing Facility. VII. Reducing the Debt Burden on Poor Countries 41. The burden of debt on poor countries has been recognized over the last few years as a major issue in their efforts to promote development and reduce poverty. The Debt Initiative for Heavily Indebted Poor Countries (HIPC) was an imaginative response to try to address this issue and to reduce the debt of these countries to sustainable levels. At present, 38 countries qualify for assistance under the Initiative. As of December 2001, 24 countries had reached their decision point under the enhanced Initiative framework and are receiving debt service relief, which will amount to about USD 36 billion, a reduction of some USD 20 billion in the net present value of their outstanding stock of debt. 42. Linking debt relief to poverty reduction: the Poverty-Reduction Strategy Paper (PRSP). Countries seeking assistance under the Debt Initiative are required to have a poverty-reduction strategy in place at the decision point, and to have made demonstrable progress in its implementation by the completion point. PRSPs, prepared by country authorities with broad participation by civil society, are vehicles for developing such strategies. They translate the principles into practical plans for action and are intended to strengthen country ownership of poverty-reduction strategies, broaden the representation of civil society - particularly local institutions and associations of the poor - in the design of such strategies, improve coordination among development partners and reduce overlapping conditionality (see Box 6).
43. Early indications suggest that relief under the Debt
Initiative has helped governments to raise social spending, but the rural
sector has often been by-passed by this increase. Social spending
in countries of the enhanced decision point are projected to increase
by an average USD 1.7 billion per year during 2001-02, or some 1.2% of
GDP.9 Unfortunately, many PRSPs have paid
inadequate attention to agriculture and the rural sector, and to ODA flows
as a whole. In most of the poor countries eligible for the Initiative,
agriculture is especially important as a source of livelihood for the
poor. Accordingly, it is critical that PRSPs give appropriate priority
to strengthening resource allocations for the rural sector, and this issue
should be addressed in the review of the PRSPs that is being undertaken.
For its part, IFAD has participated fully in the Initiative and is working
with the World Bank, IMF and other concerned institutions, and in particular
with the countries themselves, to ensure that the needs of rural development
are reflected fully in the PRSP process. This is an issue that requires
urgent attention. VIII. Systemic Issues and Policies Supporting Development and Poverty Reduction 44. Systemic issues regarding the coherence and consistency of international monetary, financial and trading systems in support of development are critical in determining the external context of development efforts. Actions taken in the trade field can undermine efforts made in development cooperation, and the stability (or lack of it) in the international financial system can impinge severely on poverty reduction. This was seen in 1998 when some countries in South East Asia saw sharp increases of poverty levels arising from a financial crisis whose origins were primarily outside the countries involved. 45. The FfD conference provides a good forum for a systematic
consideration of these issues with participation from developing countries.
Stronger coordination of macroeconomic policies in ways that allow developing
countries to play a meaningful part is important in today's globalized
world. It will help to promote a more open trading system and more predictable
and stable financial flows to developing and 46. Good governance at the international level is also essential for sustainable development worldwide. Broadening and strengthening the representation and participation of developing countries in global economic decision-making and norm-setting bodies is essential to ensure the soundness and ownership of agreements, codes and standards, and their effective implementation. To these ends, further action should be taken to help developing countries build their capacities to promote and defend their interests in multilateral fora. This should include providing adequate funding to initiatives such as the Integrated Framework for Trade-Related Technical Assistance 10, which helps coordinate the technical assistance provided to developing countries to enable them to derive greater advantage from the world trading system. IX. Summary Issues for Consideration 47. In the new context created by the Millennium Summit, there is a now greater urgency for the international community to ensure that economic trade and development policies are made more coherent and supportive of the goal of halving the proportion of people living in extreme poverty by 2015. In this connection, the following are a number of issues that Governors may need to consider:
X. The Millennium Development Goals - IFAD's Role 48. Poverty and chronic deprivation have throughout history been a sad but seemingly inevitable aspect of human society. Yet now, the experience of the last 40 years of development and poverty reduction gives grounds for real hope that poverty can be reduced substantially within a reasonable period of time. It was this understanding that inspired the Millennium Summit Declaration. In fact, ending mass poverty has been recognized as perhaps the most important challenge facing humanity in the first decades of this new Millennium. 49. For the first time, multilateral and bilateral development agencies are all starting to focus on this challenge. This creates important new opportunities for an institution like IFAD to reinforce its own efforts and to use its extensive experience of reaching the poor to contribute, in collaboration with its national and multilateral partners, to achieving the goal of reducing poverty by half by 2015. 50. IFAD's current lending level of about USD 450 million per year draws forth considerable cofinancing from its development partners, allowing the Fund to support poverty-reduction programmes with a total annual investment of about USD 1 billion. Each year these programmes directly reach about two million households - or about ten million men, women and children -offering them fundamental support for their productive activities. By 2015, IFAD programmes are likely to reach some 150 million poor people directly, and many million others indirectly. 51. Inevitably, not all these direct beneficiaries will be able to use the support to work their way out of poverty in a sustainable way. The poor are vulnerable to far too many uncertainties, natural and man-made, for that. Nonetheless, evaluations of IFAD programmes, including a study undertaken in 1999 of a representative sample of some 40 completed projects, suggest that a large proportion of beneficiaries do succeed in raising their incomes very substantially and do move out of poverty. What is perhaps even more important - in their own eyes - is that these very poor groups, especially women, can gain a position of dignity in their communities. 52. IFAD programmes, of course, depend on the investments made by many other partners, especially the countries themselves, which finance infrastructure, help develop financial and other institutions and provide health, education, extension and other services. At the same time, the Fund's experience shows that the introduction of an innovative poverty programme, supported by an external agency, helps to leverage domestic resources in favour of these poor rural groups, which otherwise may not have occurred. This catalytic effect, together with the direct support for their productive activities that IFAD-type programmes bring, is especially important for the poor since it helps them to take advantage of infrastructure and other development programmes. A large-scale water-control programme, for example, will be of little benefit to poor farmers unless tertiary canals are built that reach their farms. Similarly, a major national road is useful to them only if their isolated villages are connected by local-level roads and they can increase their productivity to generate produce for sale. These are elements that are covered in IFAD interventions, helping the poor to access benefits from investments by the larger financing institutions and governments. 53. To achieve the poverty goal endorsed by the Millennium Summit, a much larger volume of support that directly helps smallholder farmers and other poor rural groups to increase their productivity and incomes is essential. Spokesmen of major donor countries have in recent months called for substantial increases in ODA. It would be reasonable to hope that a fair share of these additional resources can be channelled to the poor where they live - the rural areas - and to support the activities that provide them their livelihood. 1/
IFAD, Rural Poverty Report 2001: The Challenge
of Ending Rural Poverty, IFAD, Rome, 2001.
|
 |
 |
 |
