INTERNATIONAL FORUM ON THE ERADICATION OF POVERTY
SESSION 3: BUILDING
PRODUCTIVE CAPACITIES AND FACILITATING
WEDNESDAY, 15 NOVEMBER 2006
Moderator: Mr. Jomo Kwame Sundaram,
Assistant-Secretary General for Economic Development, DESA
Mr. Charles Gore, Productive Capacities
and Poverty Reduction: Links and Processes
The core processes through which productive capacities are developed are: (1) Capital accumulation; (2) Technological progress; (3) Structural change. The two key ingredients of these processes are finance and knowledge. The processes are strongly interrelated. All are also strongly affected by the form and degree of integration of a country with the global economy as well as by national and international institutions.
The development and utilization of productive capacities matter for poverty reduction, because there is a virtuous circle between the development of productive capacities and economic growth. However, there is a virtuous circle between the development of productive capacities and poverty reduction. The development of productive capacities can lead to poverty reduction through:
At the same time poverty reduction can lead to the development of productive capacities through:
Ideally policy-makers should seek to start, sustain and accelerate a cumulative
process in which the development of productive capacities and the growth
of demand mutually reinforce each other. Inclusive development (or pro-poor
growth) will be achieved if this is done in such a way that the labour
force becomes more productively and fully employed, the prices of wage
goods fall and fiscal space is expanded, and poverty reduction will itself
reinforce the cumulative process.
In most developing countries it has been observed that there is an inefficiency gap between potential supply in rural finance provision and current achievements, an insufficiency gap between legitimate demand, and potential supply, particularly in the rural sector, and a feasibility gap between political expectations of an all inclusive finance and legitimate demand of those in real need. In the Africa region these gaps are huge and continue to grow in spite of the many internally and externally funded programmes targeted to achieve rural development.
The CGAP Donor Information Resource Centre 2004 has highlighted the following challenges as characterizing rural finance: dispersed demand, high information and transaction costs, weak institutional capacity, crowding –out effect due to subsidized and directed credit, seasonality, farming risks and lack of usable collateral. These and many other country specific challenges have marginalized many rural African communities and have made them “unbankable”.
The recent wave of Decentralization in many African countries has been characterized by devolution and democratization of local governments. This has meant a greater empowerment of local communities, adoption of democratic local governance, more significant transfers of resources to locally elected bodies and greater horizontal and vertical accountability.
Local governments are responsible for feeder roads, for provision of schools, clinics and water supply –they create the necessary infrastructure, which is the lifeblood of economic activity. This touches on the fundamental issues of reaching the remote villages, of having effective land records and of preparing legal plans on which built environment assets can be created. While these functions are very well developed in the urban local government sectors, they are sadly missing among rural local governments and this is a major drawback because most of the assets that people have are not recorded –their land, their houses, their livestock and their fruit gardens. This is indeed the collateral that they have, and it requires local governments to make it usable through recording these assets and giving them the necessary legal endorsements.
In many developing countries, there is a huge opportunity for expanding the frontier of finance in rural areas by tapping on the power and potential that local governments have and could readily use. Local governments are therefore an important part of unraveling these mysteries of capital through fixing the economic potential of assets; integrating dispersed information into one system; making people accountable; making assets fungible; networking people; and protecting transactions.