## June 2019

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**Canonical URL:** [June 2019](https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/jun2019.pdf)

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### Macroeconomic Consequences of Remittances Seminar
- Ralph Chami gave an internal training seminar titled “Macroeconomic Consequences of Remittances in LMICs and Fragile States” on March 25, 2019.
- Remittance flows are important private income transfers for at least 70 members of the IMF and, in many countries, are the main source of foreign exchange, surpassing FDI and ODA.
- The seminar was oversubscribed with attendance from desks of remittance-dependent countries and functional departments; the IET seminar received outstanding evaluations.
- A two-day course on this topic will be designed and delivered in 2020.

### Understanding Export Diversification: Key Drivers and Policy Implications
- Rahul Giri and Saad Quayyum presented the working paper “Understanding Export Diversification: Key Drivers and Policy Implications” on April 10 at the IMF’s Spring Meetings.
- Methodology: Bayesian Model Averaging (BMA) used to address model uncertainty and identify key determinants of export diversification.
- Key policy recommendations (in order of importance for diversification generally):
  - Prioritize human capital accumulation.
  - Reduce barriers to trade.
  - Improve quality of institutions.
  - Improve quality of infrastructure.
- For commodity exporters, the most important drivers (in order) are:
  - Reducing barriers to trade.
  - Improving education outcomes at the secondary level.
  - Financial sector development.

### Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries
- Kpodar, Le Goff and Singh (2019) analyze how the structure of the financial system affects macroeconomic volatility from terms of trade shocks.
- Sample and period:
  - Focus on 38 low-income countries (LICs) over the period 1978-2012.
  - Expanded sample to 121 developing countries for robustness checks.
- Main findings:
  - Banking sector development acts as a shock-absorber in poor countries, dampening transmission of terms of trade shocks to growth volatility.
  - The shock-absorbing role of banking fades as economies grow richer.
  - Stock market development appears neither a shock-absorber nor a shock-amplifier for most economies.
- Robustness: findings hold across fixed effect, system GMM and local projection estimators.

### Human Capital and Gender Equality
- Vivian Malta and Monique Newiak document in an IMF Selected Issues Paper that education and health outcomes in Nigeria are among the weakest worldwide and are deteriorating in some parts of the country.
- Key observations:
  - Access to education is highly unequal across states and by income and gender; regional differences in health outcomes are vast.
- Model results (micro-founded general equilibrium model):
  - Narrowing gaps in education between boys and girls and across income distribution would boost productivity, decrease income inequality, and narrow gender gaps in labor force participation rates and earnings.
  - Closing the gender gap in years of schooling in each income quintile alone would boost long-term GDP by 5 percent.
  - Much higher GDP effects are expected for more ambitious scenarios that also include anti-discrimination policies.
- Policy recommendations:
  - Improve child health outcomes to support education and labor productivity.
  - Ensure increased and regular funding for education and health across all tiers of government to support reforms.

### Informality and Gender Gaps Going Hand in Hand
- Paper by Vivian Malta, Lisa Kolovich, Angelica Martinez and Marina Mendes Tavares using microdata from Senegal examines female informality.
- Main findings:
  - In urban areas, being a woman increases the probability of being informal by 8.5 percent.
  - Education is usually more relevant for reducing informality for women than for men.
  - Having kids reduces men’s probability of being informal but increases women’s probability of being informal.
- Cross-country comparisons indicate strong associations between gender gaps and higher female informality in sub-Saharan Africa.

### Policy Trade-Offs in Building Resilience to Natural Disasters: The Case of St. Lucia
- Paper by Alessandro Cantelmo, Leo Bonato, Giovanni Melina and Gonzalo Salinas uses a dynamic general equilibrium model calibrated to St. Lucia.
- Core resilience elements considered:
  - Financial protection: insurance and self-insurance.
  - Structural protection: investment in adaptation.
- Key findings:
  - Both financial and structural protection considerably reduce output loss from natural disasters.
  - Structural protection normally delivers a larger payoff due to its direct dampening effect on disaster costs.
  - Financial protection is superior when liquidity constraints limit the government’s ability to promptly rebuild public capital.
  - The trade-off between strategies is very sensitive to the efficiency of public investment.

### Some Policy Lessons from Country Applications of the DIG and DIGNAR Models
- Over seven years, DIG and DIGNAR models complemented the IMF and World Bank debt sustainability framework (DSF) across over 65 country applications to analyze macroeconomic effects of public investment scaling-ups.
- Five common policy lessons:
  - Improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers debt sustainability risks.
  - Prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones because of private sector crowding-out, absorptive capacity constraints, and debt sustainability risks.
  - Domestic revenue mobilization helps create fiscal space for investment scaling-ups by containing public debt surges and their later repayments.
  - Aid smoothens fiscal adjustments associated with public investment increases and may lower risks of unsustainable debt.
  - External savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers.
- The paper discusses how the models were used to estimate quantitative macroeconomic effects associated with these lessons.

### Inequality Toolkit: Version 2.0
- The inequality toolkit and accompanying working paper (Adrian Peralta-Alva, Xuan Song Tam, Xin Tang, and Marina Mendes Tavares, 2018) received major updates.
- Toolkit purpose and features:
  - Evaluates macroeconomic, distributional, and welfare effects of fiscal reforms in low-income countries using three tax instruments: value added tax (VAT), corporate income tax (CIT), and personal income tax (PIT).
  - Analytical framework: heterogeneous agents incomplete markets model extended to include multiple sectors and regions to capture features of low-income countries.
- New capabilities compared to previous version:
  - Computation of transitional dynamics.
  - Welfare effects evaluated by consumption equivalence changes.
  - Welfare decomposition into aggregate and distributional components.
- The toolkit was taught in a two-day workshop for IMF staff during May 14-15, 2019.

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_Source: https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/jun2019.pdf_