Illusions and Disillusions with Poverty Reduction Strategies: Growth, Crisis and the MDGs in Bolivia, Honduras and Nicaragua

The Poverty Reduction Strategy Papers typically made little provision for coping with economic volatility and hardly paid attention to macroeconomic trade-offs when scaling up public spending for poverty reduction. This article assesses such trade-offs in the case of Bolivia, Honduras and Nicaragua, using economy-wide models and accounting for the impact of the global economic crisis. The analysis shows that the crisis will not only cause severe setbacks in progress towards poverty reduction targets and other millennium development goals, but will also significantly raise the costs of the strategies to reach those goals. Given domestic financing constraints, more non-debt creating development assistance will be required to finance the strategies and to avoid an insurmountable rise in public debt in the three countries. This finding is worrisome in the light of existing aid dependence and complex relations with donors. Reducing such dependence may only be possible in the medium run and will require better alignment of macroeconomic policies with long-term development goals.