Pro-poor Governance: What does it mean for Liberia (ns)?

Pro-poor Governance: What does it mean for Liberia (ns)?

By: Octavius T. Quarbo

Introduction

At the close of 2017, the year of political decision-making in Liberia, Liberians experienced the dawn of a new leadership which aspired to govern based on ‘pro-poor’ policies. Then President-elect George Manneh Weah, in an acceptance speech, renewed the hopes of Liberians by promising to change lives through instrumenting “pro-poor public governance”. Nearly a month later, during his inaugural address, he reemphasized this by saying: “I intend to construct the greatest machinery of pro-poor governance in the history of this country”. On the 29th, only a week later, the Chief Executive announced, during the state of the nation address, and as part of his legislative agenda, several proposed reforms, affecting land ownership and citizenship. He also stated his development targets of: quality education, road connectivity and economic improvements.

Regarding pro-poor governance, the idea behind this, one would think, is to ensure that actions by the government end up being beneficial to the poor – which by recent studies make up about 54.1% of the population. Without the details of this agenda being comprehensively available, it, like other forms of public policies, should be grounded on academic/theoretical foundation. Thus, a brief analysis follows.

Pro-poor Growth, what is it?

In terms of national development, pro-poor governance targets shifting the fundamentals of the national economy. First, the lives of the poor are unlikely to sustainably improve without growth. This is because, redistribution of already circulating resources in the economy works through taxation and charity, but not significantly enough.  And so, a sustainable way to reduce poverty is to facilitate the poor’s earning of additional resources that accompany growth. Given that the economy allows for competition amongst actors, the poor’s ability to attract additional economic gains is highly possible when their capabilities (access to the factors of production) are enhanced, which eventually increases their involvement in economic activities. This explains why growth is not often even. It either favors the non-poor largely, or the poor – when targeted.

There are two widely debated definitions of pro-poor growth in policy discussions, based on the academic literature. The first emphasizes distributional changes as the economy grows. For the second, ‘what happens to poverty, when there is growth’? There are associated arguments with both definitions, which, per this paper’s scope, cannot be exhausted (See Ravillion, 2004 for analysis). Hence, this review considers a combination of these factors: economic growth, income inequality, and poverty reduction over the last twelve years. References are made to movements along the absolute poverty line, whilst also analyzing the shifts in income earned between decile-based categories (relative).

Liberia’s Growth and Inequality: 2006 – 2017

The Liberian economy has grown (real growth rate) on the average by 5.3 % between 2006 and 2017 (IMF). Contrary to popular assumptions, this growth appears to have characters of inclusivity. Inequality data accessed covers the period 2007-2014. According to the World Bank, Liberia’s Gini which stood at 36.5 in 2007, fell to 33.2 by 2014. This, in details, shows the rise in the income share of Liberia’s lowest quintile from 6.5% (in 2007) to 7.8% (2014). At the same time, income share held by the top-most quintile dropped from 43.5% (2007) to 41.3% (2014). This see-saw pattern between the two compared quintiles occurred, whilst the middle quintile experienced a slight change from 16.2% to 16.5%. Comparatively, Liberia is the lowest in the Mano River Union region in terms of inequality (Household Income and Expenditure Survey – HIES, 2014). The change in Gini favoring the poor seems to corroborate with the reported decline of about 10% in overall national poverty. The HIES (2014) reports that poverty stands at 54.1% compared to the 2007 estimate of 63.8%.

Effecting Pro-Poor Growth

Pro-poor governance is a means to an end. By this, government utilizes scarce resources to deliver services that benefit the poor most. In the current Liberian context, a pro-poor form of governance demands stabilizing recurrent expenditure and increasing investment in public capital (goods) and other social services that enhance the productive capacity of the poor. With the 2017/2018 fiscal year (FY) budget of $563.6 million, $393.4m or 69.8% goes to government operations (remuneration, goods and services) while $55.2m or 9.8% goes to public sector investment programs (which is dominated by the conduct of the presidential and legislative elections and road construction). Amongst several, there are two key reasons why the roughly half-a-billion dollars Government of Liberia (GoL) budget does not significantly impact the Liberian economy. On the overall, capital flight estimates were put at an annual average of $966 m for the decade between 2004 and 2013 (Gould, 2017; with reference to Global Financial Integrity Report, 2015). This amount includes, amongst other things, remittances from salaries paid to professionals and profits earned by foreign merchants.

With families and other interests based abroad, the final economic (expenditure/investment) destination of most of the GoL recurrent cost (budget used on payment for salaries and goods and services) was away from Liberia. Such huge amount that should have circulated and kept the economy liquidated was lost to international transfers. On the aspects of private investment, Liberians account for a small fraction. The manufacturing sector, for example, has only 23% Liberian ownership (Ministry of Commerce and Industry Annual Trade Bulletin, 2015). This has caused limited returns to the Liberian economy, since, according to Picketty’s (2013) argument, on the average, the rate of return on capital is usually larger (at 5%) than the rate at which the economy grows (at 3%) on the overall. There is basically no adequate savings for most of the 75% of the working population who are found in government and the private sector (HIES, 2014), and so their ability to invest and get returns on capital is limited. So, whilst the Liberian economy has grown at an average of 5.3% over the last twelve years, the share of growth realized by the workforce (a fair representation of the population) has been limited.

Given that about 70% of the Liberian workforce is in agriculture (CIA World Fact book, 2017) and that huge potentials for job creation exist in the sector, investments aimed at revolutionizing agriculture would be a major step in pro-poor governance. This could be used to provide public goods (including roads) and improve smallholders’ access to capital – two binding constraints to agricultural development/productivity in Liberia. As the sector lead, the Ministry of Agriculture (MoA) has worked with partners to identify options to address the challenge of farmers accessing private capital. From the studies, an incentive-based risk-sharing mechanism alternates with establishing a full-fledged agriculture development bank, as essential to easing stress associated with commercial banks availing capital for smallholder agricultural purposes. Whichever model is adopted, there is an unavoidable need for capitalization of said vehicle that should be private sector-managed.    The GoL, could therefore, invest an estimated $100 million as seed funding for the mechanism/bank. This could partly come from savings of pro-poor governance practices (cut in government operational cost). Increased investments in social development – education and health – will also significantly contribute to enhancing the capacity of Liberians to compete in the economy, although this route takes a much longer period.

With increased investment, production and productivity are enhanced, and Liberia will expand in value addition for both local consumption and export. This also increases the number of jobs that will be available. According to a Tony Blair Institute’s Analysis of relevant data, reports and sector strategies, potentially, the agricultural sector could provide around 600,000 jobs over the next 12 years. Along the agricultural value chain, services of warehousing, transportation, storing, processing, marketing, and distribution will increase and then Liberians, when empowered by government-subsidized capital, will compete in providing these services. This will create earnings in work (salary) and contribute to the Liberians benefiting more from the overall returns on capital. Within the period of three-five years, local production of the Liberian staple (rice and cassava) will have improved, along with other food and cash crops, livestock and fisheries.  Imports will then fall as value-added exports rise – thus leading to enhanced balance of payment.

Another step towards empowering Liberians is to improve their rights to land ownership. As underserved as the poor are already, in terms of the two other higher-return factors of production: capital and entrepreneurship, giving them edge in the ownership of land will enhance their productive capacity and increase bargaining power when joining partnerships with other investors who bring forth capital. To do this, from the policy perspective, passage of the current land rights act will be a major step. This way, Liberians can, in a communal way, make a case for investment partnership and earn higher returns on the products. They would be better positioned to compete with the dominating business class (which is largely made of foreign merchants) whose approach to sourcing wealth has been importation. With capital also accessible to them, Liberians then will lead and man, through small and medium enterprises (SMEs), value chains with the greatest potentials for economic returns.

Immediate Next Steps for Policy-making

Towards achieving this, a policy instrument available to President Weah is the FY2018/2019 national budget. Ahead of this budget formulation, there seems to be more flexibility for reduction in recurrent cost. The President has promised to reduce his salary and benefits by 25%; same is reported to be under consideration by the House of Representatives (reducing earnings which are in the tone of $13,000 per month for each of the 73 members and hopefully their 30 counterparts in the Senate). Heads of state-owned enterprises (Managing Directors at the Liberia Petroleum Refining Company and National Transit Authority) have also announced reduction in earnings. Foreseeing a possible continued trend, either by policy dictate or ‘following the leader’s example’, we estimate the realization of about 25% savings on recurrent cost. Because salaries and goods and services make up this portion of the budget, we acknowledge that effecting cuts in remuneration is more voluntary, given its high level of rigidity when moving downwards.  The latter (goods and services) is largely flexible to downward shifts, making it a matter of policy.  Saved resources from effected cuts should be pooled together for additional investment in capital and social development.  Using the current FY numbers, 25% of the operational costs would amount to about $98.3 m which could go towards financing agriculture-related (value addition) lending, farm-to-markets roads construction, and increased expenditure on health and education (with emphasis on STEM education and TVET).

More importantly, whilst developing the successor framework for the Agenda for Transformation (AfT) is ongoing, there’s an immediate need to develop a market-friendly agro-based industrial policy. This, premised on relevant sector plans, would provide for an inter-ministerial (Ministry of Agriculture, Ministry of Commerce and Industry, Ministry of Finance and Development Planning) and inter-sectorial (public, private and not-for-profit) coordination that is owned by the GoL, and co-managed by the lead ministries (MoA et al). With this cabinet-level coordination machinery, donors and partners support to agricultural production, market and value chain development will be aligned. Having a clear vision, strategy and efficient implementation mechanism will ensure inclusive growth that is much more pro-poor.

Conclusion

We acknowledge that to accelerate growth that will favor the poor, the government, through its policies, would begin to target initiatives (some of which have been proposed in this paper) that increase the potentials of the poor to participate in economic activities. With targeting, a possible tradeoff may arise. There could be some opportunities for public investment that have higher economic returns but are not naturally pro-poor. Hence, there is a balance to be struck between propelling economic growth and ensuring that it favors the poor.

Between 2006 and 2017, Liberia reportedly reduced its poverty level by about 10%. And so, at 54.1%, much is yet desired; hence the pace of reduction must be accelerated. Key approaches to accelerating economic growth, reducing inequality and enhancing Liberians’ participation in the economy revolve around investing in the people – through agriculture, education, health programs and increasing Liberians’ rights to land ownership and access to finance.  Initiating and attracting additional investment in critical infrastructure to facilitate internal trade and add value to agro-produce to make them export-ready, complements investment in the people. Unless these things, and many more, are ensured, Liberia may continue to experience growth that will not substantially benefit the poor.

About the Author

Octavius T. Quarbo’s professional and academic research has focused on poverty, growth and inequality as well as aid. He holds a Master of Arts Degree in International Development – Merit (with focus on Political Economy) from the University of East Anglia (UEA), Norwich – United Kingdom. Reachable at: otquarbo@gmail.com ; +231-777-605209/886-

Thanks to comments from Lucio Esposito, PhD – Associate Professor of Development Economics, UEA and Jonathan Said, MSc – Head, Private Sector Development Practice, Tony Blair Institute for Global Change

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