## December 2019

## Source details

**Canonical URL:** [December 2019](https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/dec2019.pdf)

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### The Political Costs of Reforms: Fear or Reality?
- Staff Discussion Note by Gabriele Ciminelli, Davide Furceri, Jun Ge, Jonathan Ostry, and Chris Papageorgiou examines whether the fear of political costs associated with structural reforms is justified and what design lessons can mitigate such costs.
- Key findings:
  - "Reforms do not lead to electoral costs when implemented in a way that internalizes political economy considerations."
  - Reforms are associated with significant electoral costs only when implemented in the runup to elections; reforms undertaken earlier in an incumbent’s term do not affect election prospects.
  - Reforms have political costs when enacted in periods of weak economic activity.
  - Reforms that engender large short-term adverse distributional effects can prove electorally costly.

### Reigniting Growth in Emerging Market and Low-Income Economies: What Role for Structural Reforms?
- October WEO chapter using a newly constructed database on structural reforms assesses medium-term output gains from reform packages.
- Key findings and projections:
  - A reform push in governance, domestic and external finance, trade, and labor and product markets could deliver sizable output gains in the medium term.
  - "A comprehensive reform package might double the speed of convergence of the average emerging market and developing economy."
  - Reforms take several years to deliver benefits; some reforms entail greater short-term costs when carried out in bad times and are best implemented under favorable economic conditions.
  - Reform gains tend to be larger where governance and access to credit are strong and where labor market informality is higher, because reforms help reduce informality.
- Outreach: Study presented in missions to high-level public officials, academia, the private sector, and civil society, with coverage on the Internet, social media and the press.

### International Capital Flows, Land Conversion and Wage Inequality in Poor Countries
- Study focus: evolving skilled-unskilled wage gap following land conversion from agricultural to industrial use in a multiple-commodity world where land is an input for both sectors.
- Key results:
  - An influx of capital supporting industrial production must widen the skilled-to-unskilled wage gap.
  - If the rate of conversion of land exceeds a critical value in the short-run, the wage gap rises.
  - In the long run, the possibility of full conversion can raise the wage gap if agriculture is labor-intensive, as is the case in developing countries.

### Examining Structural Unemployment in Sub-Saharan Africa: Empirical Evidence from Unobserved Components
- Study applies an empirical methodology to quantify structural unemployment (NAIRU), potential output, output gap and unemployment gap for South Africa, Kenya, Mauritius and Ghana.
- Policy-relevant findings:
  - NAIRU estimates are especially relevant for these inflation-targeting or hybrid inflation-targeting economies to assess domestic slack and potential inflationary pressures.
  - Increased government spending on education, a competitive exchange rate, and boosting financial development (measured as the market capitalization of listed companies) can play a role in lowering NAIRU.
  - Sustained gender barriers—reflected in high female unemployment rates and low female participation rate—and higher agricultural sector growth could keep NAIRU high.
  - Both FDI counterpart and domestic investment are projected to exhibit a negative relationship with NAIRU.

### Borrowing Costs and the Role of Multilateral Development Banks: Evidence from Cross-Border Syndicated Bank Lending
- Paper by Daniel Gurara, Andrea Presbitero and Miguel Sarmiento examines MDBs’ role in syndicated loans, focusing on loan pricing.
- Findings:
  - MDB participation is associated with higher borrowing costs and longer maturities—signaling greater willingness by MDBs to finance risky projects which may not be financed by the private sector.
  - MDBs are more likely to lend to borrowers in countries with high credit and financial risk.
  - Overall implication: MDBs could play a role in easing access to credit for high risk borrowers.

### Macroeconomic Outcomes in Disaster-Prone Countries
- Working Paper uses a dynamic model to study channels through which natural disaster shocks affect macro outcomes in disaster-prone countries.
- Quantitative results:
  - Weather shocks significantly impact the convergence path of disaster-prone countries.
  - Relative to non-disaster-prone countries, on average, these shocks cause a welfare loss equivalent to a permanent fall in consumption of 1.6 percent.
- Policy implications:
  - Welfare gains to countries that self-finance investments in resilient public infrastructure are found to be negligible.
  - International aid must be sizable to achieve significant welfare gains.
  - It is more cost-effective for donors to contribute to financing resilience before disasters, rather than disbursing aid after disasters.
- Dissemination:
  - Giovanni Melina presented findings at the 50th Anniversary of the MMF Conference at the LSE in September and at the workshop “Integrating impacts, mitigation and inequality” organized by the German Potsdam Institute for Climate Impact Research in October.

### Gains from Boosting Education Outcomes in Sierra Leone
- Presentation by Vivian Malta during the November 2019 Article IV and Second ECF Review Mission to Sierra Leone discussed preliminary results of a Selected Issues Paper on human capital formation and gender inequality.
- Empirical findings and projections:
  - Human capital indicators for Sierra Leone have generally improved over two decades, but education and health outcomes lag behind most countries.
  - The government’s National Development Plan 2019-23 targets boosting human capital, including via the Free Quality Education for All program.
  - Providing each child with at least lower secondary education could, in the long-term, boost GDP by 40 percent, substantially lower income inequality, and generate additional revenues through higher individual incomes.
  - Closing gender gaps in education across income groups could yield gains of 8 percent of GDP.
  - Increasing the quality of education could yield gains of 27 percent of GDP.

### High-Level Policy Conference: Making the Case for Reform
- Panel at the 2019 IMF-World Bank Annual Meetings discussed the political economy of reform and implementation challenges.
- Key takeaways from the panel:
  - Reform priorities: Panelists agreed on the goal of sustainable growth but differed on reform priorities.
  - Reform implementation: Timing, allocation of benefits, and the public narrative are important considerations.
  - Political-economy challenges: Panelists highlighted challenges in the political process for approving reforms and noted possible electoral costs to incumbents.

### Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries
- Presentation by Roland Kpodar on November 18 at a seminar organized by the Graduate Institute of Geneva (IHEID).
- Main findings:
  - Banking sector development acts as a shock-absorber in poor countries, damping the transmission of terms of trade shocks to growth volatility; this role fades as economies grow richer.
  - Stock market development appears to be neither a shock-absorber nor a shock-amplifier for most economies.
  - Results highlight the importance of financial structure for growth volatility, contrasting with the conventional wisdom that financial structure does not matter for growth.
- Discussion suggestions included narrowing the analysis to commodity exporters and exploring the role of foreign ownership of banks in strengthening resilience to shocks.

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_Source: https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/dec2019.pdf_