Discussion Paper on
Development AssistanceNo. 2

The “Poverty Trap” and“Public Expenditure Management”- In Pursuit of a New Development Model -Shigeru Ishikawa

August 2006

The “Poverty Trap” and “Public Expenditure Management”- In Pursuit of a New Development Model -※Discussion Paper on Development Assistance Number 2

Shigeru Ishikawa（Professor Emeritus, Hitotsubashi University）

August 2006

※ I would like to thank Takamasa Akiyama, Shinji Asanuma, Yasutami Shimomura, Toru Yanagihara, Yoshio
Wada and two anonymous referees, for their valuable comments on the draft of this Discussion Paper. I am also
grateful to the Japan International Cooperation Agency (JICA), particularly its Indonesia Department; theInstitute for International Cooperation; the Japan Bank for International Cooperation’s JBIC Institute,
Development Assistance Strategy Department and Development Assistance Department IV; the Foundation for
Advanced Studies on International Development (FASID) as well as Ryozo Hattori and the Institute of
Economic Research, Hitotsubashi University, for their assistance in collecting necessary materials for this paper.
The views expressed in this paper are those of myself and do not necessarily represent the views of FASID or
any other organization. Responsibility for any errors in this paper rests with the author.

Table of Contents
I.

Introduction ................................................................................................................1
1.
Discovery of New Analytical Perspectives
2.
Organization of the Discussion PaperII.

The “Poverty Trap” as Seen from Participatory Poverty Assessment (PPA)
Surveys .........................................................................................................................5
1.
What is PPA?
2.
Poverty Surveys Conducted by the World Bank: The Transition
3.
4.

5.

Conclusions from PPA Reports : Common Patterns of Poverty
Poverty Trap and Poverty SpiralForms of Shocks (or Triggers): Survival Strategy;
Importance and Effectiveness of Institutions
Observations from PPA Reports: Those Who Fall into the Trap andThose Who Move up from the Trap
Empirical Confirmation and Mechanism of Declining Households“Quintile Transition Matrix” of Household Poverty Status andDynamics of Poverty
Promotion of Coping Strategies for the Poor: CDD, Infrastructure
Building, etc.
Escaping and Climbing Out of Poverty: Long-term Challenges ofIndustrialization

III.

Public Expenditure Management (PEM): Hidden Potential Resources .......................18
1. The Advent of PEM and its Three Contexts
The Emergence of GovernanceEmphasizing PEM Reform
2. PEM Reform Models in Developing Countries
The History of Budgetary Systems in Western Nations
Current Issues on the Reform of Budgetary Systems
Linking Policy, Planning and Budgeting
Role of Medium Term Expenditure Framework (MTEF)
3.
PEM Issues in Low-Income Countries: Gap with Developed
Country Model.
4.
Observations from PEM Literature: Political Will and Institutional-1

Reform
ODI and Experiences of Five African Nations;
Commonalities between African Institutions andOrganizations; PEM in Vietnam: “Political Will”
and the Three-Year Reform Plan
IV. Framework for Macroeconomic Balance .....................................................................39
1.
Concepts of Stability, Poverty Reduction and Structural Reform
2.
Coexistence of Growth and Poverty Reduction: Macroeconomic
Policy Framework3.
“Debt Sustainability” in Heavily Indebted Countries
V.

Conclusion ....................................................................................................................46

Postscript ...............................................................................................................................48
Bibliography ..........................................................................................................................57
Endnotes ................................................................................................................................60
Graphics
Table 1: ..................................................................................................................................14
Table 2: ..................................................................................................................................28
Figure 1:.................................................................................................................................400I.

Introduction

In the 1990s, the World Bank and the International Monetary Fund (IMF)
conducted a review of their past aid policies and concluded by declaring “poverty
reduction” to be the primary goal of their development assistance to low-income
developing countries, a shift from the previous primary goal of growth promotion in all
developing countries. I am in accord with this shift in primary goal as it makes explicit
the (natural) ideal of development for low income countries and as such takes animportant step in the evolution of international development policy. However, I cannot
escape from a strong feeling that the new poverty reduction strategy documents so far
published by the IMF and the World Bank do not comprise an effective development
model that indicates the set of development and aid policies by which the primary goalof poverty reduction in low income countries can be achieved. The present discussion
paper represents a preliminary step toward defining a new development model forreaching that goal consistent with the assumption that “poverty reduction” means“sustainable poverty reduction based on the promotion of growth.”A
As a means for attaining the poverty reduction goal, the World Bank devised the
Poverty Reduction Strategy Paper (PRSP) process. In a separate discussion paper
recently issued, I examined some problems with the PRSP system, focusing on three
aspects – “aid systems,” “development models” and “relief systems for highly indebted
poor countries (HIPCs)” (Ishikawa 2003). The present paper focuses on thedevelopment model aspect. Underlying the paper’s analysis is the thesis that resolutionof the development model problem is essential (although perhaps not sufficient) for
improvement of the PRSP system so it can more effectively facilitate both growth andpoverty reduction.B
Insufficient understanding of the nature of underdeveloped market economies andindustrial structure is at the heart of the development model problem. The PRSP process
fails to recognize the decisive importance of measures for nurturing modern industries,
including complete product and factor markets, in essence measures to encourage
growth and the building of modern industries necessary for sustainable poverty
reduction. One consequence of this has been a strong tendency in low-income countries
towards the crowding out of investment expenditure fundamental to growth, commonly
when countries with low savings rates try to meet high donor demand for poverty
reduction measures. There is also cause for concern that the poverty described in official
documents is based on presuppositions drawn through desk work in Washington, or in
the capital cities of developing countries, and does not accurately reflect the economic1reality of poor people and regions.
When I prepared my previous paper, I had no means for addressing theseshortcomings. But since then, I have made progress.
1.

Discovery of New Analytical Perspectives

At first, beginning in the mid-1990s, the World Bank conducted country/region
specific qualitative research on the poor using the methodology of the Participatory
Poverty Assessment (PPA) promoted by the Bank itself. Individual reports ofassessment results were made available one after another. I have come to realize that thesituations of extreme poverty illustrated in these reports describe poor households
caught in poverty traps, or, more accurately, in downward poverty spirals. If this poverty
reality could be reflected in a development model that appropriately considers therelative positions of such poor people and regions within their countries, the credibilityof poverty reduction as an explicit aim would be enhanced.
Subsequently, beginning in the mid-1990s as well, a considerable literatureappeared on “governance-related conditionality” and on “aid coordination”. The
governance-related conditionality was for aid to poor countries, especially in Africa,
and the aid coordination was aimed at donors providing budgetary support. This
literature called on developing countries to strengthen, among other things, the linkages
between previously little noticed components of Public Expenditure Management(PEM) — policy making, planning, budgeting and performance monitoring — inparticular, the linkages between PEM and poverty reduction. Given these emphases, it
seemed to me that important impetus for growth exists in PEM-driven fiscal
management, and thus also in the reform of macro-economic management bygovernments. This complements the reinforcement of industrial policy, which I havebeen advocating over the years. While there still remains a knot of unresolved issues
with regard to macroeconomic management, if PEM reform continues, the effectivenessof macroeconomic management, one of the major pillars for realizing growth-based
poverty reduction, will increase.
My paramount challenge in this discussion paper is to launch a reconsiderationof the development model issue from a platform created by these two new
methodological concepts — PPA and PEM. To do this, I first analyze the economic
cycle of households or regions identified by PPA studies as mired in poverty traps orpoverty spirals. I proceed from there to an analysis of PEM that appropriately links key
2components mentioned above.
This study is preliminary because the country-specific PPA and PEM reports
currently available and to which I refer to are limited mainly to Vietnam and Ghana. To
generalize significantly the results of my observations, I will need to obtain, scrutinize
and summarize reports covering a far greater number of countries. Moreover, thedifferences between Vietnam and Ghana go beyond their initial conditions as
low-income developing countries and may, to some degree, reflect differences between
Africa and Asia in nature, culture and tradition as well as differences in political, socialand economic stages of national development. If a more aggressive theory, even ahypothetical one, can be constructed that incorporates these differences, it will facilitate
future analytical research covering a larger number of countries.
2.

Organization of the Discussion Paper

PPA surveys and PEM reform are important new development aid policy
instruments initiated by the World Bank and the IMF in parallel with the PRSP system.
Because they are little known in Japan, I devote much of Section II and Section III to
explaining their importance, the context of their emergence and their main outlines. I
then discuss how the knowledge and policy implications to be gained from them can betransformed into elements of a new development model, and, accordingly, contribute to
an improved PRSP system.
Findings from PPA surveys strongly suggest that in the poor regions of
low-income countries, the considerable number of households that are at the thresholdof poverty constitute a group vulnerable to serious shocks, both internal and external.
When these households just above the income poverty line do encounter shocks, theirposition may deteriorate, sending them into a poverty trap, or it may improve,
depending on the coping strategies employed. Change in poverty rate at the national
level refers to net figures arrived by offsetting increases and decreases. Any new
development methodology should acknowledge and incorporate this two-way
movement. In addition, the coping strategies adopted by households in vulnerable
groups should be identified so that measures supporting them can be prescribed in apractical manner as part of public policy. (Section II)
Important findings from PEM-related materials suggest that fiscal revenue andexpenditure mechanisms and cash flows are surprisingly unsophisticated in developing
countries, something largely unnoticed when we look at development issues only from3the perspective of the real economy. Behind this situation is an absence of politicalagreement, leadership and administrative discipline. The PEM program proposed by theWorld Bank and the IMF is a standard fiscal reform, finding its ideal model in the
neo-liberal “New Public Management” (NPM) approach implemented in Western
nations since the 1970s. For a PEM program to be successful and release new fiscal
resources, a broad range of institutional and organizational reforms are necessary. These
reforms include modernization at the political and societal levels, possibly beyond
adjustments that might already have been made. Thus, any improved development
model must incorporate a comprehensive mechanism that will focus not only on theeconomy but also on politics, administration and society, beginning with prescriptions
for comprehensive institutional and organizational reform. (Section III)
Section IV will deal with an analytic framework for achieving macroeconomic
balance, indispensable for a new development model. It will also deal with an analytic
framework for debt sustainability which must be realized before analysis and policy
management under the macroeconomic framework are implemented in heavily indebted
poor countries. Although they are not the main focus of this paper, discussion of thesesubjects is unavoidable. Take Section II as an example: Public policies to support
coping strategies for vulnerable groups include measures that compete for spending,such as strengthening regional communities, assisting agricultural and ruraldevelopment, building infrastructure, and implementing and supporting industrialization
by direct production activities. They also require that a choice be made between the“pro-poor targeting” approach and the “broad-based growth” approach as a way to
reduce poverty. Section III highlights the backwardness of public-sector expenditure
management in low-income countries in general and the need for PEM reform if such
backwardness is to be overcome and if further steps to carry out sweeping structuralreform of political and administrative systems are to be taken. But actual conditions
differ greatly from country to country, putting constraints on financial, human andinstitutional resources available for implementation of the above-mentioned public
policies. Accordingly, it is clear that decisions based on prescriptions gained from these
two sections will not be effective unless they are preceded by macroeconomic balanceand debt management. Because these are not central topics of this paper, I will not go
beyond presenting and briefly commenting on an outline of the framework prepared by
the World Bank and the IMF.
Section V provides a summary of insights into the development model that areyielded by PPAs and PEM.

4

II. The Poverty Trap As Viewed through Participatory Poverty
Assessment (PPA) Surveys
In this Section, I examine, from a new analytical perspective, static and dynamic
characteristics of poor households in low-income developing countries as revealed by
PPA surveys.
1.

What is a PPA?

The PPA is a methodology developed by the World Bank in the early 1990s to
examine and analyze poverty. It can be characterized in a nutshell as “an instrument forincluding the perspectives of the poor in the analysis of poverty and the formulation ofstrategies to reduce it.”C When asked about poverty, the poor see poverty not only froman economic viewpoint but also from political, social and psychological viewpoints,
which are more qualitative than quantitative.
PPA surveys go beyond the household unit to the individuals who constitute thehousehold, including male heads of family and housewives. (Gender differences areimportant, especially in light of social conventions in Africa.) Site selection is purposive
and the surveys focus on the properties of the community and region to which thehousehold belongs and which influence it in various ways. They focus also on the staticand dynamic mechanisms involved in poverty; i.e., what causes people to become pooror escape from poverty and with what coping strategies.
PPA methods and characteristics are unlike traditional household surveys which
focus on physical indicators, such as living standards as defined by income and income
distribution. The PPA uses open-ended interviews and discussion topics which the poor
can choose. By contrast, traditional household surveys employ a closed-end method,
meaning that they are quantitative studies for analyzing the economic activity of allhouseholds in a country or region or of sample households selected at random.D Sincemany important elements of poverty are still unknown to statistical researchers, theclosed-end method fails to capture the diversity of poverty and elicits limited knowledge
about it.E Yet, as I have indicated above, the findings of traditional household surveys
complement PPAs. (Robb 2003; Narayan 2000 I)
2.

Poverty Surveys Conducted by the World Bank: The Transition
The World Bank began to take an interest in poverty issues during the era of5

President Robert McNamara and Chief Economist Hollis B. Chenery. In World
Development Report 1990: Poverty, which clarified the new strategy of incorporating
poverty reduction approaches fully into Bank operationsF, the World Bank took an
aggressive approach to its review of international aid policies (Ishikawa 2002 II). The
new strategy consisted of two important elements: (a) adoption of a wide range of
growth policies to create labor demand, and (b) widespread provision to the poor ofbasic social services, especially primary education and primary health care, so that they
could benefit from access to the results of growth. To promote the implementation ofthis strategy, a country-specific “Poverty Assessment” was required to be conducted ona regular basis. The objective was to understand the reality of poverty in each country,
to determine whether government policies, public expenditure and systems werecompatible with the aim of overcoming poverty, and to propose necessary reforms. The
Poverty Assessment involved quantitative data, including economic profiles of the poorsuch as the poverty line, social demographic characteristics, income sources, owned
assets, consumption and access to services. The data was obtained through national
household surveys.
For three reasons poverty reduction operations could make little progressG,
especially in the African region. (World Bank Annual Reports 1991, 1992, 1994;
Narayan 2000 I), Firstly, there was delay in the implementation of reliable national
household surveys (as of the date of publication of the World Development Report 1990:
Poverty, only 24 countries had conducted poverty assessment); secondly, poverty
assessment activities were carried out in a limited number of countries — 20 by the endof 1990 and 39 by the end of 1994; and thirdly, there were the information constraints ofclosed-end quantitative surveys explained above. It was against this background thatafter 1994 PPA surveys became important sources of information for poverty
assessment. PPA survey data accounted for 20% of all poverty assessments conducted in
1994, and from 1996 to 1998, the rate increased to 50%. In 1999, the number ofcountries that conducted poverty assessments was 113, covering more than 90% of theworld’s poor countries. (Narayan 2000 I; World Bank Annual Report 1999).
PPA poverty surveys can be divided into two groups, depending on when they
were conducted. Surveys in the first group were conducted in the 1990s and covered
60,000 poor men and women in 60 countries. The second group of surveys took place
after 2000. (I have read only some reports of the 2000 results.) It is advisable to further
divide the first group and view the surveys conducted in 1999 (targeting 20,000 poor
men and women in 23 countries) separately from those conducted earlier. The earlier
surveys were called “Consultations with the Poor Study” or “Voices of the Poor Study.”6

It is those which served as background for the World Development Report 2000/01:
Poverty, from which the theoretical foundation for the PRSP system was built.
3.

Conclusions from PPA Reports - Common Patterns of Poverty

Deepa Narayan, Economist for the World Bank in charge of PPAs, presented theconclusions from the PPAs of the 1990s in two books. The first book (Narayan 2000 I)
covers the whole of the PPAs conducted in that decade while the second book (Narayan
2000 II) focuses on the 1999 survey. Essentially, PPA surveys deal with “contextual”
subjects which are greatly affected by country-specific initial conditions. This makes it
difficult to generalize their findings. Nonetheless, Narayan’s summary extracts
important points from country-specific surveys and puts them together successfully as
common patterns irrespective of each country’s situation. Although the summary has tobe read with some caution, it is well worth reading for reference. I will briefly introduce
five main points from the summary of the first book. From the second book, I will only
present the important points that complement the first book.
The five main points from the book Voices of the Poor: Can Anyone Hear Us? areas follows:(1) Poverty is an interlocking multidimensional phenomenon. The bottom line isalways hunger — the lack of food. Poverty also has important psychological dimensions
such as powerlessness, voicelessness, dependency, shame, and humiliation. Poor people
lack access to basic infrastructure — roads (particularly in rural areas), transportation,and clean water. The illiteracy rate among poor people is high. Poor people suffer frompoor health and illness. Finally, poor people lack income, not only money but also, andespecially, physical, human, social and environmental assets. In many areas, thisvulnerability has a gender dimension.
(2) The state has been largely ineffective in reaching the poor. Although thegovernment’s role in providing infrastructure, health, and education services isrecognized by the poor, they feel that their lives remain unchanged by government
interventions. The poor also report vast experience with corruption as they attempt toseek health care, educate their children, claim social assistance or relief assistance, getpaid by employers, seek protection from the police or justice from local authorities.
(3) The role of non-governmental organizations (NGOs) in the lives of the poor
is limited, and the poor depend primarily on their own informal networks. Poor people
7

give NGOs mixed ratings. In some areas, NGOs are the only institutions people trust.
However, poor people sometimes also report that, besides being rude and forceful, NGOstaff members are poor listeners. Informal associations and networks may help the poor
to survive, but they serve a defensive function, and usually do little to move the poor outof poverty.
(4) The household as a social institution is crumbling under the weight ofpoverty. Men, unable to adapt to their failure to earn adequate incomes under harsheconomic circumstances, have difficulty accepting that women are becoming the main
breadwinners and that this necessitates a redistribution of power within the household.
The result is often alcoholism and domestic violence on the part of men and a
breakdown of the family structure. Women, by contrast, tend to swallow their pride andgo out into the streets to do demeaning jobs, in fact, to do anything it takes to put foodon the table for their children and husbands. However, this neither helps improve
women’s status in society nor eliminates gender discrimination within the household.
(5) The social fabric — the bonds of reciprocity and trust which is the only
insurance available to the poor -— is unraveling. The reasons are: (1) only the elite haveaccess to new opportunities in harsh economic environments. the poor are excluded; (2)when men are forced to migrate to find employment, family members left behind are
unable to maintain community networks; (3) as a result of the breakdown of social
networks, people’s awareness of social norms weakens at the community level, leading
to increased crime and violence where the police and judicial systems are not working
effectively.1
4.

Poverty Trap and Poverty Spiral

I want to highlight the significance of the 1999 PPA surveys by describing somepoints that constitute the dynamic aspect of poverty issues. They are: (1) forms of
economic shocks that lock the poor into the poverty trap or become triggers for adownward spiral; (2) coping or survival strategies on the part of the poor in response to
the economic shocks; and (3) the importance and effectiveness of institutions for thepoor.
Forms of Economic Shocks (or Triggers)
In the 1999 PPA studies, surveys of shocks (through “analysis of situations”) wereconducted for 125 cases. Forms of shocks in the order of frequency recorded are:1

This paragraph was complemented by materials from Chapter 6, Narayan 2000 II.
8“disease, injury or death of a breadwinner,” “loss of employment or decline intemporary and seasonal wages,” “expenditure related to life-cycle, excluding aging,such as birth of a child, school fees, dowry, wedding ceremonies, etc.,” “life-cycle
related to aging,” “increased living costs,” “natural disasters and environment
deterioration,” “divorce,” “decline in profit from farming,” “decline in business profit,”and “decline in income and delay in wage payment.” Gender differences and regional
differences affect this ordering. By region, the poor in Asia regard a loss of employment
or decline in wages as the second biggest shock, following injury or death of thebreadwinner. In Africa, loss of employment is ranked at the bottom, although, as in Asia,
injury or death of the breadwinner is ranked highest.
Survival Strategy
When the poor face shocks, the range of survival strategy options available tothem is very limited. They often are forced into trade-offs of one bad thing for another.
Narayan calls these trade-offs “agonizing choices.” For example, the poor will often sell
their production equipment or property to pay medical bills. By doing so, their loved
one may be cured but they soon face another crisis — hunger. Data from PPA surveys
conducted in many countries show that such trade-offs are frequent.
Importance and Effectiveness of Institutions
In the 1999 surveys, poor people were asked how important, how effective or how
ineffective they thought various institutions were.H Since the questions were open-ended,judgment criteria varied from person to person. Narayan compiled data from all thesurveys and derived the ratings of institutions. The ratings for importance are based on
how frequently an institution was mentioned by poor people at each survey point(community). For effectiveness/ineffectiveness of institutions, those listed as important
are ranked based on poor people’s evaluation at each survey point. Overall ratings are
determined after the institutions are divided into three groups: state institutions, civic
institutions (which are further divided into community-based organizations for the poor,
NGOs, religious organizations, local leaders and relatives/families), and market
institutions (private companies, moneylenders, etc.) What is interesting is that state
institutions account for 45% of the institutions considered important, 33% of theinstitutions considered effective, and a whopping 83% of the institutions consideredineffective. For civic institutions, the rates are 50%, 60% and 15%, respectively. The
corresponding rates for market institutions are 7%, 7% and almost 0%.
5.

Observations from PPA Reports - Those Who Fall into the Poverty Trap andThose Who Move Up from the Trap
9

In Section I, I noted that PPA reports provide fresh analytical perspective toestablish the new development model which is our aim. The value of the PPA surveys
lies in the huge number of findings contained in their country and region specific reports.
Although I have not read all of them, those which I have read have given me clear
insight in several new directions. In this section, I will explain how we apply PPA
perspective to our research, along with related research information, both old and new.
First, it should be noted that according to official economic documents, PRSPs are
written to reduce poverty on a headcount ratio basis and in many countries, figures doshow improvement. Rapid progress in Vietnam is noteworthy. The country’s poverty
rate steadily fell from 58% in 1993 to 37% in 1998 and to 29% in 2002.2 In Ghana, thepoverty rate continued to rise from the 1960s to 1983, but declined from 52% to 40%
between 1991/92 and 1998/99.3 (Since the statistical definition of poverty rate varies
from country to country, a direct country-to-country comparison is not possible.) This isconsistent with the Millennium Development Goal (MDG) of halving the global
proportion of people living in extreme poverty between 1990 and 2015, from 30% to
15%.
But there is a problem here because in the backdrop of changes in the overall
poverty rate lie three distinct groups of households: (i) households which have climbed
out of poverty, (ii) households which have fallen into poverty, and (iii) households
which have remained poor. Distinctions among these groups are hidden because theabove data represent net figures. PPA surveys reveal the different movement patterns
among the three groups which we can then explore. I will discuss the second group, thedeclining group whose households have fallen into poverty, and then the first group, therising group whose households have climbed out of poverty.I
Empirical Confirmation and Mechanism of Declining Households
For the declining group of households, if the external process of descending intopoverty and the relevant mechanism are clarified, and if the details of survival strategies
or more general coping strategies of the poor are understood, as well as the experiencesof governments, communities and NGOs that have tried to help them, this will help us
draft a development model providing effective prescriptions for poverty reduction.
Thanks to the PPAs, an increasing amount of empirical research data on aspects ofdeclining households is becoming available.
2 Government of Vietnam-Donor-NGO Poverty Working Group (2003)
3 World Bank (1995), World Bank (2001), and IMF (2003)

10

When households face shocks in various forms, they may try to cope with them byselling assets (or borrowing money using assets as collateral). That may well be themoment they begin the fall into poverty. As shown above in Subsection 4, “Survival
Strategy,” some poor households sell their production equipment and assets to pay
medical bills when a family member (particularly the breadwinner) becomes ill. Even if
the illness is successfully cured, the family will have difficulty recovering because theequipment and assets are gone. Different situations in different regions of Tra Vinhprovince in Vietnam’s Mekong Delta illustrate the possibilities. Tra Vinh is one of four
provinces covered by the 1999 PPA survey of Vietnam. In the 1990s, in one of thepoorest areas of this province, many households in distress borrowed money bymortgaging their farm land, which they had acquired through land reform, to begin
shrimp farming. The shrimp farming business was expected to bring in a lot of money if
successful, but the probability of failure was high (0.5) and many people lost theirmortgaged land. In a fairly rich area in this same province, by contrast, where an
irrigation system had been installed through public investment, many of the households
turned, not to shrimp farming, but to the cultivation of high-yield varieties of rice. The
success rate for this endeavor was 90%, so these households were able to repay theirdebt and are becoming prosperous.4
Coping strategies incorporate not only physical assets owned by households, butalso social capital such as embodied in the local community. This is apparent in 1999
PPA case studies covering two other provinces in Vietnam, Lao Cai and Ha Ting, as
well as from 1995 PPA case studies of Ghana (particularly provinces in the northernsavannah). Local communities provide important refuge for households facing shocks,
but this is not without problems. Reportedly households increasingly pay more (gifts for
special events such as weddings and funerals, and various types of contributions) tomaintain community functions, thus receiving less net benefit. It is also reported thatwhen breadwinners relocate to distant places due to work, many households lose contact
with their local community. (Vietnam-Sweden Mountain Rural Development Program,
1999) (Action Aid Vietnam, 1999) (Norton, Aryeetey, Korboe and Oogle, 1995)“Quintile Transition Matrix” of Household Poverty Status and Dynamics ofPoverty
Detailed, comprehensive empirical research has begun to analyze the mechanismof dynamic change in poor households. The research focuses on specific regions/groups
4 Oxfam Great Britain (1999) particularly, Fig.1, Fig.2 and description of the process of households
losing land (pp.25-26).

11and households. Researchers record the poverty status of households at different timeintervals based on household surveys and interviews conducted at the same time. The
purpose of the research is to estimate, based on the data collected, the “transitional
function” over time with regard to changes in assets, the most crucial factor in thechange of poverty status. The results from Vietnam studies were compiled into a“Transition Matrix,” Table 1.
In Vietnam, household living standard surveys (VLSS) and interviews wereconducted on 4,304 households, first in 1992/1993 and then in 1997/1998. The
transition matrix into which the results were compiled shows changes in the poverty
status of households and was disclosed to the public through a brief announcement.
Table 1(1) shows that 64% of the households in the “very poor” category in 1993 had
moved up by 1998. On the other hand, 34% of the households in the “very poor”
category in 1998 had earlier been in the higher categories. Table 1(2) is a more detailed“quintile transition matrix” compiled around the same time by dividing households into
five categories on the basis of their expenditures. Here, the same trend can be seen.
For households in the “vulnerable group,” positioned between the poor category
and the non-poor category and living on the poverty threshold from which they move up
or down, a numerical estimate was made for the first time based on the PPA surveys
conducted on the nation’s 43 communes in 2003 and the national household living
standard surveys (VHLSS). The estimate was that as of 2002, on a nationwide basis, thevulnerable group accounted for 28.9% of the population who were below the poverty
line, 6.7% of the population who were 10% above the poverty line, and 10.2% of the
population who own no material assets with which to cope with shocks.5
A group at Cornell University surveyed sheep farming communities in the savanna
region in northern Kenya and southern Ethiopia. By establishing a similar transition
matrix and using it as base material, the group succeeded in estimating for the first timethe “transitional function” in this area of research. With regard to shifts between social
strata based on the number of livestock owned by sheep-farming households, theCornell survey found three equilibrium points which are common to both regions. One
is a stable, low-level equilibrium (the “poverty trap”), a second is a stable, high-level
equilibrium (rich households) and the third is an unstable intermediate dynamic
equilibrium in between which is positioned on the threshold. If sheep-farming
households cross the threshold upwards, they can wander freely with increased livestock
5 Government of Vietnam-Donor-NGO Poverty Working Group (2003), no estimate of a transition
matrix was made, but Table 1.4 shows the ratio of quintile expenditures in 1993, 1998 and 2002.

12

within vast meadowland. But if they fall below the threshold level, they will have to sell
their livestock one after another, thus falling into a poverty trap. Such households
become settled farmers, owning perhaps one dairy cow and a patch of field, but theysoon become unable to support themselves because of their low productivity. (Lybbert,
Barrett, Desta and Coppock, Barret and MacRock, 2004.

13

Table 1
Poverty status of all the households and Poverty Transition Matrix for Vietnam,
1993 to 1998
(1) Poverty Status Transition Matrix
Poverty Status in 1998
Poverty Status in 1993

Very Poor

Poor

Non Poor

Total

Very poor

8.2

7.6

7.1

22.8

Poor

3.5

9.4

20.3

33.3

Non-Poor

0.8

4.0

39.2

43.9

Total

12.4

21.0

66.6

100.0

Note: 1.

World Bank estimates based on VLSS93 and VLSS98.

2. Dark shaded cells indicate the percentage of panel households whose poverty status did not change
between 1993 and 1998.
3. “Very Poor” is the group of households below the “Food Poverty Line.

“Poor” is the group ofhouseholds between the “Food Poverty Line” and the “Total Poverty Line.” “Non-Poor” is the group ofhouseholds over the “Total Poverty Line.”
Source:Government of Vietnam─Donor─NGO Poverty Working Group (1999).

(2) Expenditure Quintile Transition Matrix
Expenditure Quintile, 1998
Expenditure
Quintile, 1993

1

2

3

4

5

Total

1

448

230

124

51

8

861

2

237

259

217

115

33

861

3

113

207

218

230

93

861

4

47

125

214

282

193

861

5

16

40

88

183

533

860

Total

861

861

861

861

860

4304

Note: 1.
2.

World Bank estimates based on VLSS93 and VLSS98.
Quintile 1 is the poorest and quintile 5 is the richest. Quintiles are defined on the basis of unweighted per
capita expenditures for the 4,304 households interviewed in both VLSS93 and VLSS98. About 40% ofhouseholds were in the same expenditure quintile in both years. These households are shown by thedark-shaded-cells along the diagonal of the transition matrix. The expenditure ranking of another 40% ofhouseholds moved up or down by one quintile between 1993 and 1998. These households are shown by
the light-shaded cells in the transition matrix. The remaining 20 percent of households moved up or
down by two or more expenditures quintiles.

3.

It is possible that some of the households whose quintile ranking is unchanged between the two years
have higher income in 1998 than in 1993, taking account of the increase in per capita income between the
two years.
Source: World Bank estimates based on VLSS93 and VLSS98.

14

Promotion of Coping Strategies for the Poor: CDD, Infrastructure Building,etc.
Livestock assets in sheep-farming regions correspond roughly to the farmland andagricultural production equipment and materials referred to earlier in connection withsurvival strategies. If we discern the process revealed in the table above which draws
households hovering around the threshold level down into the poverty trap, we will havea general understanding of the mechanism of impoverishment. In Narayan’s PPA
summary of the 60 countries surveyed, social capital such as families, relatives andlocal communities played the role of assets. Paragraphs (4) and (5) of the PPA note thatthe loss of access to this social capital precipitates a fall through the threshold into thetrap; underlining the importance of public policies that can prevent or reverse this “fall”
mechanism.
What public policies would these be? To answer this question, we turn toinformation in Narayan’s report on the 23-country 1999 PPA surveys. This reportpresents the comparative assessments of poor people themselves of the potential
importance and actual availability and effectiveness of the three major types of
institutional organizations which impact on their welfare: the state, civil society and themarket. Civil society, which includes local communities, relatives and family members,
was rated as the most important and effective organization. The state and the market
were seen as much less important and effective. Evaluation of the public policies
common to the three institutional organizations and their comparative evaluation seems
to depend largely on the particular stage of economic and social development of thecountry.J But the results of the 1999 surveys offer insight into public policies that
support the role of local communities.
One relevant issue is the Community Driven Development (CDD) program,which has been strongly promoted by the World Bank, especially its Africa Region,over the past few years. This is a rural development program for strengthening local
communities by giving them policy-making and implementation authority with a viewto achieving substantial reduction in poverty levels (World Bank African Region
undated). Some anthropologists have voiced reservations about the CDD approach,apparently on basis of the experience of a French aid organization working in the Sahelregion of Africa (Platteau J.P. and F. Gaspart 2003). They claimed that although donororganizations intended to provide benefits directly to the poor, the benefits wereappropriated by community leaders acting as intermediaries. The poor were aware ofthis situation, but did not confront the community leaders as long as they, too, werereceiving some benefit, however small it might be, because “it’s better than nothing.”
15

This phenomenon is not limited to Africa and can be seen in virtually any aid programof this type. As a counter to this criticism, I refer to a very different situation reported by
the PPA surveys of Vietnam. In that country, except for the Mekong Delta region wheremost of Vietnam’s rice for export is grown and where the market economy has
developed rapidly in recent years, communities still play an important role in facilitating
community engagement to help the needy.
The absolute importance of communities in coping strategies has been
decreasing due to continued population pressure on agricultural land; nonetheless, therelationship of trust between community leaders and ordinary community members,
together with rich villagers’ sense of obligation to others, seems to remain little changed(World Bank and DFID 1999). Another aspect the community role in coping strategies
is the building of infrastructure, such as irrigation facilities and farm roads, throughcommunity participation. We see an example of this in the southern Vietnamese villages
where irrigation has been installed. As noted above, in those villages farmers positioned
around the threshold level chose to grow new high-yielding varieties of rice that offer ahigh success rate; whereas in villages without irrigation farmers tended to chose shrimp
farming even though the expected failure rate was known to be high. Although wheninfrastructure is built on a large scale, such as is the case with modern irrigation systems,
sophisticated technology and direct government involvement are required, Japan and
China have shown that in the presence of traditional social capital, infrastructurebuilding can be part of community activity (Ishikawa 1968).
Escaping and Climbing out of Poverty: Long-term Challenges ofIndustrialization
Many researchers write that economic development in general, or the recovery ofagriculture (in the case of farming villages), leads to a decline in the poverty rate asmeasured by macroeconomic statistics. There is little discussion in PPA reports ofmechanisms by which households “climb” out of poverty. However, one climbing
mechanism already mentioned in this paper is the use of copies strategies to protect
against shocks — such as the relatively short term mechanism used by the Vietnamese
farmers who switched to high-yielding varieties of rice. A longer term mechanism forescaping poverty identified by numerous studies is industrial modernization and theensuing collapse of old, rigid systems. The case of farming villages in Japan during the
Meiji and Taisho eras (1868 – 1925) provides one illustration of this mechanism.
Initially, the rural poor in Japan were usually tenant farmers (kokata) who worked under
the direction of landlords in the “tenant-landlord system” (tezukurikosaku-seido), thebasic agricultural production system in Japan at the time. But with the establishment of
16

industrial zones after the Japanese-Russo War and WWI, many poor peasants moved tolarger cities and became urban factory workers. With this huge loss of manpower, the“tenant-landlord system” collapsed and was replaced by a system characterized inJapanese as the “parasitic landlord system,” a quasi-absentee landlord arrangement. The
case of caste in India provides another illustration. Poverty in rural areas of India is
deeply interrelated with the caste system but the caste system is undergoing change. In
particular, people at the bottom (outcastes or untouchables) have been climbing up outof poverty. Their movement together with urban industrialization is eroding the
traditional “Jajmani” system under which rural Indians are tied to hereditaryoccupations and paid in kind. (Ishikawa 1990, Chapter 6)

17

III. Public Expenditure Management (PEM): Hidden Potential
Resources
1.

The Advent of PEM and its Three Contexts

In its Annual Report 2001 published in September of that year, the World Bank forthe first time declared that “effective public spending is crucial for poverty reduction,and strong public expenditure management (PEM) systems are essential to ensure thatdevelopment assistance is utilized as intended” (World Bank 2001:44). PEM refers to
the management of public resource expenditures encompassing fiscal and otherspending channels. Official documents of the World Bank and the IMF also often define
PEM as the macroeconomic management both of public revenues used to acquireresources and of the private sector. The above quote, however, suggests that the twoorganizations recognize the potential of improved PEM-oriented macroeconomic
management as an additional strategic resource for poverty reduction. My immediate
interest in PEM as one of the two analytical perspectives in this paper is its strikingly
underdeveloped nature in many low-income countries, and conversely the shape andsize of latent resources that may be released through PEM reform.
To explain the possibilities, I review some of the literature on PEM reform,
starting with observations on the following three major contexts in which it occurs:(1) The issue of governance including PEM reform emerged as a key policy
reform item towards the latter part of the Structural Adjustment Lending (SAL)
policy period. It has become increasingly important under the PRSP approach that
followed. Expectations about the role of PEM reform within governance reform
have heightened. During the period 2001-2002, PEM reform came to be identified
as an urgent issue affecting the implementation of poverty reduction strategies.
(2) New Public Management, the advanced PEM reform model widely
implemented in developed countries since the 1980s, has influenced PEM reformin low-income countries in diverse ways. The models adopted by the United
Kingdom, New Zealand and Australia were particularly influential (JBIC 2001).
(3) PEM reform became an important prerequisite for major donor agreement on
the policy of “general budget support,” the latest type of aid coordination among
donor countries.
The Emergence of GovernanceAlthough the word “governance” was not used specifically in it, the World18

Development Report 1997 is often regarded as the first publication in which the WorldBank and the IMF acknowledged that governance was a key determining factor for theiraid policies (World Bank 1997; World Bank 1998, “Foreword”). 6 In reconsidering therole of the state in development, the report noted that sustainable development could nolonger be achieved solely by adopting “good policies.” Supporting institutionalarrangements and an established, effective public sector had become equallyindispensable. This was the first report in which the World Bank appeared to extend thescope of permissible state intervention in the market to cases involving non-market
adjustment methods; for example, “contest-based” competition assistance provided
during the “East Asian Miracle”. Yet according to the report of a Harvard University
Group (Kapur and Webb 2000) that studied governance-related conditionality under the
SAL system, governance issues had come to the fore in World Bank thinking as early as
the 1980s as a consequence of a reexamination of its repeated failure to bring aboutdevelopment in Africa.K Based on this history, it could be said that governance reform
was predestined to become an additional SAL conditionality item when the World Bank
established that system in 1980.
The SAL system was adopted following the two oil crises of the 1970s after theWorld Bank acknowledged that investment project lending, historically the main pillarof assistance to developing countries, was not sufficient to bring about development.
The thinking was that market economies would have to be encouraged through reformof the institutional policy frameworks of controlled or planned economies, together with
the introduction of programs to support macroeconomic stability and growth. Yet
according to assessments made by the World Bank itself, by 1990 it had become
obvious that the structural adjustment approach also had failed in low-income countries,
not to mention in middle-income ones. (Ishikawa 2001 I). It would have been possibleat that time to redress some of the structural adjustment issues through an array ofprescriptions designed to induce the growth of market economies; such as the mix ofmethods or the pace of implementation. Instead, the international aid community reliedsolely on the addition to existing prescriptions of a new item, “governance,” to bringing
about the desired change.
The advent of governance reform as a prescription for aid policies was also
directly due to political factors. The above-mentioned Harvard Group report alsostressed that the emphasis on governance was a consequence of significant shifts in theinternational political scene. The end of the Cold War created a need to reconstruct civil
6

The first time the term “governance” appeared in a World Bank Annual Report was in the Annual
Report 1998.
19

societies in the former Soviet bloc countries. Challenges to the sanctity of nationalsovereignty which previously had prevented outside interference in domestic affairs (forexample, indictments against former Chilean president Augusto Pinochet and Chadianpresident Hissene Habre from outside the countries where their crimes were committed)
were perhaps more significant. The international community’s definition of the conceptof “governance” was strongly influenced by these and other political factors.
According to Japanese aid researchers L , although the specific definition of
governance varies among major aid donors and international aid organizations, the term
broadly refers to a concept associated with (1) decisions on the type and structure ofgovernment; (2) execution of authority to manage economic and social resources fordevelopment; and (3) political authority to formulate, plan and implement policies. All
three are subject to varied interpretations by stakeholders, but the most significant
difference concerns (1) above. Whereas Western nations, the OECD and institutions of
the United Nations advocate democratization, the World Bank and international aid
organizations have preferred to remain hands-off on this issue. In part because the IBRD
Articles of Agreement forbid discrimination in lending policies based on politicalalignments of recipient countries (Article IV, Section 10), governance provisions of theWorld Bank have been limited to the efficient and effective pursuit of (2) and (3) above.
In reality, however, World Bank activities have gradually come under the strong
influences of the major donor countries that constitute its Board of Directors(Shimomura 1999; Kondo 2003).
Major donor countries affiliated with the World Bank incorporated governance inconcrete terms into the agreement for the Twelfth Replenishment of the International
Development Association (IDA) in 1998, and reemphasized it at the time of Thirteenth
Replenishment in 2002. As a result, the World Bank introduced the Country Policy andInstitutional Assessment (CPIA) system, a set of performance assessment indicators forborrowers of IDA policy support assistance. The CPIA rates borrower governments
according to twenty criteria. Five criteria fall under the cluster of “public sector
management and institutions (i.e. governance),” four under “economic management,”
six under “structural policies,” and five under “policies for social inclusion and equity.”
One economic management criterion is also counted as a governance criterion. The six
governance criteria are “property rights and rule-based governance,” “quality ofbudgetary and financial management,” “efficiency of revenue mobilization,” “efficiencyof public expenditure,” “transparency, accountability and corruption in the public
sector,” and “management and sustainability of the development program.” (IDA 2002
II).
20

Emphasizing PEM Reform
It was in this way that governance reform came to be one of the major reform
objectives of World Bank and IMF policy support lending from the 1980s onwards.
During the period 2001-2002, the debate over governance was brought into sharper
focus and PEM emerged as the core issue. This notion is supported in publications
related to PRSP co-authored by the IDA and the IMF. A report that reviewed the earlyexperience with PRSPs — covering 42 I-PRSP countries and ten full PRSP countries in
the first two years of its implementation — immediately identified near term
prioritization of the PEM system as a measure of good practice at the country level toenhance the PRSP approach.M A section in the same report titled “Governance andPEM” states the following:
Good governance and effective public sector performances are central topoverty reduction. As poverty reduction strategies are neither developed
nor executed in political vacuums, the overarching political andinstitutional context sets the parameters and constraints that shape theprospects for economic and social reform.
In the past, governance was considered too sensitive to be discussed, but thiswas no longer the case. “The importance of sound PEM is increasingly recognized”(IDA and IMF 2002 I: 7, 55-58) out of all other governance-related issues.N A PRSP
progress report written later in the same year goes so far as to state that “strengthening
countries’ public management systems will be critical for PRSP implementation” (IDA
and IMF 2002II). The World Bank Annual Report 2001 which was quoted at the
beginning of Section III also anticipated this development.
What happened in the period between the late 1980s when the issue of governancebegan to gain prominence and the years 2001-2002 when PEM evolved to become its
focal point? An examination of the following developments in low-income World Bankand IMF aid recipient countries provides us with some answers.
(1) Initially, the governance issue was rejected by those countries lacking
fundamental structures such as political unity; an established state system; minimum
policy agreements within the government, key social strata, groups and political parties;
and decision-making, political leadership and policy execution skills. Yet by the period
2001-2002, many of the same countries had reconsidered. The government of Ghana,for example, initially rejected as political interference policy reforms initiated by theWorld Bank and donor countries. Both the former Rawlings administration and its
21

successor Kufuor administration which came to power in December 2000 elections
opposed the primary goal of poverty reduction, a conditionality of the PRSP approachthat followed the SAL regime. However, the British Overseas Development Institutewhich evaluated the poverty reduction and public expenditure policies of Ghana
reported that its research team noticed for the first time in June 2001 that poverty
reduction policies were moving up the government’s agenda. (Foster, Fozzard, Naschold
and Conway, 2002). This suggests that low-income countries will consider governancereform and PEM once the appropriate political conditions have been established.
(2) “New Public Management,” an attempt to reform the public sector using
private sector management methods, became popular in developed countries during the
1980s. Many low-income countries modeled budgetary management, PEM evaluation
and reform proposals, in particular, on the experiences of New Zealand and Australia(JBIC 2001 I, 2001 II). The Public Expenditure Management Handbook published by
the World Bank in 1998 (World Bank 1998) analyzes in detail the PEM models ofadvanced countries and discusses “three levels of institutional arrangements to achieve
successful budgetary outcomes” necessary for the successful introduction of the models
in low-income countries. The three levels are “aggregate fiscal discipline,” “strategic
prioritization (allocative efficiency)” and “operational performance (technicalefficiency).” The Handbook discusses and recommends the introduction of the“Medium Term Expenditure Framework (MTEF)” (estimates of sustainable budgetary
expenditure over the medium term beyond annual balanced budgets) as a necessary
precondition for “strategic prioritization.” In reality, PEMs in the low-income countries
are ineffectual and far less sophisticated than advanced country models. At the sametime, this makes the potential for improvement extremely attractive, once again
underscoring the importance of PEM reform within the context of governance reform.
On the other hand, “deep-seated capacity constraints are often not being
adequately addressed” when advanced country models are considered for low-income
countries (IDA and IMF 2002 I: 58), perpetuating the difficulties from underdeveloped
PEMs in the first place.O The three levels of institutional arrangements discussed in the
Public Expenditure Management Handbook is reminiscent of the failures under the SAL
system resulting from the mistaken notion that market mechanisms will spontaneously
revive once a law is passed prohibiting totalitarianism (Ishikawa 1990). The fact is thatin general, the introduction of effective MTEFs is beyond the present capabilities of
low-income countries. According to publications at the beginning of 2002, the majorityof PRSP countries as well as over four-fifths of HIPCs have not integrated MTEF into
their budgetary formulation processes (IDA and IMF 2002I: 59).
223) The rethinking of international aid policies during the 1990s resulted in a
movement toward “aid coordination” among donors and between donors and specificrecipient countries. Since then, aid coordination has grown to encompass the
harmonization of procurement of aid materials (harmonization); adjustments todevelopment policies for specific sectors (sector-wide approach); and the use of acommon basket of assistance funds (common basket). More recently, aid coordination
has expanded to include Multi-Donor Budget Support (MDBS) for PRSPs in individual
countries. However, a credible standard for budgetary management must exist in
developing nations before MDBS can be introduced.
Aid coordination has been implemented in African nations where Western donor
influences are strong, but on a relatively small scale. Aid coordination was originallyconceived to handle the different procedures required for each recipient country by anincreasing number of donor countries and to reduce the burden on competent local
personnel caused by the numerous dialogues and negotiations associated with multiple
donors (often referred to as “transaction costs”). An additional reason for the existenceof MDBS is cited in a World Bank report. ODA funds traditionally flow directly fromthe donor to the responsible ministry within a recipient government and negotiations for
the ODA-assisted project are conducted with the same ministry. This means that ODA
cannot be instrumental in correcting one of the significant shortcomings of budgetary
management and PEM in low-income countries, namely the lack of linkages among
policy making, planning, budgeting and performance monitoring. Multilateral Donor
Budget Support, in the World Bank’s view, has the capacity to address this shortcoming.
One outstanding issue remains, however; the lack of capability in these countries toimplement PEM, itself The expectation is that this will be corrected through technicalassistance provided by MDBS funds.7
This concludes the subsection on the three contexts in which PEM reform has
appeared. I now make observations on PEM models of developed country models basedon the theory of New Public Management and on the current underdeveloped nature of
PEM in low-income countries (a generalized pattern).
2.

PEM Reform Models in Developed Countries
The 1998 World Bank PEM Handbook describes a normative pattern of PEM that

7

I am indebted to Mr. Noriyuki Hashimoto, JICA Project Formulation Advisor dispatched to Ghana,for information regarding Ghana.
23

low income countries can aim to achieve. Its development was based on the WorldBank’s twenty-years of experience with PEM and the PEM reform models of developed
countries. This subsection will examine this normative pattern from the perspective of
three items referred to previously: three levels of institutional arrangements to achieve
successful budgetary outcomes (i.e., aggregate fiscal discipline, strategic prioritizationand operational performance) from the World Bank Public Expenditure Management
Handbook; strengthening linkages among policy making, planning, budgeting andperformance monitoring in connection with PEM; and the Medium Term Expenditure
Framework (MTEF). A brief summary of the history described in the Handbook ofbudgetary reforms in developed countries over the past 100 years provides a usefulbackdrop to understanding the levels of development of PEM in advanced country
models and a good introduction to the examination.
The History of Budgetary Systems in Western Nations
Modern budgetary reform began around the turn of the 20th century after central
budget agencies strengthened their authority. Reform was aimed chiefly at control of
public resources and was supported by institutional arrangements whereby all revenues
were to be paid into a central fund and drawn on only by authority of the legislature.
Over time, traditional line-item budgeting became even more detailed, inhibiting
corruption. The strengths of such a system are its simplicity and lack of ambiguity, easeof comparison with prior years, and potential for control of expenditures throughdetailed specification of inputs. Critics pointed out, however, that line-item budgeting
does not insure efficiency, a primary value of budgeting. In other words, budgets
organized according to line items give no information about why the money is spent or
about the efficiency and effectiveness of the programs it is spent on, and they do nottake into account long-term costs associated with growth.
To compensate for these weaknesses, post-war budgetary reforms resulted in theformation of several new types of processes. “Performance budgeting” is a management
system which develops and sets measures of workload and unit cost across departmental
budgets and provides incentives for performance. “Program budgeting” (or more
specifically, the planning, programming, budgeting system — PPBS— adopted by the
US administration of Lyndon Johnson) is a resource allocation system that divides theentire budget into programs; measures their input, output and outcome; and allocatesmoney according to each program’s marginal value. “Zero-based budgeting,” popularduring the 1970s, calculates the annual costs and benefits of each program, in contrast to
the incremental approach taken by program budgeting. In the end, none of these systems
became firmly established, but associated budgetary reform issues, such as efficient24

resource allocation, effective management and frameworks to support growth, werecarried into the debate on PEM reform.
Current Issues on the Reform of Budgetary Systems
The Handbook states that the several objectives of budgetary reform pursued
over the past 100 years — “control of public resources,” “planning for future allocationof resources” and “management of resources” — have been reconsidered andreformulated in light of new theoretical developments The aim has become theestablishment of a public sector budgetary process that will improve simultaneously
outcomes at the three levels identified earlier: fiscal discipline, prioritization andresource allocation, and efficiency and effectiveness of programs and service delivery.
The theoretical basis for this reconsideration is aligned to the thinking behind the New
Public Management theory, that the ultimate objective of budgetary reform is to propose
and implement rules for official intervention by the public sector corresponding to the“invisible hand” of the private sector. The following commentary on the three outcome
levels are based on this perspective.
(1) Fiscal discipline
The aim of traditional line-item budgeting is to apply fiscal balance to each itemof individual budgets at the ministry level for each fiscal year. This is efficient from afiscal perspective but at the cost of resource allocation and management efficiency.
Achieving fiscal discipline with efficient resource allocation requires a budgetarysystem that determines sustainable total expenditure over a period of several fiscal years.
“Sustainability” is measured by the stability of the macroeconomic environment, and aslong as this is maintained, budget deficits are permissible. Forward estimates ofmacroeconomic indicators and fiscal revenues are required to determine aggregate
expenditure. This is called “base-line” budgeting.
(2) Prioritization and allocation of public resources
Politically-determined visions and directions for development play the role ofprioritizing the efficient distribution of scarce public resources among competing
policies and programs. Line ministries are responsible for deciding which policies andprograms to pursue and for providing individual costing, output and outcome
information. Macroeconomic outlook and decisions on expenditures follow the same
principles set out in Paragraph (1) above. The efficient distribution of public resources
depends on the standardization of information, or information and accounting systems.
Other requirements will be discussed later.

25

(3) Efficiency of program delivery
Even when there is efficient resource allocation at the national economy, line
agencies and departments in charge of budget execution need appropriate incentives ifthey are to act efficiently. This is a matter of differentiation in terms of authority
between upper- and lower-levels of government and among departments as well as
proper management of appointment and remuneration systems for civil servants at eachlevel, based on the principal-agent concept. The World Development Report 1997
provides an analysis of how the incorporation and privatization of the public sector have,
led to improved efficiencies in the delivery of public goods by fine-tuning incentive
mechanisms.
Government agencies currently delivering public goods and services are classified
into the following three categories: those that are essentially substitutes for markets or
the private sector and can be replaced by them; the public sector in the broad sense,
whose functions can be assumed by incorporated public sector or performance-based
implementing organizations; and the core public sector, where it is difficult to specify
output or to enforce performance. The government can choose to retreat from thedelivery of public goods and services in the first and second sectors. In the second andthird sectors (the public sector in the broad and core senses), the government canincrease pressure to improve delivery by providing opportunities for citizens to voice
their opinions or it can respond institutionally to encourage loyalty among civil servants.
New Zealand, regarded as the model country that successfully implemented New Public
Management, is known to have offered performance-based contracts even in its corepublic sector.8
Linking Policy, Planning and Budgeting
Policy, planning and budgeting form the core of the “planning and resource
management cycle”P of the total economy or of sectors. This represents the total process.
The failure to link these three elements may be the single most important factor
contributing to poor budgeting outcomes at the macro, strategic and operational levels
in developing countries. Successful linkage indicates an established political leadership
under which ministries in charge of policy, planning and budgeting — especiallyplanning ministries (which held absolute power in former socialist countries), line
agencies and finance ministries — distribute their responsibilities and are mutually
cooperative. The Cabinet or Council of Ministers is the nexus between politics andgovernment and it functions well when this cooperation is maintained.
8

Line-item budgeting in developed countries is known as “program budgeting.” Please refer to the
Handbook (World Bank 1998:13) for reasons for its failure.
26

The Role of the Medium Term Expenditure Framework (MTEF)
The Handbook strongly advocates the introduction of the MTEF as a means ofachieving successful budgeting outcomes at the three levels discussed above. Fiscal
discipline supports the baseline budgetary process when fiscal objectives are targeted
towards sustainable aggregate expenditure over a period of several years. Decisions on
efficient resource allocation follow the theoretical steps of the MTEF. In terms ofoperational efficiency, MTEF guarantees that predictable annual budgets will be decided,thus removing one of the difficulties of this level.
Table 2 below is reproduced from the Handbook. It is a schematic diagram
representing the seven major stages for preparing and implementing the MTEF.
Preparatory steps start with the planning process of Stage 1. This involves developing
macroeconomic projections of revenues and expenditures over the medium term (three
years) and constructing models to check the internal consistency of proposals andillustrate trade-offs between alternative uses of resources. In Stage 1, the planningministry works together with the finance ministry, the statistical agency and the central
bank. Stage 2 is the process of sectoral review, program setting and program costing. It
is the budgeting process of the line ministries and runs parallel to Stage 1. The financeministry integrates the results of these two processes through Stages 3 and 4 in which a
detailed expenditure framework and sector based ceilings are decided and submitted to
the Cabinet. The most decisive is Stage 7, where a decision-making body such as the
Cabinet, acting as a link between politics and government, determines medium term
sectoral resource allocations based on affordability and inter-sectoral priorities.

27

28

Source: World Bank (IBRD), 1998, Figure 3.3

activities

andsubprograms

agreed programs/

programs andObjectives, outputs

and capital) ofsectoral/ministry

review

years

subprograms for 3

Costing (recurrent

Agreement on

Sector/ministry

Step 3

Step 2

Step 1

Stage 2

Mutual discussions between
planning, fiscal and statisticalagencies and the central bank

Development of a macroeconomic
framework: check internalconsistencies of proposals andclarify trade-offs

Stage 1years

objectivesof sectoral program

to agree on priorities

Finance hearings

Ministry ofStage 3and sector/ministry ceilings for 3

detailed expenditure framework

Ministry of Finance decision on

Stage 4

Stage 6

Parliamentand presentation to Cabinet andwithin Cabinet approved

estimates by ministries
ceilings

Stage 7
Review of estimates in Treasury

Preparation of expenditure

Approval of ceilings by Cabinet

Stage 5

Table 2: The Medium Term Expenditure Framework: Five Stages of a Top-Down Process

3.

PEM Issues in Low-Income Countries: Gap with Developed Country Models

I summarize here the various issues concerning PEM in low-income countries thathave come to light in debates over PEM reform. Before proceeding, three points must
be clarified: Firstly, even though PEM performances appears to vary widely from one
low-income country to another, my premise is that the underdeveloped nature of PEMs
in low-income countries, as cited by World Bank and IMF documents, reflects common
failures in catching up with developed country models. Demands from donor countries
to implement inappropriately advanced models in low-income countries may have had anegative effect, yet it is difficult to differentiate these two factors.
Secondly, I draw attention to two criteria used by the World Bank when assessing
PEM: 1) whether or not expenditures are poverty-focused; and 2) evaluation of
institutions and policies in terms of efficiency of resource allocation, independent of
whether expenditures are in line with policy objectives (in other words, “policy
neutral”). I adopt the second criteria. However, I realize that interest in policy
prioritization, a key step in PEM, and perhaps even enthusiasm to achieve PEM reform,
may be lost unless government agencies orient themselves to specific policy goals andpursue them with enthusiasm. I assume this to be what the World Bank means when it
discusses poverty focus in the context of PEM analyses.
The third point is that the urgency or difficulty in resolving PEM issues isinfluenced not only by PEM itself but also by fiscal revenues and macroeconomic
management. Tax reform, macroeconomic stabilization policies (growth and inflation
rates, foreign exchange policies), and aggregate domestic and external debt issues are
intimately linked with PEM. These are country specific issues that need to be dealt withseparately. This perspective is incorporated into my examination of the scale and natureof PEM issues with reference to PEM literature,
Given the above qualifications, following is a summary of current PEM issues in
low-income countries:(1) PEM issues cannot be readily classified by categories or by factors, but their mostfundamental characteristics can be observed in the following two quotes from the WorldBank Public Expenditure Management Handbook.
Policy making, planning and budgeting take place independently of each other.
Planning is often confined to investment activities, which in many developing29

countries refers to a series of donor-funded projects. Capital expenditures are
already largely accounted for through the planning process, and a large portionof recurrent expenditures are pre-committed to the wage bill. For these reasons,annual budgeting is reduced to allocating resources thinly across donor anddomestically funded “investment” projects and to the non-wage portion of therecurrent budget. In addition, line agencies tend to budget and spend on an
ad-hoc basis because even small discretionary allocations are rarely predictable.
(World Bank 1998:31)
In the absence of effective decision-making processes, policy making and planningare disconnected from each other and from budgeting, and they are notconstrained by resource availability or by strategic priorities. Overall, this leads
to a massive mismatch between what is promised through government policies andwhat is affordable. The annual budgeting process therefore becomes more aboutscrambling to keep things afloat, rather than allocating resources on the basis ofclear policy choices to achieve strategic objectives. (World Bank 1998:32)(Effective decision-making processes referred to in the Handbook are the activities
taken by a decision-making body such as a cabinet or council of ministers thatlinks politics and government in stages 5 and 7 in the MTEF process depicted inTable 2.)
(2) We can derive from these quotes some of the shortcomings of PEM, explained in
the following paragraphs:① Weak political leadership. The above quotes imply weak control bypolitical leaders (presidents and secretaries-general) over administrative ministries.
But the situation is even more problematic. Since the 1980s, Africa has seen rapid
progress towards political liberalization. In many countries, multi-party politics
have been accepted and general elections have been held to select presidents andmembers of parliament. However, a democratic system, or its equivalent, is yet tobecome firmly established and the foundation for civil society remains weak.
Under these circumstances, it is still early for political leaders to have espoused
seriously and to use as a basis for leadership the development goals laid down byinternational organizations and aid donors,.
② Aggregate fiscal discipline. Many developing countries are not yet ready toembrace the Medium Term Expenditure Framework (MTEF); therefore, they havelittle choice but to set annual budget goals. This means that balanced budgets
30

occur rarely, as revenues are difficult to estimate. But there is an even moredecisive issue from the standpoint of fiscal discipline: the central government (i.e.,the Ministry of Finance) lacks decision making power over key expenditure items.
Most government investment projects are financed by ODA which is channeleddirectly from donor countries to relevant line ministries. This ODA financing, andother non-budgetary activities, are outside the control of the central government.
Fixed costs, including public servant wages and compensation as well as interest
payments that are high in countries with large amounts of domestic and external
debts, also are often beyond the control of finance ministries. The bottom line isthat the ratio of central government discretionary spending to overall expenditure
can be pitifully low. In Ghana, the ratio of discretionary spending to total real
expenditure was 53.1% in 2000, of which non-wage recurrent expenditure
amounted to only 7.1% (Foster and Zormelo, 2002).
③ A critical weakness is the absence, caused by a lack of political leadership,of linkages across ministries with regard to expenditures. A typical example is
the relationship between the planning ministry that formulates plans and thefinance ministry responsible for budgeting. Each independently prioritizes policies
resulting important mismatches between decisions on investment expenditures forinvestment projects (planning ministry) and recurrent costs once the project is up
and running (finance ministry). (Lack of funding for the latter drasticallydecreases the capacity utilization rate of the project.)④ Public expenditures are monitored hierarchically and inconsistently inthe administrative institutions. Independent monitoring by civil societies, NGOs
and think tanks is desirable, but the capabilities of these organizations are severely
restricted.
(3) Statistical data on public expenditures and related areas are indispensable to PEM
reform. The Handbook devotes one chapter to describing an advanced model of the“Financial Management Information System (FMIS).” The FMIS provides a set of tools
to support ① control of aggregate spending and the deficit, ② strategic prioritizationof expenditure across policies, programs and projects for allocative efficiency andequity, and ③ better use of budgeted resources, i.e., to achieve outcomes and produce
outputs at the lowest possible cost. The Handbook recommends building the entire
system sequentially and computerization is not considered an urgent issue. However, theHandbook does not address the state of FMIS in low-income countries.

31

Vietnam is one developing country whose PEM system is working well for acountry at its stage of development according to 2000 Public Expenditure Review (PER
prepared jointly by the Donor Consultative Group (CG) of Vietnam and the Vietnamese
government. It is fair to assume, therefore, that the situation in Vietnam is better than
the average for a low-income country. Nonetheless, there are limitations in Vietnam’s
PEM. For one, sectoral breakdowns of total budgetary spending cover only threequarters of total expenditures, leaving one-quarter which cannot be defined by spending
type. For another, the lack of a consolidated budget makes it difficult to determine total
revenues and expenditures. The paragraphs below provide some detail related to thislatter problem. The data used for the PER is from 1997 and 1998 national budget
statistics, which is available in much greater detail than the June 1999 General Statistics
Office publication of budgetary information. (Government of Vietnam and Donor
Working Group 2000).
Items covered by Vietnam PER:a.
Recurrent expenditures (i.e., wages and wage-related expenditures plus
goods and service expenditures for operations and maintenance).
b. Capital expenditures (funded by government resources, ODA grants andloans, including domestic and external ODA loans).
Items not covered by Vietnam PERa.
Recurrent and capital spending by ministries from “off-budget funds”
encompassing the following seven accounts: “Social Security Insurance Fund,”“Health Insurance Fund,” “National Development Support Fund (NDSF),”“Export Support Fund (former Price Stabilization Fund),” “State-owned Enterprise(SOE) Restructuring Support Fund (to cover the cost of workers made redundant
by SOE reform, to resolve SOE debt and to provide support for SOE investment),“Sinking Fund” (for that portion of ODA which must be repaid to the donor by thegovernment) and “Reforestation Program Lending Fund.” According to the
Ministry of Finance, transactions in these seven accounts amount to only about
one percent of GDP. Most are dependent on specific sources of revenue, and theaccounts cannot go into deficit by law. Unforeseen fiscal risk is limited, excluding
the NDSF. The NDSF was established in 2000 and provides financing for public
purposes through the issuance of bonds.
b. Investments by SOEs from retained earnings.
c.
Investments by SOEs using ODA (some portion of which must be repaid).
d.
All expenditures by communes (except payments made to them by higher
levels of government).
32

e.
Certain ‘fees” and “voluntary contributions” collected by local governments,
mainly at the commune level, for local services such as water and electricity,
educational contributions, contributions to local infrastructure, child assistanceand the local militia. These amounted to 23% to 61% of revenue in four out of thesix communes studied for the PER.
(4) Vietnam is burdened by the critical weakness of poor linkage across ministries
described above. It has a system of “dual budgeting” which incurs high costs because
budgeting for capital expenditures related to investment projects is undertaken by aseparate ministry (Ministry of Planning -- MPI) from that which budgets recurrent
expenditures (Ministry of Finance -- MOF). As examples of wastages, almost half of thenational road network is in “poor” or “very poor” condition, and one quarter of thebridges have considerably reduced load bearing capacity. The situation of provincial,
district and commune road networks is even worse. As a result, the World Bank
estimates that vehicle operating costs are higher by US $150 million each year then theywould be otherwise. Furthermore, most of the roads are eventually rehabilitated at a costseveral times higher than that which would be incurred as part of a proper maintenancestrategy. This is true also for inland waterways and irrigation works. The balance ofcapital and recurrent expenditure in the health and education sectors are relatively good.

33

4.

Observations from PEM Literature: Political Will and Institutional Reform

In our efforts to construct a development model, what insights into a new
analytical perspective have been gained from the above review of PEM reform? As
stated in Section I, the emergence of PEM literature has made us awareness that there isa surprisingly high level of hidden potential resources in the fiscal balance mechanismsof low-income countries. In order to release this potential, there must be PEM reformthat is deep-rooted, encompassing not just technical and regulatory reform in the narrow
sense but also fundamental change at the level of economic, social and politicalinstitutions and organizations (i.e., attitudes of leaders). This is logical when one
considers that the essence of development is not progress within the existing
institutional and organizational framework, but advancement accompanied by changes
to the institutions and organizations themselves.9 I stress, therefore, that institutional andorganizational change centered on PEM reform must be recognized as one componentof a development model and must be incorporated into any such model.
For reference, this subsection introduces some of the problems with PER reform
encountered by five African nations based on research by the Overseas Development
Institute (ODI), a British think-tank, followed by further discussion of the case ofVietnam.
ODI and Experiences in Five African Nations
The common objective of the five case studies — conducted by ODI on Ghana,
Malawi, Mozambique, Tanzania and Uganda — was to determine the success of eachcountry in linking PEM reform with poverty reduction policy goals.Q I draw on theInstitute’s Ghana report (Foster and Zormelo, 2002) as well as its report covering all
five countries (Foster, Fozzard, Naschold and Conway, 2002). The research started in
the mid-1990s, and from the beginning it reflected a deep understanding of Africa. The
studies were based on two hypotheses:(i) In order for public expenditure to better serve the interests of the poor,
political will is necessary to confront difficult choices.
(ii) But political will alone is not sufficient. To implement the intended policies
it must be aligned with more effective public expenditure management,
macroeconomic and budget stability, and budgetary systems that turn policy
analyses into actual cash spending. These in turn must be linked to policies that9

Joseph Stiglitz is perhaps the strongest proponent of this view in recent years. Amartyna Sen’s
capability approach for development also supports this notion. Please refer to Ishikawa 2002 I.
34

strengthen the incentives of organizations to implement expenditure programs.
Some of the discoveries related to the hypotheses are as follows:(i) Political will. The most important issue seems to be the consistency
displayed by the leadership towards poverty reduction policies.
Amongst five countries, the strongest and most coherent national
leadership in the direction of poverty reduction has been in threereforming formerly socialist countries. Mozambique and (to a lesser
extent) Tanzania have, like Uganda, enjoyed strong public signals thatpoverty reduction is the strategic goal of policy and public expenditure
management, in part because such signals are consistent with anembedded political tradition, even if the proposed means to the end
have changed.
The World Bank and the IMF consider Uganda under President Yoweri
Museveni’s administration to have achieved the best performance out of the three
countries. In 1986, when President Museveni gave priority to economic growthunder the SAL system; growth was regarded as a means to achieve social justiceand poverty reduction. In none of the five countries, including Uganda, aredomestic unity and agreement among the different social strata firmly grounded.
In Uganda pressure on the fiscal deficit comes from increases in expenditure items
which threaten poverty reduction related spending and from corruption andcover-ups involved in the misuse of public funds. However, President Museveni’s
political determination and the abilities of a handful of technocrats have been
given credit for Uganda’s continued positive economic achievements.
Commitment to poverty reduction in the other countries is more fragile.
Ghana and Malawi have been subject to the “election cycle,” wheremacroeconomic and fiscal stabilities are compromised whenever there is apresidential election. Planning documents in all five countries emphasize theimportance of economic growth to achieve poverty reduction, but this seems to be
based on the realization that poverty reduction without growth will requirepolitically difficult choices in the redistribution of resources.
(ii) Introduction of the Medium Term Expenditure Framework. In the early
1990s, patterns of public expenditure were extremely inefficient in all fivecountries. Governments were involved in too many areas, some of which should35

have been assigned to the private sector. Annual budgetary processes wereincremental in nature, with any expansion in the total budget spread evenly acrossall spending categories. Inter-annual variations between sectoral or geographicalpatterns of spending were primarily determined by the ebb and flow of donor
project aid. There was thus a pressing need to fundamentally change the pattern of
public expenditure and the process by which these were determined. The MTEF is
the most effective tool to achieve this goal.
The MTEF approach is used in each of the five countries but the results
differ. Uganda has again taken positive steps to establish priorities within available
public investment resources, a determinant for the success of the MTEF. In
Uganda, the Ministry of Finance, Planning and Development was established in
the central government to oversee the entire process from policy decision making,to planning to budgeting, ensuring that the priorities which emerge from the
Poverty Eradication Action Plan (PEAP) are reflected in the proposed expenditure
allocations for the MTEF. In Ghana, planning and finance are split. The Ghanaian
National Development Planning Commission has been given the authority toconsolidate these activities but it is weak and has not been able to secure thenecessary engagement of the finance and line ministries. Planning documents havelacked realism and have little influence on expenditure priorities. The financeministry also lacks the capacity to provide strategic analysis of spending priorities.
Ghana’s MTEF follows a technocratic bottom-up approach, but does not display
strategic resource allocation focus. A similar situation prevailed in Mozambique,and in 1994, the Ministry of Planning and Finance was established. Planning andbudgeting are not consolidated, however, and responsibility for planning andfinancial management instruments continues to be divided between separate
departments within the ministry.
(iii) The most fundamental consideration in the budgetary process is that the
totality of revenue and expenditure are captured in the national budget. Only
partial information is offered here about the coverage of donor aid flows. In Ghana,donor flows are all off-budget items, with the exception of the health sector, andthe government receives only limited information. In Tanzania, half of the aid is
outside of the annual budget and in certain sectors up to 90% of the development
budget is provided by external funding. This makes strategic resource planningand pro-poor expenditures extremely difficult.
Commonalities among African Institutions and Organizations
36

There is another ODI research publication relevant to the African countries
highlighted above. It concerns institutional and organizational characteristics common
to African nations. (These are characteristics rooted in evolving stages of political,
social and economic development and influenced by cultural attributes, but thisinteresting area is outside the scope of the discussion here.) The ODI conducted a casestudy of eight African countries (the above five countries excluding Uganda, plus Benin,
Kenya, Mali and Rwanda) as an interim report on the institutionalization of PRSP
mandated under the HIPC rescue scheme (Overseas Development Institute 2000). It is
not so much the report itself, but rather the five characteristics of the eight countries
provided as supplementary information that is of relevance for the purposes of thispaper.
(i) The eight countries are all semi-democratized states with completely
fragmented policy making processes; i.e., low coordination among different
centers of decision making and between the formulation and implementation ofpolicies.
(ii) Domestic politics is patronage-based; i.e., the political party system isfragmented, and civil societies are weak.
(iii) Each country has high levels of institutional aid dependency withcorresponding low domestic accountability.
(iv) Public expenditure and revenue management systems have been driven by
public policy only in few instances, at least until recently.
(v) The administrative systems are similarly characterized by low morale andweak performance incentives.
PEM in Vietnam: “Political Will” and the Three Year Reform Plan
The experience of Vietnam is in marked contrast with that in Africa describedabove. While shortcomings remain, PEM in Vietnam is driven by strong political will, a
prerequisite for reform.
The Vietnamese government initially was critical of making poverty reduction its
primary goal, believing instead that economic growth should be the primary goal
leading to sustained poverty reduction (Ishikawa 2002 II). In recent years, thegovernment seems to have fallen into line with the World Bank’s poverty reduction
policies, but this perhaps is more a shift in World Bank’s thinking, that growth is aprerequisite for poverty reduction. In 2000, acknowledging weaknesses in the PEM
established at the time, the Vietnamese government adopted the “Action Plan of
Measures to Improve PEM with Decided Timetable for the Next Three Years.” This was37revealed in the “Report and Recommendation of the President of the IDA to the
Executive Directors on Proposed Poverty Reduction Support Credit of SDR 197.2
Million to the Socialist Republic of Viet Nam” (World Bank 2001). This report
recommends the following measures:(i) Increase public transparency by releasing budgetary data early. A sectoral
breakdown of 75% of all expenditures should be available before the start of thesubsequent fiscal year.
(ii) Designate Treasury within the Ministry of Finance as the supervising agency
directly responsible for maintaining comprehensive public accounts (including
expenditures from aid) and implementing the completely integrated Public
Financial Management System. The latter includes Treasury’s integrated
accounting system.
(iii) Integrate budget and expenditure information including the off-budget
government account balance.
(iv) Integrate capital spending and current expenditure spending during thebudgetary formulation process and implementation phases to guarantee
improvements to the budgetary balance.
(v) Adopt the “Medium Term Sectoral Expenditure Program” for each sector.
Start with basic education.
This Three-Year Plan is a key condition (ex post) for the World Bank’s
concessionary Poverty Reduction Strategy Credit (PRSC), agreed only after Vietnam
completed its full Comprehensive Poverty Reduction and Growth Strategy (CPRGS),
which is the official name for that country’s PRSP. Undoubtedly, both the World Bankand the Vietnamese government are highly confident of the success of the plan and holdgreat expectations for its outcome.

38

IV. Framework for Macroeconomic Balance
The preceding two sections have identified policy issues that the a development
model must address. We learned in Section II that Participatory Poverty Assessment(PPA) reports suggest various public policies to support coping strategies for households
confronting the poverty threshold, including strengthening the regional community,
promoting agricultural and rural development, developing infrastructure and providing
industrialization assistance. Section III, “Public Expenditure Management,” dwelt on
issues of institutional and organizational policies related to surprisingly inefficient fiscal
expenditure activities, as well as the underlying problems of political unity andleadership formation.
Section IV proceeds to a discussion of a comprehensive macroeconomic
framework for the issues raised in the two previous sections. Most of the issues thatarise from PPA studies must be resolved through public investment funded bygovernment finances or through private sector investment financed by private banks andthe capital markets. The latter may compete with the public sector through demands oncurrency and capital. Regardless of the sector, a check of the macroeconomic balance isnecessary when the construction of infrastructure or modernization of industrial
production facilities is dependent upon long-term and costly investments. As for Public
Expenditure Management, if it is underdeveloped, macroeconomic management must
make the best use of the fiscal resources effectively available in a way that corresponds
to the level of underdevelopment. As institutional and organizational reforms progress, amore complex macroeconomic management system and better results can be expected.
In other words, progress in integration and adjustment through macroeconomic
management must straddle both PPA and PEM.
I draw on Chapter 12 (“Macroeconomic Issues”) of the Poverty Reduction
Strategy Source Book, co-authored by World Bank and IMF staff, as a reference.10.
From this source I adopt as Figure 1 below the diagram “Financing Poverty Reduction
in a Sustainable Manner” (macroeconomic factors) as the standard methodology for themacroeconomic check. I also provide supplementary commentary. The actual
macroeconomic check based on this method is country specific, but in this section I
discuss only the general framework.

10

Chapter 12 (World Bank IBRD 2003: Figure 12-1) is co-authored by B. Ames, W. Brown, S.
Devarajan and A. Izquierdo.
39

Figure 1

Growth and Poverty Reduction Scheme Built in the PRSP System:
Macroeconomic Balance Basis
POVERTY REDUCTIONSTRATEGY

Governance

Structural

Macroeconomic

Sectoral

Growth Target

Inflation Target

Reserves Target

Private Sector

Fiscal Accounts

Development

Bank Credit
Money

Private Sector

TargetCreditOther+

Budget Financing

Budget Expenditure

Tax Revenues

Primary Spending(Step 3)

(Step 1)Net Domestic

Discretionary

Borrowing (Step 3)

Non-primary Spending(Step 2)Credit to＝Government
External+

Financing

Spending (Step 3)(Net Financial-Grants

Assets) Target-Net borrowing

Non-discretionary
Spending (Step 2)-Debt relief

Macroeconomic objective and poverty
Imbalance?

reduction objective are now integrated into
a consistent framework.
No

Source: World Bank (IBRD) 2003, Chapter 12.

40

Reconsider (Step 4)Macro targets
Poverty goals
Revenue effort
Spending program
Domestic financing
External financing

Yes

1.

Concepts of Stability, Poverty Reduction and Structural Reform

Before explaining Figure 1, I would like to introduce some of its underlying
concepts. (The underlined sections are my comments on the concepts.)(1) The Poverty Reduction Strategy Source Book (World Bank 2003) identifies threeissues in the relationships among the concepts of stability, growth and poverty
reduction: ① Economic growth is the single most important factor influencing poverty.
② Macroeconomic stability is essential for high and sustainable rates of growth. ③
Macroeconomic stability should be a key component of any poverty reduction strategy.
The IMF has advocated ① consistently since June 1999.11(2) Along with macroeconomic stability, structural reform is decisive factor for highand sustainable rates of economic growth. Key measures include regulatory reform,
privatization, civil service reform, improved governance, trade liberalization andbanking sector reform.
(3) Macroeconomic stability exists when there is a sufficient degree of balance within
and among key economic elements: aggregate domestic demand and output; balance of
payments; fiscal revenues and expenditure; and savings and investment. There does nothave to be exact balance. Some imbalances, such as fiscal and current account deficits,
are compatible with economic stability provided they can be financed in a sustainable
manner.
(4) Generally speaking, the framework contained in the Source Book is pessimistic
about government capability and the functions of governmental organizations, while
optimistic about the capabilities of private enterprises and the functions of the private
sector. The Source Book expects that growth will be achieved mainly through increasedbank credit to private enterprises that emerge through privatization. To allow this tohappen, the government sector must not only scale back state-run enterprises but also
pursue sustained restrictive fiscal policies to minimize the possibility that private bankfinancing of fiscal deficits crowds out private credit. Other prescriptions are needed if
private sector capabilities are inadequate or if there is a high levels of independence ordesire to learn in the government sector.
(5) The framework in the Source Book also deals with macroeconomic policies thatare suitable for countries that have achieved fundamental macroeconomic stability. A
11Refer to Endnote I.
41

very different prescription will be necessary for developing countries still saddled withhigh inflation (Source Book, Table 12.2). Countries that are characterized by a market
economy, cyclical macroeconomic structure (possibility of soft landing) and sustained
deflation — such as China after 1996 — will require Keynesian-type effective demand
expansionary policies.
2.
Coexistence of Growth and Poverty Reduction: Macroeconomic Policy
Framework
Figure 1 depicts a framework that emphasizes a broad-based approach todevelopment centered on the assumption that poverty reduction follows as aconsequence of economic growth. “Poverty Reduction Strategy” is the apex of theframework. The major variables indicated are mutually interdependent components ofany strategy for which poverty reduction is the ultimate goal of development policy. The
items in the first row immediately below the apex reflect a comprehensiveness that
extends beyond the economic; for example, governance reform is a non-economic
element. Operationally, however, analysis is conducted on the economic sector and ismeasured in terms of the economic items in the following row — growth, inflation andreserves targets. “Pro-poor” targeted expenditures, where spending is directly targeted atpoverty reduction, are implicitly handled as items within priority spending budgets.
Government fiscal accounts, private sector activities and financial sector activities
drive the implementation of macroeconomic policies. The three blocks under the budget
expenditure category in the fiscal accounts have been discussed under PEM in Section
III. The conclusion was that great potential exists to increase fiscal resources but
execution is difficult. An important challenge is to prevent the budget deficit fromwidening but nondiscretionary spending including interest payments takes up asignificant proportion of any given amount of revenue, and civil servant wages,
although considered a discretionary non-priority spending item, is effectively a fixed
cost. Thus, it is difficult to allocate priority spending to poverty reduction, infrastructureand structural reform. Revenues are on a steadily decreasing trend because of
inefficiency in the public sector and badly performing state-owned enterprises. ODA
often carries the risk of “Dutch disease.”12
The main underlying issue in the financial market sector is modernization,
particularly modernization of the banking system. As modernization progresses,
12“Dutch disease” refers to the harmful effects of rising real currency values on industrialization anddevelopment of the real economy.
42monetary policy increasingly will affect levels of and changes to output. There is a riskthat private enterprises will be crowded out when monetary and fiscal policies converge.
The development of financial markets is limited as shown by the fact that the ratio of
M2 to GDP is less than 30%. Taking into account the need for increased investment incapital markets, there is little scope for monetary policy to promote stable growth unless
it is accompanied by a rise in the total savings rate that will then improve economic
strength.
If the implementation of macroeconomic policies results in fiscal imbalances thatthreaten the achievement of macroeconomic stability and growth, there is no choice but
to lower growth and poverty reduction targets. Theoretical models are often used inmacroeconomic analyses, and it is desirable to develop alternative scenarios factoring indifferent growth rates. This is recommended by the Source Book.”R Some of the bottom
blocks in Figure 1 are premised on this assumption.
3.

“Debt Sustainability” in Heavily Indebted Countries

In addition to the annual cash flow suggested in Figure 1, as part of theirmacroeconomic balance check, countries with a heavily indebted public sector mustalso prepare an outlook program to reduce the current debt level down to at least
sustainable levels. External and domestic debt will be considered separately. (i)According to the Enhanced HIPC Initiative of 1999, the “sustainable external debt
level” of each of the 41 participating countries is determined when they become eligible
to join the scheme (“decision point”).S Debt relief for amounts above this level isprovided at the “completion point,” theoretically in three years time. The initiative andits effectiveness were part of a previous discussion on the effectiveness of the PRSP
system (Ishikawa 2003). For the purposes of this paper, external debt is assumed to beprocessed in this way. (ii) In addition to external debt, some countries are burdened withexcessive amounts of domestic debt. In Ghana, for example, the external public debt
stock amounted to 150% of GDP and domestic public debt to 65%, of which central
government debt excluding SOE debt was 29%. For these countries, accumulated
interest and principle payments exert tremendous direct and indirect pressure on alreadylow levels of fiscal revenue. (Principal is normally financed by fiscal surpluses, or byincreased deficit financing when the fiscal balance is in the red.) Important fiscal
expenditure items such as for investment or poverty reduction may be crowded out, or
increased money supply may lead to higher inflation. To avoid this situation, further
increases in domestic debt levels must be prevented, meaning that further debt reduction
efforts are required. Only then can the macroeconomic balance framework discussed
43

above be applied effectively towards public policies for development.
Measures to cap the increase or to reduce accumulated debt are fundamentally thesame for both external and domestic debt. I refer to an IMF framework entitled “Fiscal
Sustainability” (Chalk and Hemming 2000). Theoretically, assuming a closed economy,
for each period (t) the sum of interest payments (interest rate r) on debt stock during theperiod (Bt) plus the primary deficit (Dt: fiscal deficit excluding interest payments)
determines the amount of increase of debt stock in the current period. In other words,
Bt + 1 – Bt = rtBt + Dt ············································································(1)This equation can be converted to the difference equation of the form:
Bt = Rt Bt + Dt, where Rt = 1+rt ··························································(1)’This difference equation is solved in such a way that an intertemporal budget
constraint equation is derived. This equation is pragmatically interpreted and expressedas:∞

Bt = Σ

R (t, t + j) -1

D t + j ·······························································(2)j=0where R (t, t + j) -1 is the discount factor applying between periods t and t+jT. This
formula of present value of budget constraint (PVBC) is applied again pragmatically inpolicy implication. One way is to use the primary gap indicator as a sustainability
indicator tool for domestic debt management. The primary gap indicator is thedifference (d - dt) between the notion of the value of domestic primary balance to output(d) that provides stability through all periods for annual domestic debt burden (bt or
Bt/Yt) and the ratio of actual value of domestic primary balance to output (dt or Dt/Yt). d
is represented numerically asU :d = (nt – rt) bt (note nt is GDP growth rate) ········································(3)Because bt is assumed to be fixed in this equation, it may differ from thetheoretical model, thereby causing policy distortionV, but it is used widely because it issaid to be instinctively easy to understand.W
I conclude this section by directing the reader to the extensive endnotes examining thecase of GhanaX, a country encumbered with a massive domestic debt burden, and the44case of Vietnam Y , whose situation is less grave, as practical cases where themacroeconomic balance frameworks have been implemented.

45

V.

Conclusion

There are shortcomings in the low-income country development models advocatedunder the PRSP system by the World Bank and the IMP. The objective of this paper was
to uncover ways to improve the model. An understanding of the issue was developed byreviewing a range of new research available from PPA reports and PEM research, twoconcepts born out of new policy focuses of the Bank and IMF.
The PPA reports reveal that households in poor regions that cross the poverty
threshold may move downward, either descending gradually or falling precipitously into
a “poverty trap;” or conversely, they may move upwards into a wealthier stratum. The
reports focus on the need for public policies to support coping strategies for households
facing the poverty threshold. Examples include strengthening regional communities as a
refuge of last resort; supporting agricultural and rural development; constructing socialand economic infrastructure; and implementing or assisting industrialization that
directly results in output. PEM literature reveals that the fiscal accounts of low-income
countries are surprisingly underdeveloped. In order to rectify this, institutional andorganizational reforms to the fiscal expenditure system, including the modernization ofpolitical and administrative systems and organizations, become indispensable steps forany development model.
Achieving different public policy objectives may mean competing for limited
resources. A check for maintaining macroeconomic balance will ensure that theallocation of resources is aligned to multilayered institutional and organizational
policies. In heavily indebted poor countries, measures to reduce debt and to attain fiscal
sustainability are prerequisites for a macroeconomic balance check.
The deficiencies of the PRSP development model need to be addressed to assertthat analyses and policies from the above perspectives will lead to its reform. (Ishikawa
2002 I, 2003).
Finally, I conclude by commenting on two points raised in the introduction.
(i)

The Importance of Case Studies
The true significance of specific information derived from PPA and PEM isevident only when based on an understanding of the country or regional context.
This paper discussed the general importance of specific information and its role indevelopment without reference to particular context. Country and region specific46information has frequently been used to facilitate the understanding of the points
under discussion, but this does not mean the position of these issues in thedevelopment model has been clearly established. Additional information fromother areas related to development mechanisms must be also reviewed before sucha result can be achieved. The cases of Ghana and Vietnam have been cited, but
information on these countries is still incomplete.Z In other words, case studies on
the development mechanisms of specific countries must be undertaken repeatedly,
each time incorporating new information gained from PPA and PEM, before asuccessful development model can be constructed.
(ii)

Differences between African and East Asian Development Models
The opinions and interpretations of background information regarding
country specific PPA and PEM case studies in this paper are fragmentary andincomplete. Nonetheless, dissimilarities between African and Asian cases areclearly evident, particularly in reference to the oft-cited Ghana and Vietnam.
These countries reflect respective differences in the political, social and economic
stages of development, cultural traditions, and colonial policies and structures.
Future case studies of specific countries will benefit from discussion ofdissimilarities in the development mechanisms between the two continents. Overtime, it has become clear that Japan’s position on development cooperation
policies has been influenced by the East Asian experience, in contrast with theWestern countries which have been influenced by African development. A clear
understanding of this will make it easier for Japan to play a more significant rolein shaping the international aid systems.
In the near future, I hope to see further case studies conducted for a small
number of countries premised on the use of country specific PPA and PEM data.

47

Postscript
First, I must describe (1) some of the characteristics in which development
assistance strategies had been formed and evolved in the international aid community inthe stage as of the end of 2003 when this paper was written and (2) the motives in which
I wrote it (this paper). In 1999, The World Bank and IMF launched a new framework inwhich concessional loan assistance would be provided to low income developing
countries only in accordance with their poverty reduction strategies. Nevertheless, bythat time period (the end of 2003) they had not yet put forward a development modelthat convinces us that the strategy can produce sustained poverty reduction andeconomic growth that supports it in many low income countries. Despite that, however,in between these two periods (1999 and 2003) was recognized the emergence of two
events that this paper focused on. First, from the large number of by-country WorldBank studies on the poor based on Participatory Poverty Assessment (PPA) approach it
has become, for the first time, possible to derive useful information on the dynamicchanges over time in the status of poor households. Second, through the efforts of
Public Expenditure Management (PEM) reform in low income countries, again led by
the Bank, we have learned also for the first time that public finances in many low
income countries are utterly underdeveloped. Although these two findings might nothave been sufficient to immediately produce the necessary development model, they
were expected to be important components of the model that should be forthcoming.
The motives of my writing this paper was, with this expectation in mind, to clarify the
implications of these two events, mainly for the consumption of the Japanese leaders,
this paper discussed the importance of macroeconomic balance in addition to the two
factors above with the intention of demonstrating that, before all of these main
components can be put in place, a system of macroeconomic checks is needed to ensurethat they will be effectively combined and realized.
Meanwhile, the search for the development model that determines the success or
failure of the poverty reduction strategy has been carried on in earnest by theinternational aid community, major donors and scholars in the related fields. This
afterword describes the new movements in this search by major donors and researchers.
In terms of major donors, we will discuss The World Bank and IMF as well as the
Department for International Development (DFID) of the United Kingdom which seems
to be trying to lead the international aid community with its unique international
development policy developed since the end of the 1990s. I gained many insights fromthe DFID’s search for its development model, and recently and finally developed myown prototype model. Mine is a “basic development model” that can incorporate the48

three factors discussed in this paper--the dynamics of poverty reduction, the mechanismof PEM and the macroeconomic balance--as its important components.
DFID-ODI’s aid philosophy and pursuit of political change
DFID’s search for the development model began when the Labour Party took
control of the government in 1997 and announced its new international development
strategy. The search was aided by the London-based think tank Overseas Development
Institute (ODI) and its formidable capabilities for theoretical and empirical research on
development assistance. The main focus of their research has been Africa, the UK’s new
aid target. The new strategy, detailed in the DFID’s 1997 White Paper on International
Development - Eliminating World Poverty: A Challenge for the 21st Century, promised
to apply the concept of helping the socially excluded (especially a huge number ofyoung people including the NEET and job-hopping part-timers) with public policies(“social inclusion” and ensuring the “equality at the starting point” as a way to achieveit). This concept was the essence of the Labour Administration’s new welfare state
philosophy (as exemplified by Tony Blair’s “The Third Way”). This aid philosophy of
the 1997 White Paper closely resembled the concept of poverty alleviation in ethicaleconomics based on Amartya Sen’s “capability” approach. Sen’s concept of poverty is acondition where a person’s capability does not reach a certain “threshold” or “basic
capability.” Capability is defined as a combination of a certain level of income wealthand “utility functions” with which people use that wealth to live the lives they see as
desirable (called “functionings”). This bundle of utility functions is nothing but existingsocial systems. Therefore, reforming and improving social systems to overcome social
exclusion is an important component of poverty alleviation as defined by Sen. The
Bank’s World Development Report 2000/01 states that the report is based on Sen’s
capability approach, and its three pillars of attacking poverty--expanding opportunity,
empowerment and security--are indeed the content of the social system reform andimprovement in this sense. (Many Japanese interpretations of Sen’s capability
approach do not understand this point sufficiently.)
Despite this lofty aid philosophy, the British government’s new international
development policy has not shown any signs of success in its main battlefield, Africa.
Moreover, most of the recent international aid performance reports warn that Africa’s
performance in development and poverty reduction is actually getting worse. (Forexample, see Joint World Bank/IMF 2005 PRS Review, 2005.4.19.)13 The innovative
13 IMF and the World Bank, 2005 Review of the Poverty Reduction Strategy Approach: Balancing Accountabilities and Scaling up
Results, Aug. 15 2005.

49

proposals to revitalize low income countries that the British government has made to theinternational aid community in quick succession since 1999--the Enhanced HIPC
Initiative (1999), the IFF proposal (2004), the publication of Commission for Africa
Report under the initiative of Prime Minister Blair (March 2005), the announcement of
the PRBS (general budget support) policy (May 2004), the New Partnership for Poverty
Reduction policy (March 2005) and the proposal to double the amount of ODA to
Africa at the G8 Summit (July 2005), among others--have probably been motivated byits urgent desire to overcome this underachievement.
However, another characteristic of the UK’s international aid activities was thatthe DFID effectively utilized the excellent research capabilities of the ODI (Overseas
Development Institute) and other private think tanks and contributed to the assessmentof this underachievement, analyses of its causes and search for corrective measures. The
analyses utilized not only the methodologies of economics but also those of sociology
and political science.
Studies on Africa by the ODI and others are often conducted as comparative study
projects involving several countries under the direct or indirect commission by the
DFID. A survey of these works reveals the following three characteristics:(1) In diagnosing the current situation, they try to understand the complex mechanismthat has brought developmental challenges to African countries in a coherent manner byconsidering their premodern political systems as the root cause. This is a novel attemptthat we have not seen in the studies of developing countries within the discipline ofdevelopment economics. The premodern political systems in African countries take ahybrid form of “neopatrimonialism,” where “patrimonialism”--a typological concept in
Max Weber’s sociology of domination--has undergone changes under the mantle ofmodern state systems introduced after their independence. Under this hybrid system, thePresident, who is the ruler, typically governs the nation on one hand (formally) byendowing official posts and salaries to administrative officers of central and local
governments, and in turn securing the provision of administrative services. But on theother hand (informally), the President appoints his/her private clientele to official
positions with many perquisites, and in return receives their personal allegiance. There
have been several attempts since the early 1970s to analyze the functionings of African
states with this Weberian concept of neopatrimonialism. Towards the end of the 1990s,
this effort took a more systematic form as part of comparative democratization studies
in the third world (as exemplified by the works in 1997 of the Bratton and van de Wallegroup of Michigan State University). The ODI gained insights from these works, but its
own research made a contribution as well by finding that the effects of50

neopatrimonialism spread to the economy, distorting the mobilization and distributionof the state’s fiscal resources and having a critical and negative impact on growth andpoverty reduction.
(2) In terms of policy prescriptions, the ODI’s research circa 2000--when African
studies was beginning to gain momentum--only went as far as emphasizing that aid
would not succeed unless political leaders recognize the importance of the goal ofpoverty reduction and publicly commit to it. (For a comprehensive survey of various
research projects in this period, see David Booth ed., Fighting Poverty in Africa: ArePRSP Making a Difference? ODI, 2003.) However, the DFID, ODI and other thinktanks soon began to shift their attention to overcoming the premodern nature of thepolitical system itself. Their effort bore fruit as the “Drivers of Change (DOC)” research
project. This project was aided by the strong leadership of Clare Short, the former
Secretary of State for International Development who contributed to the launch of the
DFID as a cabinet-level ministry. Within the DFID, specific divisions and teams wereidentified to take charge of the DOC project. Field studies are conducted by the ODI
and many other think tanks on a contract basis. As of October 2004, field studies had
been completed in 11 countries (Ghana, Kenya, Malawi, Nigeria, Uganda and Zambia
in Africa) and two regions (Asia and Asia/Caucasus); studies were ongoing in ninecountries and being planned for Vietnam and Middle East and North Africa. In the DOC
project, researchers are not satisfied by simply explaining the failures of poverty
reduction programs by a lack of political will to implement them. They go one stepfurther and look for the reasons for the lack of political will. More specifically, the
DFID’s interest with regard to poverty reduction used to be in finding strategies forpro-poor changes, and to do so they tried to shed light on the current status of sustained
economic growth, access to markets and public services, empowerment and security. In
contrast, the DOC approach expands its analysis to an entire country. To establish afoundation for this project, the DFID commissioned Oxford Policy Management, athink tank led by Alex Duncan, to construct a conceptual framework for the DOC
analyses based on a DOC study on Nigeria. The resultant conceptual model consists ofinstitutions including economic and social structures and political and administrative
processes (i.e., official and unofficial rules that determine the behavior of agents) andagents (i.e., individuals and organizations that pursue certain interests, examples ofwhich include the political elite, public officials, political parties, local governments, themilitary, media and the private sector). (The foregoing is based on Debbie Warrerer, The
Drivers of Change Approach, ODI, Synthesis Paper 3, Nov. 2004.)
Among the DOC country studies, the one I looked at relatively closely was the
ODI’s Ghana project. It describes the establishment of patrimonialism in the context of51

the history of Ghana’s state, economy and culture after the colonial rule. (Especially, therelationship between patrimonialism and fiscal management and the formation of theprivate sector is described with clarity.) On the economic front, it identifies thefollowing as the drivers of change: (1) international trade and competition, (2) financial
systems, (3) foreign direct investment and (4) development of Ghanaian entrepreneurs
and growth of large and small enterprises. On the political front, the identified drivers
are: (1) stronger competition among political parties, (2) free flow of information andcritical mass media and (3) the process of emigration and remigration of the Ghanaian
diaspora14. The study states that these drivers generally need to be put in place at thesame time but the political drivers play a more critical role than the economic ones.
My prototype development model
The process of elevating the discussions in this paper to the construction of adevelopment model with the insights gained from the DFID-ODI studies can be
described in two stages. The first stage, which was inspired by a series of ODI’s studies
on development aid to Africa, involved researching the structure and historicalbackground of the DFID’s international development policy itself, and contrasting themwith the outcome of the policy’s application in Africa. The result of this work was
published in GRIPS Development Forum Discussion Paper No. 9 and JBIC Discussion
Paper No. 8 (“Supporting Growth and Poverty Reduction: Toward Mutual Learningfrom the British Model in Africa and the Japanese Model in East Asia,” March 2005). I
concluded in this paper that, despite its lofty aid philosophy, the UK’s aid to Africa had
failed because a development model for poverty alleviation which operationalizes thephilosophy had not been constructed. (I will not touch on the East Asian model ofJapanese aid here. Also, the UK’s research on aid to Africa I considered for this paper
had still been at an early stage where political leaders’ commitment to poverty reduction
was considered as key to successful policies.) In the second stage, I used this insight asa part of the groundwork to construct my own prototype development model. I
introduced this model in the first chapter of my book, Kokusai Kaihatsu Seisaku Kenkyu(Studies on International Development Policies) published in January 2006 by Toyo
Keizai Inc. The model was described as constituting the “basic framework” for thestudies on international development policies together with the “studies on theinternational aid systems.” My development model is largely constructed based on thehistorical school’s view of development stages, and it attempts to analyze thedevelopment process of present-day developing countries under three large pillars:“political, social, economic and other sectoral development stages and the identification
14 Tony Killiak, What Drivers Change in Ghana? - A Political Economy View of Economic Prospects, July 2004 (mimeo).

52

of current stages,” “the mechanism of transitioning between the stages” and “theprocess of growth (poverty reduction) in the given (mixed) development stages.” Whatis especially novel in this framework is the fact that the “political system” is expressly
considered in addition to the “economic system” and “production vitality” in theassessment of sectoral development stages. With regard to the political system, I
identified the following development stages (in order of progression): the premodern“patrimonial system,” “non-patrimonial, non-democratic system” and “democraticsystem.”Now that I have stated the foregoing, I can finally explain why the studies in thispaper which focused on the poverty trap and public expenditure management served as
an important step in the search for the development model. I would like to point out two
things.
(1) In light of the “basic framework” development model, the processes of poverty
reduction (including the poverty trap) and growth as its prerequisite are “the process ofgrowth (poverty reduction) in the given (mixed) development stages.” Public
expenditure management reform is an attempt related to “the mechanism oftransitioning between stages.” And these two factors, if combined with an analysis ofovercoming patrimonialism which enables the political system to transition frompremodern to modern, will be driven by the analysis and begin to work together, making
it possible to achieve sustainable poverty reduction. (This will be the theme of my next
paper.)(2) Within the sequential reform and improvement process that progresses from“transition of the political system” to “fiscal system reform” to “promotion of growthand poverty reduction,” the first two steps play the role of the “system reform” in Sen’s
capability approach and are appropriate suggestions for low income countries. In his
recent paper, David Booth of the ODI commented on my 2005 paper mentioned above.
He stated that “It [Ishikawa’s paper] holds that the development aid policy based on theideologies of Sen and Blair has failed in Africa by hitting the wall of neopatrimonial
politics, and that our New Aid Agenda has the same ideological foundation.” That,
however, is a misunderstanding. I think it is desirable for a country’s aid policies to havea particular aid philosophy, and it is compatible with the evidence-based diagnoses andpolicy planning Booth advocates. With regard to Sen’s approach, I think it is amanifestation of efforts to pursue ethical legitimacy in designing economic policies, andis a precondition for obtaining a broad-based consensus for poverty reduction15.
15 David Booth, “Is the New Aid Agenda Anti-Trade?” in Sheila Page and David Booth, eds. Aid and Trade Cohabitation orDivorce? ODI, 2005. This comment contains several interesting arguments in addition to the point mentioned here, but I’ll wait foranother opportunity to comment on them. The discussions on Booth’s cited paper (03) between are summarized in GRIPS
Development Forum Policy Minutes No.20 (July 2005) pp.27-31.

53

As an additional note, Duncan’s conceptual framework for the DOC project itself
may have a role in substituting my development model. I am yet to see its details, but it
seems to be constructed in a sociologically comprehensive manner. Although mydevelopment model incorporates elements based on political concepts, its basic
framework is economic and can withstand economic analyses.
The World Bank and IMF’s search for the “road map for poverty reduction”
The World Bank and IMF’s search for a new development model can be observedin a nutshell based on two documents. I will briefly discuss them.
The first are documents by their independent evaluation departments, namely the
IMF’s Independent Evaluation Office (IEO) and the Bank’s Operations Evaluation
Department (OED: recently renamed as Independent Evaluation Group (IEG)), that
evaluated the effectiveness of each organization’s activities to support Poverty
Reduction Strategies (PRSs). In these documents, the OED points out that the Bank
failed to sufficiently emphasize growth which is necessary for poverty reduction. (TheBank’s management rebutted by saying that the evaluated documents (PRSPs) had been
prepared not by the bank but by recipients. This argument is not persuasive, however,
because if the PRSPs were as deficient as claimed, it only means that the Bank’s advice
was not sufficient.) On the other hand, the IEO’s evaluation document states as follows:“[M]ost PRSPs fall short of providing a strategic road map for policymaking, especiallyin the area of macroeconomic and related structural policies. The focus of most PRSPs
is on the composition of public expenditures, especially social sector spending, withmuch less emphasis on other aspects of a broader strategy to encouragepoverty-reducing growth[;]” and “The [PRS} approach has so far not contributed
significantly to understanding the linkages between growth, poverty incidence, andmacroeconomic policies at the individual country level.”16
It is quite significant that the evaluation divisions of the IMF and the Bank gavesuch harsh criticism to the PRSP approach only five years after it was launched in 1999
under the Bank’s initiative. However, the important question is, given this assessment,
what reform and improvement policies can be proposed and implemented. As the IMF
is in charge of macroeconomic policies, it naturally seems to be working to elaborate its
16 Related reports are as follows: World Bank(OED), Improving the World Bank’s Development Effectiveness: What Does
Evaluation Show? 2005; World Bank, 2004 Annual Review of Development Effectiveness: The World Bank’s Contribution to Poverty
Reduction, 2005; and IMF (IEO), Evaluation of the IMF’s Role in Poverty Reduction Strategy Papers and the Poverty Reduction
and Growth Facility, 2004.

54

macroeconomic analyses which served as the backdrop for the criticism. From theperspective of the Bank, which is in charge of development and structural adjustments,
to the extent that its evaluation report is presented as cross-sector lessons, its reform andimprovement policies center on institutional development (including public sector
reform and private sector development) and human and institutional capacity building17.
However, to understand the latest efforts of the Bank as a whole to support
growth-based poverty reduction, we should at least take a quick look at World
Development Report 2006: Equity and Development which was prepared under the new
President (Paul Wolfowitz) and new Chief Economist (Francois Bourguignon).
The concept of “equity” included in the title is a broad amalgam of related
concepts put forward by John Rawls, Amartya Sen, Ronald Dworkin and John
Roemer--the four scholars who represent the post-Kenneth Arrow, non-welfaristic
Ethical Economics or Welfare Economics. Equity here is defined by two principles:“equality of opportunity” which leaves equality of income to individual efforts and“avoidance of absolute deprivation” which eliminates deprivation resulting fromdifferences in circumstances beyond individuals’ control. (It seems similar to the
combination of Rawls’ principle of equality in the obtainment of “basic social goods”
and the Difference principle to deal with the differences in circumstances which should
be redistributed in accordance with the maximin principle.) The report, however, statesthat it did not raise the concept of equity to propose a new framework for development,
but as the foundation on which various existing approaches can be integrated andexpanded. In the “Epilogue” of this report, these various approaches to development aresummarized as four major “strands of thinking and action” that the Bank itself has usedin several of its annual World Development Reports: (1) the market mechanism, (2)human development, (3) institutional development and (4) empowerment of the poor.
We must note that each of these strands of thinking was a synthesis of lessons learned in
the context of development issues and actions that were prevalent at the time, and that if
we are to use them at some point of time, a further synthesis is necessary. One such
synthesis was the WDR 2000/01’s advocacy for the poverty reduction policy based on
expansion of opportunity, empowerment and security. More recently, the former WorldBank Chief Economist Nicholas Stern suggested a synthesis into the two pillars of“good investment climate” and “empowerment of the poor.” Without these efforts
towards synthesis and integration, elements of different development experiences are
isolated and cannot complement each other to produce a holistic development process.
Either in the WDR 2000/01 or Stern’s paper, the forces of such syntheses are still not
17 This is also true with the following report which summarizes the OED’s activities up to 2003: Bjai Chhiben et. al, Reform and
Growth, Equality World Bank Experience, Transaction Publishers.

55

strong enough. In that, the WDR 2006 seems to be implying, lies a new role for its
concept of “equity and development” to play.
I am impressed by the novel proposal of the WDR 2006, but the question iswhether that proposal can be a force to remedy the “lack of strategic road map for
growth and poverty reduction” as observed by the IEO and OED. In this regard, I am
reminded of the fact that, faced with a severe underachievement in growth and poverty
reduction at the forefront of African aid, the DFID-ODI proposed, as a bold initiative
for breakthrough, to overcome the neopatrimonial, premodern political systems. My
own prototype development model is inspired by this bold initiative. In contrast, in theireffort to overcome the crisis of the PRSP approach, the IMF and the Bank are reluctant
to step into the territory of political analyses involving the modernization of politicalsystems. While they are willing to go as far as “governance policies,” they have notstepped out of the traditional territory of economics. Neither camp, however, is yet tocome up with an effective road map for growth and poverty reduction.

56

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Endnotes

A

The primary goal under the PRSP process, announced as the result of a reviewof Structural Adjustment Lending (SAL) during the 1990s, was “poverty reduction”
instead of the “continuation and promotion of growth” under the SAL system (Ishikawa
2002I). However, it should be remembered that from the beginning, the World Bank
considered growth to be a prerequisites of poverty reduction. With regard to the IMF,
current publications noted that it “broadened the objective of its concessionary lendingin September 1999 to include an explicit focus on poverty reduction in the context ofgrowth-oriented policies” [emphasis added]. In order to reflect the broadened objective,
the IMF “Poverty Reduction and Growth Facility (PRGF)” replaced the previous“Enhanced Structural Adjustment Facility (ESAF).” In addition, IMF policy supports
the PRSP process only when it the two objectives of a healthy macroeconomy andgrowth are both satisfied (Robb 2003). World Bank literature also shows that the Bank’sview of the role of growth relative to poverty reduction was gradually approaching thatof the IMF. The International Development Association (IDA) report on the “Thirteenth
Replenishment, Supporting Poverty Reduction Strategies,” presented to the IDA Boardof Governors, placed the promotion of “sound policies that will lay a secure foundation
for productivity growth and poverty reduction”[emphasis added] first on a list of four
objectives of the replenishment.
B

My previous paper points out that the biggest problem with “aid systems” lies in
the current mechanism that “buys reform with aid” by making use of conditionality, andexpects the donors and recipients to resolve the problem by returning to their originalmeans – “policy dialogue” based on a relationship of mutual trust. As for the problem
with “HIPC relief systems,” the paper notes that the level of “sustainable debt” to be
met at the “point of completion” of relief is set unrealistically high, and proposes
lowering the level to a workable one. If these solutions are successfully applied, what
will remain to be addressed will be the problem of the “development model.”C

This explanation was given by Robb (Robb 2003). According to Narayan(Narayan 2000 I), those interviewed in PPAs are multiple stakeholders (who are
involved in poverty issues). Among them, the most important stakeholders involved in
the research process are poor men and women. PPAs also involve decision-makers fromall levels of government, civil society and the local elite. According to Robb,
stakeholders other than poor people are involved in the design of PPAs.

60

D“Robb 2003” reflects IMF’s interest in research on the impact of various
macroeconomic policy decisions on poverty reduction results. As a method of
measuring the impact, the World Bank (Africa Region) uses the “Poverty and Social
Impact Analysis (PSIA)” method from PRGF. This method lists the following tools andtechniques mobilized from many areas of social science: social/environmental tools(PPA, social impact analysis, village-based research, gender analysis, social capital
evaluation, etc.), economic tools (benefit incidence analysis, poverty mapping, public
expenditure tracking surveys, etc.), partial-equilibrium tools (multiple market models)and general-equilibrium tools (CGE: Computer General Equilibrium) model, social
accounting matrix).

E

But the problem with the open-ended approach is the difficulty in pre-identifying
poor people to be interviewed. They may somehow be identified through trial and error,
but in this approach, the “definition of poverty” cannot be determined until PPAs arecompleted. The multiple dimensions of poverty, in Narayan’s Summary Section 1, canbe described as the definition of poverty obtained after completion of PPAs.
F

This new strategy was based on the report compiled in 1987 by a special task
force comprising World Bank’s senior staff to review past poverty-related activities andpropose new activities. The report emphasized the need to design clearly-definedpoverty reduction activities that would complement economic growth, saying that theWorld Bank could not depend on economic growth alone to eradicate the worst form of
poverty in developing countries by 2000 although it was an important factor inlarge-scale poverty reduction in the long term. (World Bank Annual Report 1991)
G

For the countries where no “poverty assessment” was conducted, the WorldBank’s general approach was to design an “adjustment program” to solidify the base ofsustainable growth of production and employment. At the same time, it introduced a“program of targeted intervention (PTI)” to protect the most vulnerable stratum. The
PTI program includes projects, such as a “project aimed at alleviating poverty (helping
small farmers to improve production and providing primary education, primary healthcare, nutrition service, water supply, environmental hygiene and basic infrastructure forpoor regions) and a project targeted at regions where the proportion of the poor among
all beneficiaries is much higher than that of the poor in the entire population. PTI
lending as a share of all IDA lending increased from 44% in 1992 to 65% in 1999. For
the World Bank as a whole, including IBRD, the share increased from 25% to 51%.
(World Bank Annual Reports 1992, 1999)

61

H

There is no knowing what criteria poor people used in evaluating institutions.
Taking schools or hospitals as an example, Narayan states that they might have been
considered ineffective because the quality was not good or access to them was not goodeven if they were important. At the same time, Narayan states that the message frompoor people is sobering and the pattern of institutional ratings confirms the need of moredetailed analysis of how poor people described their interactions with institutions.
(Narayan 2000 II)

I

In some countries, the poverty status of many households has remained
unchanged over a long period of time. This is probably due to special factors, such as
the pervasive influence of the caste system or a severe economic slump, and requires
separate consideration.

The governments of countries at advanced stages are able to establish safety nets
and institute other social security policies, But this is not a subject for the present paper.
This paper; rather, considers the mechanism by which poor households escape frompoverty and better their condition.
JK

An overview of the backwardness in African development which has led toperiodic reforms of World Bank and IMF international development policies can beobtained by examining the analyses and prescriptions contained in major andcomprehensive research reports on African economic development issued by the World
Bank. “Sub-Saharan Africa: from Crisis to Sustainable Growth, A Long Term
Perspective Study” (World Bank 1989 I) was the first report to point out that long term
growth trends measured by annual average growth rates per capita in Africa(abbreviation of Sub-Sahara and hitherto referred in the same way) entered a growthphase during 1961 to 1971, remained static between 1973 and 1980, and criticallydeclined during the period 1981 to 1987. The decline was studied from the perspectiveof the real economy. The report concluded that healthy macroeconomic policies andeffective infrastructure development were essential but not sufficient to escape from thecrisis, requiring the development of capabilities supported by appropriate governance.
The “African Adjustment and Growth in the 1980s” (World Bank and UNDP
1989), published jointly by the World Bank (African Region) and the UNDP in the same
year, offers a slightly different prescription. According to this report, the situation in
Africa is more complex and less bleak than its frequent depiction as a continent offering
little hope and suffering many cruel setbacks. From a long term perspective of 15 to 20

62years, the drastic drop in growth during the 1980s in fact prefaces a return to a long term
growth trend. The report divides Africa into countries that are actively undergoingpolicy reforms and those that are not. In the former, the situation is not seen to be as
urgent and crises can be avoided by giving priority to ODA to these countries.
Yet two ensuing comprehensive research reports published in succession in the
mid-1990s titled “Adjustment in Africa: Reforms, Results, and the Road Ahead” (WorldBank 1994) and “A Continent in Transition, Sub-Saharan Africa in the Mid-1990s”(World Bank 1995) indicate that predicted growth in fact never occurred. The former
publication states that strong leadership and good governance must accompany any
policy reform. The 1995 publication expresses hope that good governance may emerge
following political liberalization that began in the early 1990s and the ensuingdevelopment of opposition parties and dialogues between political parties.
L

Amongst research on governance by Japanese development aid scholars,
Shiratori (1994), Shimomura (1999), and Kondo (2003) discuss governance reform in apolitical context. Chapter 1 of Shimomura’s research (2002) is a detailed and persuasive
argument about the link between governance and overall reform in an economic context.
M

Later this would include “monitoring and evaluating, and their capacity
building,” and “strengthening and institutionalizing participatory processes with respect
to a broad range of domestic stakeholders and development partners.”
N

The following governance-related issues were not addressed in the PRSP
document: “corruption and accountability,” “reform to the civil service system,”“intra-government relations and decentralization,” “public expenditure management,”
and “legislative and judiciary systems.”O

Low income countries that have adopted the PEM models of developed nations
but characteristically lack PEM reform capabilities need to be examined by separatingthem into former socialist transitional countries that have executed standard planned
economy models and all other low income countries. It cannot be stated a priori how
this difference will impact the acceptance and implementation of PEM models ofdeveloped nations. In a planned economy, resource allocation for the entire economy isbased on distribution plans of major production capital based on data from individualmaterial balance tables. The system is institutionalized to ensure it would work, at leastin the modern sector. Given material planning, fiscal and monetary policies play
supportive roles. In a market economy, market mechanisms fundamentally dictate

63resource allocation, and the public sector steps in to correct “mistakes of the market.” In
general, the economic systems of low income developing countries can be characterizedas “developing market economies.” The traditional economy can compensate forresulting distortions to resource allocation but early intervention by the public sector is
not readily allowed. This difference must be duly considered when analyzing
capabilities for transition.
P

This cycle comprises the following items: review previous policy; set and plan
policy (establish resource framework, set out objectives, policies, strategies andexpenditure priorities); mobilize and allocate resources (prepare budget); implement
planned activities (collect revenues, release funds, deploy personnel; undertake
activities); monitor activities and account for expenditure; and evaluate and audit.

Q

As discussed in the previous subsection, PEM reform is evaluated from theperspectives of whether public expenditure is poverty focused, and the effects ofimprovements to resource allocation efficiency. It is often difficult to distinguishbetween the two perspectives, which I bear in mind when reviewing ODI research.

R

Ishikawa (2000 I) proposes the use of the CGE model to optimize the process of
trade-off between growth and poverty reduction rates.

S

Under the Enhanced HIPC Initiative, the “sustainable official external debt” ofindividual HIPC (present value) must be less than 150% of the value of total annual
exports, or 250% of annual fiscal revenue in each country. These figures were derived
empirically from a set of hypothesis and there is some debate as to theirappropriateness.

T

The present value of budget constraint across all periods obtained by solving theT→∞difference equation (1) should be the equivalent of adding Lim R (t, t+1) -1Bt+T+1. Thisadditional item represents the present value of “terminal debt stock.” “Equation (2)presumes that the value of this additional item is zero in reality. The reason is asfollows: (1) a positive value means that the indebted country government continues tohold on to debt. No rational borrower is willing to hold its liabilities indefinitely.” (2) A
negative value means that the government is a creditor to the private sector which isalso not realistic.
U

d = (nt – rt) bt is derived as follows. Stabilization of the domestic debt burden
64

・

・

means that (bt)= (Bt / Yt) = 0. However, (・) indicates annual growth rates. This equation
・・・
can be developed as follows: (Bt / Yt) = Bt–Yt＝∆Bt/Bt –∆Yt/Yt = (Dt + rtBt) /Bt – nt =(dt/bt) + (rt–nt) = 0. Therefore, dt = (nt – rt) bt. nt and rt on the right side of the equation
is determined exogenously. On this account, dt, derived by assuming bt is fixed, is thevalue d which is the value of the policy goal.
V

Theoretically, no hypotheses exist that determines the limits to the value of bt, or
its fixed value. In reality, developing countries with extremely low bt value could
increase the value over time and fiscal policy may become sustainable. For heavily
indebted countries with large bt value, sustainable fiscal policies may require debt
reduction (Chalk and Hemmings, 2002).
W

Let us consider IMF policy research on Ghana that uses the sustainability
indicator (IMF 2003). The table below calculates the domestic primary balance value
necessary to stabilize the domestic debt burden based on real GDP growth (top row,
across) and real interest rates (left column). bt is assumed to be fixed at 0.289 based on

its true value in 2000. (IMF 2003, III. The Challenge of Fiscal Sustainability on the Post
HIPC Era in Ghana)
Domestic Primary Balance Necessary to Stabilize Domestic Debt Burden (%)
Real GDP Growth (%)
Real Interest Rate (%)

3

4

5

6

1.25

-0.5

-0.8

-1.1

-1.4

8.00

1.4

1.2

0.9

0.6

12.00

2.6

2.3

2

1.7

16.00

3.8

3.5

3.2

2.9

Other “sustainability indicators” include the “Domestic Primary Gap Indicator” and“Tax Gap Indicator.”
X

Ghana’s macroeconomic balance check policy becomes clear by referring to thefollowing from the “Medium Term Macroeconomic Strategy” and “Medium Term
Fiscal Targets” contained in the “Fourth Review under the Poverty Reduction Growth
Facility (PRGF) Agreement on Ghana: Three Year Plan” (May 1999 to May 2000)
conducted by the IMF. The reports clearly show that Ghana, facing a crisis stemmingfrom extremely low domestic savings rate and accumulated external and domestic debts,
has adopted the “sustainable debt” model and a PRSP Source Book type65

macroeconomic framework to perform macroeconomic checks on reform efforts
identified through PPA and PEM. (Ghana relies upon the HIPC initiative to resolve its
external debt problem and it is not adequately addressed in the medium term strategy.) It
remains to be seen whether Ghana can escape from its economic crisis as a result of themacroeconomic check and get on track for economic growth (including higher savings)
and poverty reduction, which is dependent upon the future implementation of thesestrategies.
“Ghana’s Medium Term Macroeconomic Strategy is intended to take theeconomy out of the trap of rising domestic debt → interest costs → escalating inflation,
which have hindered private sector development and consumed public resources that the
government needs to improve the provision of social services and public infrastructure.
This broad approach was endorsed in the course of discussions during 2001 on the
Ghana Poverty Reduction Strategy (GPRS), and the specific macroeconomic goals havebeen designed as an integral par of the strategy to reduce poverty in Ghana.
The Medium Term Fiscal Targets are to generate domestic primary surpluses
sufficient to cover all domestic debt service, approximately halving the ratio of domestic
public debt to GDP by 2003 from its end-2000 level of 29% of GDP. Reduced relianceon the banking system budgetary and parastatal financing, combined with positive realinterest rates, are expected to curtail monetary growth and bring inflation down to single
digits by the end of 2003. The framework allows for rising non-interest government
spending as a share of GDP, as well as substantial expansion credit to the private sector
in real terms (annual increases of 10% to 15%), in support of the targeted growth in real
GDP of 5% from 2003.” (IMF 2002)
Y

According to the IMF, the ratio of combined domestic and external official debt
to GDP in Vietnam in 2000 was 63%, certainly not an insignificant amount.
Nonperforming loans owed to commercial banks by the SOEs make up most of thisfigure. Although this is a major medium term fiscal risk, it can be dealt with separately
under the medium term macroeconomic strategy. 3% of government debt is domestic,and 27% is external, both which are sustainable under high economic growth and low
interest rates. The main focus of the medium macroeconomic framework
supported by the IMF in the PRGF (2001-2003) of Vietnam is the realization of higheconomic growth rates and sustainable poverty reduction, as seen below, and to this end,
the PRGF advocates the maintenance of prudent fiscal and monetary policies and the
support of private enterprises through low inflation.
“The goal of the medium term (2001-2003) PRGF-supported (macroeconomic)
program is to put Vietnam’s economy on a higher growth path, for a lasting reduction in66

poverty. Stronger growth with low inflation will need to come from maintaining
macroeconomic stability, and from accelerating structural reforms (to boost private
investment and competitiveness of the economy). The main forces for growth andemployment are expected to come from the private SME sector and FIEs. This strategy
for the proposed PRGF-supported program is consistent with the medium-term
structural and macroeconomic framework set out in the I-PRSP.
Key policy elements to spur private investment include reforming the banking
sector and further liberalizing the business environment to level the playing fieldvis-à-vis the state sector. Domestic competition would be bolstered through promoting
the private sector and reforming the SOE sector, and external competition strengthened
through trade measures. Macroeconomic vulnerability would be addressed throughprudent fiscal and monetary policies, and by stemming the losses of SOEs andstrengthening the performance of the SOCBs (state-owned commercial banks).” (IMF2001)
Z

I will give the example of Vietnam. In Chapter II, PPA research revealed thatmajor coping strategies for households at the “poverty threshold” included
shrimp-farming and high yield rice cultivation on collateralized land in Tra Vinhprovince, and seeking refuge in regional communities in Lao Cai and Ha Tinh provinces.
At the same time, household-based living standard surveys in 1992, 1998 and 2002
revealed that the national poverty rate (head count) saw a dramatic decrease over the ten
year period, to 58.1%, 37.4% and 28.9%, respectively. Estimates from the Quintile
Transition Matrix (table 1) are also available for the period between 1992 and 1998. For
2002, in addition to 6.7% or 10.2% of the aforementioned “vulnerable group,” figures
for the ratio of the quintile for landless households can be obtained. For all of these, abreakdown by the 8 regions nationally is also available.
At a minimum, the following observations can be made from this information.
(i) Poverty reduction policies based on broad based growth pursued by the Vietnamese
government since the 1990s have been more effective than pro-poor targeting. (ii) These
policies were strongly pursued in the “Mekong Delta region” in southern Vietnam andthe “south-western region” with bipolarized results; the loss of assets as coping
strategies were most marked in these two regions. (iii) In remote mountainous areas,
particularly in the “northwestern region” of North Vietnam and the “central plateau
region” of central Vietnam, pro-poor targeting investments to strengthen the regional
community have meant that the asset loss ratio for households were extremely low, but
the poverty rate was the highest in the country. (iv) Both the poverty and asset loss
ratios were exceptionally low only in the “Red River delta region.”

67

The above are rare instances where accurate assessments were possible becauseof the availability of different types of information, yet information is still insufficient toformulate future policy prescriptions. More information on local agricultural
cooperatives in regional villages, industrialization of rural areas, infrastructure andurban industries is needed for a balanced prescription.

68

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