SESSION 3: BUILDING PRODUCTIVE CAPACITIES AND FACILITATING
ACCESS TO FINANCIAL RESOURCES

WEDNESDAY, 15 NOVEMBER 2006 
16:40-18:00, Conference Room 2

Moderator: Mr. Jomo Kwame Sundaram, Assistant-Secretary General for Economic Development, DESA
Mr. Charles Gore, Senior Economic Affairs Officer, UNCTAD
Mr. Augusto de la Torre, Senior Regional Financial Sector Advisor Latin America & the Caribbean, World Bank
Mr. Kadmiel Wekwete, Director, United Nations Capital Development Fund, Local Governance Unit

Session organized by UNCTAD, DESA and UNCDF

Mr. Charles Gore, Productive Capacities and Poverty Reduction: Links and Processes

The first presentation focuses on the relationships between production and poverty and puts forward a structuralist rather than statistical approach to international poverty analysis and policy. It argues that the substantial poverty reduction, rather than marginal poverty alleviation, occurs if productive capacities are developed and utilized in such a way that the working age population becomes more and more productively employed.

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:

• The employment channel: Progressive absorption of unemployed and underemployed into expanding economic activities with higher productivity
• The price channel: Lowering the prices of wage goods, particularly food prices, and the reduction of the instability of those prices
• The governance channel: Strengthening the productive base enables increased government revenues, which can allow improved public services increase the fiscal space which is essential for good governance

At the same time poverty reduction can lead to the development of productive capacities through:

• The human development channel - associated with increased expenditure on education, health, nutrition and skills formation
• The consumption demand channel -  through which increasing demand acts as a stimulus to the full utilization and development of productive capacities
• The entrepreneurship channel - in which poverty reduction is associated with reduced insecurity enabling less short-term opportunism and more risk taking.

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.

Mr. Augusto de la Torre, The role of the public sector in broadening access to finance

Economists agree that some government intervention is needed to promote financial development; there is less agreement as to its form. There are two opposing views: the interventionists argue for an active public sector involvement in mobilizing and allocating financial resources to broaden access to credit, as private markets have failed to do the job; and the laissez faire group contends that government involvement harms more than it helps, and that its efforts should focus instead on improving the enabling environment to help ease agency and entry problems, and reduce transactions costs. At the heart of the “enabling policy environment” is a clear vision of the respective roles of the public sector and private stakeholders in bringing about an inclusive financial sector. More recently, a third view has emerged, a middle ground which favours direct government intervention, but in non-traditional ways. The pro-market activists call for a limited public sector role in financial markets, recognizing that institutional efficiency is the economy’s primary goal (in this sense, it is closer to the laissez faire position). Pro-market activists state, however, that government action may be needed in the short-run, because newly built institutions take time to grow. The report, “Building inclusive financial sectors for development”, notes that while there are core government roles (maintaining economic stability, assuring an overall conducive policy environment, and regulation and supervision), much is driven outside the government sphere.
           
The purpose of the presentation is to show how pro-market activism has worked in practice, not to give a comprehensive evaluation of policies in force, or judge which type has been successful. It will be shown that the country experiences raise further questions, and that additional study is needed to understand whether pro-market activism is a viable option to developing inclusive financial sectors for development.

Mr. Kadmiel Wekwete, The Role of Local Government in Rural Finance

Traditionally local governments in rural areas deal with local government finance, which includes grants from central governments, local taxes and fees, and a range of funding from donors and other non-governmental actors. Therefore the policy and intellectual debates tend to revolve around fiscal decentralization issues and the various modalities of transfers and conditionalities. Most of these transferred funds go to satisfy the local governments’ primary mandates of providing infrastructure and services, and other key national policy objectives, which are manifest in sector policies- health, education and basic infrastructure provision.

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.