Ethiopia: Joint Staff Assessment of the Poverty Reduction Strategy Paper

Report
from International Monetary Fund
Published on 27 Aug 2002
Prepared by the Staffs of the IDA and IMF

Approved by Callisto Madavo and Gobind Nankani (IDA)
and José Fajgenbaum and G. Russell Kincaid (IMF)

August 27, 2002

I. INTRODUCTION

1. The Poverty Reduction Strategy Paper (PRSP) of the Government of Ethiopia continues the broad thrust of policies that have been debated and developed internally in Ethiopia over the past decade to reduce poverty. It builds on the Interim PRSP presented to the boards of the Bank and the Fund in March 2001. The strengths of the strategy are (i) a strong country ownership and a broad-based participatory process; (ii) a sound diagnosis of the poverty situation; (iii) an appropriate emphasis of the importance of rural and agrarian development in the lives of the poor, with a recognition of the importance of private sector development to increase nonfarm income and generate growth; and (iv) a welcome stress on investing in human capacity, as demonstrated by the reorientation of expenditures from military outlays toward social spending.

2. However, as recognized by the Government, the PRSP remains a work in progress, and the strategy needs to be further elaborated in a number of areas, including more detailed work on the costing of programs; a further examination of the linkages between growth and poverty; and, more specific policy measures to encourage private sector and agricultural development, and to tailor the strategy in light of the evolving process of decentralization. The government is working on each of these areas, and an update can be expected by the time of the first annual PRSP progress report.

3. Several factors condition the approach to the PRSP in Ethiopia. First, due to historical circumstances, the government has placed a high priority on the welfare of the poor and the equitable distribution of the benefits of growth to rural areas, and it has adopted a more interventionist approach than generally prevails elsewhere. Second, the scale of the development challenge in Ethiopia is almost unparalleled, with a population of over 65 million people and one of the world's lowest per capita incomes, at only US$100 per capita. Third, frequent droughts and limited agricultural productivity relative to population pressure have generated an overriding concern about food security.

II. THE PARTICIPATORY PROCESS

4. In the staff's view, the PRSP accurately describes the deep and wide-ranging set of consultations undertaken by the government in preparing the PRSP. Free and open consultations moderated by representatives of civil society were held in over 100 out of 550 woredas (districts). Comprehensive regional and national-level consultations debated all key policy areas. The consultations were observed and attended by independent and donor observers, in whose view they were open and free of interference by the government or the ruling party. The nongovernmental organizations (NGOs) established an independent NGO task force to contribute to - and monitor - the consultative process, while the Chamber of Commerce established sectoral working groups to feed into the consultations. Both have welcomed the process and expressed their satisfaction with it. The draft PRSP was discussed internally within the government and the Parliament, and with civil society, NGOs, and donors.

5. The PRSP consultations have constituted an unprecedented participatory process. This is the first time in Ethiopia that any consultations have been held without government moderators, and they may have established a new set of expectations with respect to public debate of policy issues. The principal drawback was that consultations served mostly to provide reactions to the government's existing policies and programs, rather than to craft new ones. However, it needs to be recognized that this is a new process in Ethiopia, and that the government has already begun to place greater emphasis on issues that were raised during the consultations, especially private sector development reforms and decentralization. The government has indicated its intention to further deepen the participatory process for the implementation and monitoring of the PRSP; however, the institutional arrangements for steering this process and for public monitoring of the implementation of the PRSP have yet to be delineated, and the role of local governments clarified.

III. POVERTY DIAGNOSIS

6. The PRSP presents a comprehensive description of the levels and spatial distribution of income and non-income poverty, on the basis of two in-depth household surveys undertaken in 1995/96 and 1999/2000,1 and of other existing data. The analysis reveals large differences in income poverty and social indicators across regions, which underscores the importance of the government's regionally differentiated poverty reduction strategy. The most recent survey data only became available while the PRSP was being prepared, and more time is needed to review the results and link them more directly to policy actions. Among other things, future work in this area should include an analysis of poverty incidence by sources of income and employment category.

7. The analysis of the determinants of poverty is sound and integrates qualitative assessments of poverty based on the woreda-level consultations. The World Bank and Fund staffs agree with the broad conclusion that overall income poverty has hardly declined over the last five years, although some social indicators - particularly those related to schooling - have significantly improved recently. The PRSP recognizes the link between poverty and rapid population growth, which has led to high dependency ratios, pressures on natural resources, and strains on the education and health systems. The first annual PRSP progress report will need, however, to present a more detailed discussion of the economic, social, and institutional causes of poverty, including by drawing on systematic qualitative poverty participatory assessments and quantitative poverty analyses. The question of vulnerability, particularly food security and HIV/AIDS, is discussed at the aggregate level but could be elaborated further at the household level.

8. The discussion in the PRSP of the linkages between growth and poverty is welcome, even though it is preliminary and partial. However, the assessment of the dynamic impact of past policies on poverty and of the links with sectoral strategies needs to be further developed. The staffs welcome the planned in-depth analysis of the actual and potential contribution that various sectors can make to the incomes of the poor. The staffs also encourage the government to conduct with donor support and incorporate in the first annual PRSP progress report poverty and social impact analyses in the areas of concern indicated in the PRSP, such as the impact of the introduction of the value-added tax (VAT) in January 2003 and the impact of the recent decline in coffee and cereal prices.

IV. THE POVERTY REDUCTION STRATEGY

9. The poverty reduction targets for the medium and long term are ambitious but achievable, and are consistent with the Millennium Development Goals. They include (i) a reduction of income poverty by about half by 2015,2 and from 44 percent in 1999/2000 to 40 percent in 2004/05; (ii) a reduction in infant mortality from 97 per thousand in 1999/2000 to 85 per thousand by 2004/05; and (iii) an increase in the gross primary school enrollment rate from 57 percent in 2000/01 to 65 percent by 2004/05.

10. Underpinned by the maintenance of macroeconomic stability, Ethiopia's poverty strategy focuses on promoting agriculturally led, rural-based growth, while improving the environment for exports and private sector growth. Although agriculture is expected by the authorities to play the key role in their growth strategy, other sectors, in particular manufacturing, electricity and water, construction and the service sectors, are expected to grow at higher annual average rates. The agriculturally led strategy is espoused both because agriculture is seen as the largest immediate source of primary surplus and because the poor are concentrated overwhelmingly in rural areas. This policy is buttressed by an emphasis on investment in education and infrastructure, coupled with improved social services, especially with respect to health and access to safe water. In the last few months, the government has also put considerable emphasis on the need for a major push in capacity building, in order to accelerate decentralization and to intensify efforts in judicial and civil service reform. The broad thrust of this strategy is appropriate and well tailored to Ethiopia's conditions.

11. A number of important issues have not been adequately covered, such as uneven implementation capacity, the degree of specificity of some aspects of the reforms in agriculture, and private sector development. On the last one, although measures to encourage foreign and domestic private investment and to promote private sector growth are limited and lack specificity, several recent developments are encouraging, including the authorities' willingness to adopt a new federal urban land lease proclamation and to embark on enhanced consultations with private sector organizations to discuss their ideas.

Footnote

1 The Ethiopian fiscal years cover the period from July 8 to July 7.

2 The analysis presented in the PRSP indicates that this can be achieved if real GDP grows by 5.7 percent per annum until 2015, assuming constant elasticity of poverty with respect to growth.

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