Poverty and Social Impact Assessment

1
Poverty and Social Impact Assessment

• The impact of increases in public expenditure in
  Rwanda
• 13 February 2003
• Rwanda PSIA team
• John Mackinnon
• Anne Thomson
• Ida Hakizinka
• Leonard Rugwabiza

2
Rwanda background

• Chronic economic decline and increasing internal
  tension from mid 1980s
• Genocide 1994 and civil war
• Economic recovery
• Development of economic management systems
• Returnees and homelessness
• Ongoing war in DRC
• Prisoners and gacaca

3
Rwanda PRSP

• key assumptions
• poverty mainly rural
• land relatively scarce
• input use very low but appears to have
  good economic returns
• high unemployment
• fragile environment

4
PRSP (cont)

• Strategy
• Poverty reduction through growth
• Agricultural growth leading to induced off-farm
  growth
• Improved delivery of social services
• Presentation of alternative scenarios

5
Public expenditure in the PRSP

• Higher combination needed in general
• Combination of high expenditure needs and low
  revenue base justifies relatively high inflows
• Specific need for temporary expenditure expansion
• Post conflict
• AIDS
• Environmental decline needs reversal
• Temporarily high unemployment
• Need for recapitalisation in the rural economy

6
The expenditure scenarios

• Baseline scenario based on existing resource
  envelope
•  
• Scenario 2 based on extra 100 million per year
• Scenario 3 financially unconstrained
• Scenarios were developed based on ministries own
  cost estimates using priorities derived from the
  national consultations and analysis of the micro
  data

7
Real public expenditure in the PRSPs scenarios
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The PSIA in Rwanda

• Issue the size of the expenditure programme
• Two views of fiscal deficit based on assessment
  of the needs of poverty-reduction and on
  macroeconomic prudence.
• Alternative ways of financing PRSP scenarios
• Costing and impact of proposed programmes on
  poverty targets
• The study includes micro and macro aspects

9
Macroeconomic concerns about higher expenditures

• Inflation
• Sustainability and dependence
• Dutch disease/demand size effects
• Excess size of the public sector
• Private investment
• Absorptive capacity
• Uncertainties about resource flows
• Fungibility
• Revenue-raising capacity
• Balance of payments and macroeconomic consistency

10
Process

• High stakes and controversial
• Strong government involvement
• IFI interest
• Consultations donors, NGOs, private sector
• Issues access, relation to government-IFI
  negotiations
•   Technicality of subject and breadth of
  consultation

11
Methodology

• literature review
• some new theory e.g. debt sustainability
• judgements of directions of key effects in light
  of the structure of Rwandas economy e.g. Dutch
  disease
• some econometric modelling
• forward macroeconomic projections e.g. of debt
  flows and growth

12
Methodology (cont)

• consultation e.g. on magnitude of investment
  effects
• unpacking costings
• use of household survey data e.g. on
  distributional impact of growth strategy
• micro-macro linkages

13
Findings
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Dutch disease/ demand-side effects

• Increased inflow will appreciate the real
  exchange rate, though the econometrics do not
  show this
• Real exchange rate appreciation will be a
  deterrent to exports, but other non-price factors
  are more important e.g. roads to tea factories
• Real exchange rate appreciation may be good for
  encouraging agricultural transformation
• Increased public expenditures may drive up costs
  of public sector output
• Employment benefits in fragmented rural labour
  markets from some forms of public expenditure
  e.g. public works programmes

15
Sustainability projecting debt service and cost
implications

• We disaggregate the extra expenditure into
  cost-neutral, cost-reducing and cost-incurring
• Tight debt sustainability indicators reduce the
  size of the affordable deficit, because the
  government has to cut new expenditures more than
  it saves on interest
• Debt sustainability is best assessed by
  medium-term projections of expenditure flows
• International evidence on negative effects of
  debt on private investment does not disaggregate
  between concessional and non-concessional
  effects. Consultations do not indicate public
  external debt is a major concern for the private
  sector.

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Implications for macroeconomic programming

• Optimal size of deficit will depend on the
  availability of different forms of finance
• Hence need for contingent expenditure scenarios
  (as envisaged in the PRGF)
• Relation between planned expenditure and
  macroeconomic programme
• Optimal size of deficit will also depend on the
  composition of expenditure
• Hence need for improved measures of Dutch-disease
  and sustainability concerns

17
Benefits of expenditures for aggregate supply and
poverty reduction

• International evidence on effects of public
  expenditure and investment very mixed
• The benefits of expenditures will depend on
  policy context
•    Critical policy areas in Rwanda include
• Expenditure prioritisation consistent with
  strategy
• property rights and land policy
• trade policy
• tea and coffee sector revival
• political stability and reconciliation
• decentralisation
• sectoral strategies consistent with PRSP
• donor modalities and the implementation of the
  strategies
• No room for policy error

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High priority activities identified in PRSP

• 1.  Intensifying small-scale agriculture and
  livestock
• 2.  Labour-intensive public works
• 3.  Malaria and HIV/AIDS prevention
• 4.  Primary school textbooks
• 5.  Economic infrastructure 
• 6. Skills development
• 7. Adult literacy
• 8. Gacaca
• 9.  Demobilisation and reintegration  
• 10. Shelter provision  
• 11. Development of sector strategies

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Expenditure Breakdown of Programmes
20
Beneficiaries of Growth promoting programmes

• Agriculture
• Some of the poorer provinces will benefit from
  successful agricultural growth
• Benefits will depend on secure land tenure
• Economic infrastructure
• At present, it is not possible to estimate the
  number of poor people who will benefit directly
  from the programme.
• Reduced transport costs should increase incomes
  of farmers producing for the market
• Public works
• Scarcity of local public goods and high rural
  unemployment, therefore good potential for
  localised benefits
• Much depends on detail of programme

21
Refining expenditure priorities

• Some areas may well need additional financing
  above the amounts included in the PRSPs budget
• Implementation of the Land Act
• Family planning
• Soil conservation
• Water supply
• Gacaca/demobilisation

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Expenditure priorities (cont.)

• Other areas are either over-optimistic in
  disbursement, not clearly pro-poor or not
  explicitly prioritised in the PRSP
• Labour-intensive public works (too optimistic)
• Secondary and higher education
• Railway and port development
• Specific roads identified for rehabilitation

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Next steps

• Institutionalising macro projections within
  MINECOFIN
• Forecasting cost implications
• Monitoring costs in the public sector
• Developing and/or reviewing sector strategies, in
  line with PRSP objectives
• Poverty monitoring systems