The Role of Capacity-Building in Poverty

Reduction

Espaol
Franais

By IMF Staff
March 2002

Contents
I. The Importance of Institutional Capacity
II. Prioritizing Needs for Capacity Building
III. The IMF Contribution to Capacity Building
IV. International Coordination of Capacity Building

Reducing poverty in the world's poorest countries fundamentally depends on a substantial

effort from the countries themselves, especially in implementing reforms needed to improve
economic performance. Unfortunately, countries often lack the capacity to implement
needed reforms or even to make the best possible use of foreign assistance. The Millennium
Development Goals (MDGs)global targets for 2015 that the world's leaders set at a
September 2000 summit meetingare an ambitious agenda for reducing poverty.1 It is
therefore essential that the international community make a concerted effort to help poor
countries develop the institutional capacity needed to reach the MDGs. This brief looks at
some key issues and the role of the IMF in the international effort at capacity building.
I. The Importance of Institutional Capacity
"Institutional capacity" is often used as a shorthand for a country's administrative and
management capacity, particularly with respect to implementing economic policies. This
encompasses a wide range of activities:

the ability to collect the statistical information needed for effective policy
implementation, and to do so in line with internationally accepted standards;

the ability to effectively plan government expenditure and the delivery of public
services at both the central and local government levels;

the public sector's aid absorption and project implementation capacity;

the effectiveness of agencies to fight corruption and enhance governance;

the establishment and operation of appropriate regulatory and/or prudential

frameworks for companies and banks;

the making and enforcement of rules and laws and judicial reforms;

the protection of property rights;

and the promotion of competition and of a market-based economic system in

general.
Where capacity is weakthat is, where a government is unable to effectively carry out its
own policiesthe consequences for society can be very costly. A good example is the
capacity to make reasonably accurate budget forecasts. In Africa just a few years ago, the
difference between budgeted and actual recurrent expenditure (i.e., spending excluding
investment projects, which are often donor-funded) was as high as 30-50 percent. Such
difficulties in forecasting mean the country's leadership cannot make the best decisions on
how to spend public money. In some countries, the government had designated primary
education, public health, and road maintenance as spending priorities, yet funds often ended
up being allocated to other areas.
II. Prioritizing Needs for Capacity Building
The coverage of institutional capacity is very broad, and includes a range of skills in all
parts of the government, as well as the ability to transmit these skills to new staff as existing
staff resign or retire. Fortunately, one of the benefits of the MDGs is to focus attention on
key outcomes for government activities, which then provide a basis for prioritizing
capacity-building activities. While needs vary from country to country, certain areas of
institutional capacity need urgent attention in many poor countries, and merit special
mention:

Sound macroeconomic policies, including a transparent and enabling domestic

business environment and an efficient financial sector based on the rule of law, are
fundamental. This requires effective macroeconomic management capacity,
including legislative and regulatory abilities and debt management skills.

Reducing poverty requires strong government financial management skills, multiyear expenditure programs, and effective expenditure monitoring.

The need to raise revenue for development and poverty reduction calls for goodtax
administration skills.

Improvements in statistical capacity are crucial for better poverty and social impact
analysis and to facilitate more effective monitoring of countries' progress toward their
development goals.

Improvements in the capacity to deliver public services to the population, especially

the poor, are crucial to translate both tax revenue and foreign aid into poverty reduction.
Indeed, it will also be important in winning increased aid from donors.
Simultaneous improvements in the various aspects of institutional capacity could create

positive synergies, but progress will take time and should reflect the priorities and starting
points of the country. Many low-income countries are now engaged in the process of
developing Poverty Reduction Strategy Papers (PRSPs). The PRSP process is a good
framework for identifying capacity enhancement needs and for the mobilization of adequate
technical assistance. Crucial in this regard is the development of local expertise, not only in
the government administration, but also within civil society, including local research and
independent oversight institutions.
III. The IMF Contribution to Capacity Building
Developing institutional capacity is an enormous undertaking, but one, which is vital if the
MDGs, are to be achieved. The IMF is strongly committed to this task, and is devoting a
substantial share of its own human and financial resourcesaround $100 million in 2001
to technical assistance (TA) and training.2 These activities are focused on the institution's
core macroeconomic and financial areas of responsibility, coordinated with other agencies
where appropriate. These include public finance and administration, financial sector
development, and development of sound statistical systems (Table 1). Assistance is targeted
to support member countries' reform efforts and development goals. Particular emphasis is
placed on providing technical assistance for capacity building, recognizing that capacity
limitationsrather than lack of political willoften impede implementation of economic
reforms.
Even with large amounts of technical assistance channeled into well-defined areas of
institutional expertise, there is a need to tightly prioritize the TA provided by the IMF.
Currently, priority is being given to heavily indebted poor countries and to post-conflict
countries, helping to set them on a sustainable growth path. In addition, priority is also
being given to countries preparing PRSPs. A framework for assistance to these countries is
being established on a multilateral basis, and the IMF's TA fits within this framework.
The IMF is providing an increasing share of its technical assistance through a regional,
country-based approach. In 1993, in cooperation with other donors, the IMF launched the
Pacific Island Regional Technical Assistance Center (PFTAC) to address the special
capacity building needs of small island countries in the Pacific. A similar center, also
launched with multi-donor support, was opened in 2001 in the Caribbean. These centers
have similar objectives: to help focus TA on capacity building; to raise the effectiveness of
IMF TA projects through faster response; and to increase positive externalities by sharing
regionally based experiences and improving coordination with other TA providers.
IV. International Coordination of Capacity Building
The IMF is not the only provider of technical assistance, even within its areas of expertise.
Almost all international development agencies support some type of capacity building
through TA. To ensure its effectiveness, some degree of coordination in the delivery of this
TA is essential. There is no single best way of coordinating the TA provided by these
agencies, and a wide variety of approaches, from the very broad to the highly specialized,
are being pursued. Examples of initiatives in which the IMF is involved at the global,
regional, and country levels include:

At the global level, the Integrated Framework for Trade-Related Technical

Assistance to Least Developed Countries is an interagency effort3 aimed at facilitating
coordination of trade-related technical assistance. The International Tax Dialog is a less
formalized initiative4 that brings together developing countries to improve tax
administration through discussion and better coordination of technical assistance. And
the Paris21 Task Team on Statistical Capacity Building Indicators, chaired by the IMF,
is one of several initiatives aimed at improving statistical capacity.

At the regional level, the Partnership for Capacity Building in Africa (PACT), an
initiative led by the intergovernmental African Capacity Building Foundation, is aimed at
strengthening human and institutional capacities in sub-Saharan Africa.

At the country level, coordination of capacity-building support by donors is a

regular feature of development assistance. It is important that the recipient countries
themselves take the lead in coordinating this support. The recent review of the PRSP
process has highlighted both the importance and the urgency of aligning donor support
with the PRSP, and the prospects are good that PRSPs will lead to stronger partnerships
with countries and better donor coordination.
Meeting the Millennium Development Goals will require that all donors improve their
focus on capacity building in poor countries and ensuring that their assistance is delivered
in a coordinated way. In playing its part, the IMF will focus assistance more sharply on its
areas of expertise, ensuring that its efforts will be fully complementary to those of the
World Bank, UNDP, and other development partners. By focusing more sharply on what
they do best, and delivering TA where it is needed most, all development partners, including
the IMF, can help poor countries to harness the full potential of their people to create a
better future.

Core Areas of IMF Technical Assistance

Monetary and
Exchange Affairs

Fiscal Affairs

Statistics

Training

Design of
structural reforms for
the effective conduct
of monetary and
exchange
policyformulation
and implementation,
including improving
monetary and

Creation and enhancement of

institutional capacity in macro-fiscal
policy management

Monetary
and financial
statistics

Training
events
focusing on:

Design of structural policy

reforms, and related institutional
reforms, forsustainable revenue
mobilization, including macrosignificant interjurisdictional issues

Balance of
payments and
international
trade statistics,
including

Macroeconomi
c management
and financial
programming

exchange operations,
foreign reserves
management,
systemic liquidity
arrangements and
related issues in
public debt
management

(e.g., fiscal federalism, tariff reform)

Budget preparation and
public expendituremanagement,inclu
ding reform of treasury and
government accounting and reporting
systems

international
investment
positions

Financial
sector issues

Fiscal
Reserves
issues
and foreign
currency
External
liquidity/extern sector issues
al debt statistics
Short-term expenditure
Promote sound
rationalization, incorporation of
Poverty
and efficient
social safety nets in IMF program

reduction
banking and
design, and analyses of macro-fiscal
Government
strategies
financial systems as sustainability of social security
finance
necessary for
systems
statistics
Structural
financial and
reform
economic stability,
Advice on how to utilize
National
including through
information technology in tax/customs accounts and

strengthening bank
administration and public expenditure price statistics
Governance
supervision policies
management
and regulation, bank
Statistical
Economic
restructuring/resolutio Design of central government
organization
issues for
n, cross-border
transfer systems to lower levels of
NGO
supervision issues,
government

representatives
and payments system
Employment
issues
Design of social safety nets and
statistics (refer
social security systems, but only when to International
Contributing
relevant to macroeconomic adjustment Labor
tocapacity-building
and in the absence of timely World
Organization)
within central banks Bank involvement
and financial
Social and
supervisory agencies Conduct of courses, seminars and demographic
for effective ongoing workshops on various fiscal issues
data (refer to
implementation of
World Bank)
monetary, exchange
Tax aspects of financial abuse
and financial sector

policies, including
Development
legal frame-work and
and
institutional
implementation
improvements, and
of census and
priority aspects of
household or
central bank
industry
accounting and
surveys
auditing systems

Banking systemComputerizatio
related issues in
n database and
corporate
information

restructuring and
bankruptcy

technology
development

Capital market
development and
oversight

Training
courses/semina
rs for
individual
countries

Nonbank
financial sector
supervision;
coordination and
consolidation of
supervisory bodies

Development
of source
statistics

Development of
credit bureaus

Workshops/seminars
on central banking
and financial sector
supervision issues

The goals for 2015 include: Halving extreme poverty and hunger, achieving universal
primary education and gender equity, reducing under-five mortality and maternal mortality
by two-thirds and three-quarters respectively, reversing the spread of HIV/AIDS, halving
the proportion of people without access to safe drinking water and ensuring environmental
sustainability.
2
The Policy Statement on IMF Technical Assistance is available
athttp://www.imf.org/external/pubs/ft/psta/index.htm.
3
Involving the IMF, International Trade Centre, UNCTAD, UNDP, World Bank, and the
WTO.
4
Involving the World Bank, IMF, OECD and the UN.