Reaching the Millennium Development Goals—Macroeconomic Prospects and Challenges in Low-Income Countries

Opening Remarks by John Lipsky, First Deputy Managing Director, International Monetary Fund
At the IMF Seminar on Reaching the MDGs: Macroeconomic Prospects and Challenges in Low-Income Countries
Washington, D.C., September 16, 2010


Good afternoon and thanks to all of you for joining us today. I would like to extend a special thanks to Nancy Birdsall and George Ayittey for being here. Our topic is the effort to reach the Millennium Development Goals, which is a central issue on the international policy agenda. In addition to today’s event, our Managing Director will address the United Nations Summit next Monday on precisely this topic. In anticipation, IMF staff have prepared a background paper on the macroeconomic foundations needed to attain the MDGs. With your indulgence, I would like to share with you a few introductory remarks on this subject.

Crisis and fallout

Prior to the onset of the current crisis, there were grounds for optimism on the progress being made toward these goals. Since 1990, poverty had fallen by 40 percent, and the number of people living in extreme poverty—that is, on less than $1.25 a day—fell by 400 million. Overall, the developing world seemed poised to reach the overarching goal of cutting poverty in half by 2015. And universal primary education also seemed within reach.

But even before the crisis, the situation was far from satisfactory. Although poverty was falling in sub-Saharan Africa, the region seemed unlikely to reach the target, given its late start. Progress on the other Millennium Development Goals was uneven. And fragile states in particular were being left behind.

The global financial crisis—and the ensuing Great Recession—resulted in serious setbacks for the Millennium Development Goals. Years of progress appear to have been lost, and the positive momentum has been derailed. Most important, the lost growth means delayed prospects for poverty reduction. The progress on key social indicators made possible by growth will suffer.

Nonetheless, we can and must put the global economy back on track. Progress on the MDGs can and must be restored. It won’t be easy and it will require a firm unity of purpose and collective effort. But one thing is certain. The central task is to attain strong, sustainable, and balanced global growth, and to restore the macroeconomic stability that had been so beneficial for boosting growth in the developing countries. Without meeting this triple target of strong, sustainable and balanced growth, prospects for achieving the Millennium Development Goals would be reduced irretrievably.

This conclusion appears clearly when we examine earlier experiences. Prior to the current crisis, a combination of strong global growth and improving policies in developing countries produced accelerated growth in these economies, together with tumbling poverty rates and advancing social indicators. Improvements in basic policies—including strengthened budget positions, declining debt burdens, and decelerating inflation—produced tangible results in terms of more rapid growth. And stronger growth in turn helped to provide both the incentive and the wherewithal to further improve institutions and public service delivery. In short, a virtuous circle.

In addition, debt relief and a favorable external environment helped the process. During the pre-crisis years, the low-income countries enjoyed the longest and broadest economic expansion in modern history. This included record growth rates in previously lagging regions such as sub-Saharan Africa.

As we all know, the crisis created a major setback. Nonetheless, developing countries had been able to build enough policy protection during the good years so that the damage from the crisis was far less than it might have been. Reflecting the existence of these policy buffers, low-income countries were able—for the first time—to use countercyclical policy to limit the impact of a serious external downturn. Because in many cases sufficient fiscal space had been established, many low-income countries realistically were able to preserve public spending —and in some cases even increase it — at a time when revenue was falling. During 2009, health and education spending rose in real terms in 20 of the 29 low-income countries in sub-Saharan Africa in 2009.

This developing country response is one of the few bright spots in the wake of the crisis. And it gives reason to hope that they may see a quicker bounce-back than in past crises, meaning less damage to key MDGs.

All this is good news. But we need to keep things in perspective. The crisis made things worse, not better. Millions were thrown back into poverty. That is just a fact. For others, an escape from poverty has been delayed, at best. To resume progress toward the MDGs, what is needed is a speedy return to the pre-crisis path of rapid growth, especially pro-poor growth and inclusive growth.

Shared responsibility

To get there, there must be a sense of shared responsibility—between the developing countries themselves, as well as the emerging and advanced economies. International institutions –including the IMF—together with regional and bilateral partners need to play an appropriately supportive role.

First and foremost, the advanced and emerging economies must continue to focus on securing a sustainable global recovery. At present, the recovery is proceeding, although the advanced economy recovery is no better than moderate, while downside risks remain apparent. As we have emphasized many times, a satisfactory global recovery will require rebalancing in two dimensions. First, primacy in advanced economy growth will need to be passed back successfully to the private sector as public demand growth is scaled back. Secondly, the relative focus of demand growth will have to be rebalanced between surplus and deficit economies. In other words, economies exhibiting sustained external surpluses will need to find ways to spur domestic demand growth—perhaps in some cases through enhanced social safety nets—while those with large deficits will need to rely relatively more than previously on net exports and business investment. At the same time, restoring the health of the financial sector is a necessary condition for restoring global growth.

These are serious challenges, and if they are to be met successfully, it must be in the cooperative spirit that worked so well during the crisis. Analysis undertaken by the IMF for the G20 has shown that cooperative action in the coming years could produce real results—boosting world growth by 2½ percentage points over five years, creating 30 million new jobs, and lifting tens of millions more out of poverty. Cooperation can’t be just a mantra when there are such outcomes at stake.

Of course, advanced economies can help in other ways as well. Even with tight domestic budgets, it will be important that the Gleneagles promises on aid are kept, helping to finance the massive infrastructure needs and the response to climate change in developing countries.

Advanced countries also can support trade, by dismantling those walls that block exports from poorer countries. As was demonstrated by the Commission on Growth and Development, open-economy policies have underpinned every example of sustained rapid growth in developing economies. Exports have the ability to unleash a wave of productivity and growth in developing countries.

A conclusion to the Doha Round would represent a key step here, but we need not wait for that. The richer countries could act now to grant full duty-free and quota-free market access to the poorest countries, and to unblock global agricultural markets. Indeed, trade is one of the most important ways that advanced countries can help their low-income neighbors, and without budgetary cost.

Advanced countries also should redouble their efforts to help fragile states. Helping to move these countries beyond fragility and toward developing their potential requires effective international collaboration, including through enhanced financial and technical assistance.

Of course, the developing countries’ own policies will be critical to restoring strong growth and to making their growth more resilient to future shocks. This includes such measures as addressing their enormous infrastructure deficit. To do this, they will need to build up the institutional capacity to invest effectively and to borrow safely. And it means stepping up their efforts to mobilize domestic resources and savings through strengthened financial systems.

To make growth more resilient to future shocks, countries will need to rebuild the policy buffers that served them well in the recent crisis. And they need to invest in more effective social safety nets, so that the poor and vulnerable can be better protected when the next shocks hit.

Role of the IMF

Finally, the international financial institutions must also play their part, in their respective areas of expertise. The IMF’s focus is on global macroeconomic and financial stability, a necessary precondition for attaining the Millennium Development Goals.

During this recent crisis, we provided temporary financial support to alleviate economic and social hardship on a larger scale than ever before. We quadrupled our concessional lending to almost $4 billion last year, and our members agreed that we could cancel all interest payments on such lending through the end of 2011, with permanently higher concessionality thereafter. We made our lending programs more flexible, streamlined policy conditions, supported countercyclical fiscal policies, and advocated the protection of social spending. We introduced different lending facilities to better reflect the diverse needs of diverse countries. And we adopted a more flexible approach to debt, giving countries with lower debt vulnerabilities and greater capacity to manage public resources greater leeway to borrow more from both concessional and non-concessional sources—this is especially important to meet vital infrastructure needs.

Looking ahead, we are committed to helping developing countries maintain macroeconomic stability, achieve higher growth, and reduce poverty. We will continue to provide focused policy advice and financial support. We will help countries develop strategies to scale up investment, and to borrow safely. And we will continue providing technical assistance to support capacity building, as sound policies must be built on sound foundations. We have three well-established regional technical assistance centers—in Tanzania, Mali, and Gabon—with two more coming, in Ghana and Mauritius. This approach has successfully combined cross-country experience with on-the-ground training.

Conclusion

As I noted at the outset, there are few more important global challenges today than meeting the Millennium Development Goals. But we first need a solid foundation of rapid and reliable growth, the foundation on which social progress can be built. We are energetically engaged in fulfilling our responsibilities to the best of our ability.

Thank you.



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