Low-income economies told to diversify to sustain growth

15 Apr 2016


Low-income developing countries need to diversify their economies, promote inclusion, and close infrastructure gaps by tapping both domestic resources and foreign funding to sustain growth, speakers at an IMF-World Bank conference said.

Resilient and inclusive growth remains key to development of low-income countries and for this it is necessary that infrastructure gaps are closed, while maintaining debt sustainability as countries tap both domestic and external resources, they said.

The conference on `Sustainable Economic Development in a Challenging Global Environment', was organised in Washington DC on 14 April as part of the IMF-World Bank spring meeting.

''The global environment is clearly causing some real difficulties in low-income and developing countries. This is partly due to lower commodity prices, which have been declining for more than a year and a half. For countries which are reliant on the extraction of resources, this is a major problem,'' said IMF managing director Christine Lagarde in her opening remarks, adding that low commodity prices are here to stay.

She also noted the economic slowdown of China - a significant client of and direct investor in many low-income and developing countries - created further difficulties.

A weaker external environment and tighter financing conditions are exacerbated by longer-term mega trends in climate change, demographic changes and technology, IMF deputy managing director Min Zhu remarked.

Resilient growth remains the key to the sustainable development of low-income countries, according to Harvard University Professor Lant Pritchett. Such growth is still lacking in many developing countries: severe growth collapse episodes hit low-income and developing countries frequently and with devastating effect. Cumulative losses in growth decelerations in the 90 recent episodes were larger than 20 per cent of GDP, Pritchett said. ''This means 90 Greek tragedies,'' he said in reference to a 22 per cent drop of Greek output between 2008 and 2012.

Setting the stage for a debate about how structural or macroeconomic policies could contribute to growth, Harvard University Professor Larry Summers noted that resilient growth must be maintained through rainy day buffers, inclusiveness, public investment, and structural reforms in low-income countries the same way as in advanced economies.

''Almost all economic policy errors take the shape of doing today what you wish you had done yesterday,'' Summers noted. ''Things are likely to get worse in the next couple of years and the tools available in the last two recessions are not going to be available on the scale they were. Otherwise, the greatest victims will be the world's poorest countries. It's a moral as well as an economic imperative,'' he said.

''Inequality and a lack of resilience, a lack of sustained growth may really be the two sides of the same coin,'' said Jonathan Ostry, deputy director of the IMF's research department. ''When inequality is rampant, all sorts of individuals are excluded from education, credit markets, adequate health, and nutrition.''

Not doomed to be poor
Fighting inequality on a micro level works, as long as help comes in a big enough push, underlined Massachusetts Institute of Technology Professor Abhijit Vinayak Banerjee, in his presentation of efficient ways to help the poorest. ''Cash to buy assets, with some training and hand-holding brings results. The poor are able and willing to grab real opportunities,'' he said, citing positive examples from Indonesia and India.

Former Nigerian minister of finance Ngozi Okonjo-Iweala said diversification of economies, a political will to save in good times to be able to tap buffers during bad times, and mobilising domestic resources were essential to ensure resilient growth in low-income and developing countries.

''Manufacturing in Nigeria is 9 per cent of GDP, which is nothing. If we don't struggle to process the goods that we produce and create jobs for our young people, we cannot build a diversified economy. I don't believe we can have resilience unless we encourage manufacturing, services, and agriculture.'' Job creation is the best way to fight inequality, she added.

The governor of the Bank of Tanzania, Beno Ndulu, also underlined the need to diversify.''In Nigeria, oil accounts for 10 per cent of the economy, but 90 per cent of exports, and 70 per cent of revenues. Thus, what one has to deal with is the current account balance and taxes, and that the rest of economy contributes proportionately to the revenues,'' he said.

Better tax administration, a larger tax base, removal of tax incentives, financial inclusion and increasing transparency and improving governance are essential to better mobilise internal resources, speakers agreed. That, in turn, has to feed into building ''high quality infrastructure that allows diversification, while keeping an eye on debt sustainability,'' noted Antoinette Sayeh, director of the IMF's African Department.

''Africa is hungry for infrastructure,'' said Cameroon's minister of finance, Alamine Ousmane Mey. IMF deputy managing director Mitsuhiro Furusawa added that, besides infrastructure, developing countries also have other priority spending needs to achieve their sustainable development goals, such as in health and education. Development areas must be prioritised, bringing in long-term concessional resources to finance the projects in a time when low-income and developing countries sovereign bond issues are no longer feasible due to high risk premiums, Mey added. Indeed, a recent United Nations report put the total investment need at $3.3–$4.5 trillion annually.

To be able to develop infrastructure without jeopardising the sustainability of debt - and in a global context which will be much less favorable than in the last decade - affordable sources of external financing should be made available for low-income and developing countries burdened by an overstated perceived risk, argued Oxford Professor Paul Collier. In addition, Organisation for Economic Cooperation and Development countries should change regulations on their pension funds, which are not allowed to invest into African infrastructure as an asset class, he said.

While challenges to maintain growth abound, some consider pessimism out of place. ''One should not forget about the exciting heavy development in Africa in the last 20-25 years,'' said Arvind Subramanian, chief economic advisor in India's ministry of finance. ''It was what I call unconditional convergence with a vengeance: many emerging countries are catching up,'' he added.

''The recent crisis has not changed that narrative fundamentally. In relative terms, the growth decline has not been as dramatic as suggested,'' he noted, but cautioned about seeking a balanced approach to the inequality agenda so it does not come at the cost of proven policies to enhance growth.

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