## Policies in Support of Selected Sustainable Development Goals (_sdn1518)

## Source details

**Canonical URL:** [Policies in Support of Selected Sustainable Development Goals (_sdn1518)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1518.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1518.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1518.pdf.json)

---

### Executive summary and introduction
- September 2015 marks the formal launch of the Sustainable Development Goals (SDGs) and the start of a new global development agenda.
- SDGs are broader than the Millennium Development Goals (MDGs) and emphasize economic, social, and environmental sustainability.
- IMF comparative advantages for supporting the SDGs:
  - focus on macroeconomic-criticality;
  - global membership to work directly with member countries and ensure a supportive global environment for sustainable development.
- IMF financing commitments in the run-up to the Addis conference:
  - increase by 50 percent the amounts that countries could borrow under the IMF’s concessional financing and emergency lending facilities;
  - set at zero the interest rate charged on lending to low-income countries hit by adverse shocks.

### Transformation for sustainable growth: diversification and structural transformation
- Core message:
  - Macroeconomic and financial stability are necessary but not sufficient for sustained growth; economic diversification and structural transformation are critical for developing countries.
- Key channels to support diversification and transformation:
  - strengthen infrastructure and its efficiency;
  - enhance human capital;
  - support financial deepening;
  - boost agricultural productivity.
- Empirical and regional findings:
  - In earlier stages of development, higher income per capita is closely related to greater diversification and structural transformation (Papageorgiou and Spatafora, 2012; IMF, 2014a).
  - Structural transformation typically involves shifting workers from low-productivity agriculture into higher-productivity sectors (manufacturing, trade, construction, services).
  - Diversification increases resilience to commodity price variability and lowers output volatility.
  - Regional experiences summarized:
    - South Asian, European and central Asian countries: fast export diversification with worker shifts agriculture → manufacturing → services.
    - East Asian countries: export-oriented strategy and integration into global value chains supported transformation.
    - Sub-Saharan Africa (SSA): slower diversification and structural transformation, reflecting limited agricultural productivity growth and commodity dependence.
    - MENA and SSA oil producers: limited diversification over past two decades; exceptions include Indonesia, Malaysia, Mexico.

### Public investment and investment efficiency
- Efficiency losses and potential gains:
  - Roughly 30 percent of the potential value of investment is lost due to inefficiencies in the investment process (countries could increase infrastructure coverage and quality by 30 percent for the same level of inputs) (IMF 2015d).
  - “Investing in investing” (strengthening public investment management, PIM) can have very high rates of return—often higher than raising the level of investment spending itself (Berg and others 2015).
  - Strengthening PIM institutions could close up to two-thirds of the efficiency gap on average.
- Institutional areas for improvement:
  - Transparency of budget execution.
  - Openness of the procurement process.
  - Efficiency of cash management.
  - Project management, monitoring, and evaluation.
- Implementation challenges for raising public investment:
  - Fiscal transfer problem: taxes or fees may need to increase to capture private benefits and ensure sustainability.
  - Transition constraints: limited absorptive capacity can constrain positive effects; pressures on domestic resources can “crowd out” private consumption and investment.
  - Foreign borrowing can ease resource pressures but can create debt sustainability risks depending on project rates of return and fiscal policy flexibility.
- Historical public capital fact:
  - The public capital stock-to-output ratio fell from 115 percent of GDP in 1960 to 88 percent of GDP by 2012, largely due to a long-term decline in public investment rates since the mid-1980s (IMF 2015d).

### Human capital, trade integration, agriculture, and small states
- Human capital:
  - Greater investment in human capital facilitates structural transformation.
  - Many developing countries increased school enrollment over the past two decades but remain far from universal coverage of quality education needed for shifts to more productive sectors.
- Trade integration and external support:
  - Developing countries can gain from further integration into the international trade system.
  - Policy reforms such as calibrated import liberalization measures are important.
  - Development partners can support through “aid for trade,” trade-related capacity-building, and project preparation assistance.
  - High barriers to imports and domestic agricultural subsidies in advanced economies remain obstacles to export expansion for many developing countries (IMF 2015a).
- Agriculture:
  - Average labor productivity in agriculture is lower than in other sectors in almost every country; the productivity gap is greater for developing countries.
  - Low productivity drivers: poor irrigation, lack of fertilizer inputs, shrinking land use, persistent infrastructure constraints.
  - Cost-effective productivity strategies: rural roads, electrification, irrigation, extension services, R&D for improved seeds.
  - Strategies must account for environmental spillovers (example: environmental costs from the Indian Green Revolution).
- Diversification in small states (population < 1.5 million):
  - Agriculture accounts for about half of small states’ exports of goods (IMF 2015e).
  - Diversification recommendations:
    - Improve product quality, especially in agriculture.
    - Diversify within and outside tourism.
    - Develop domestic supply chains and expand domestic share of tourism-related operations.
  - Structural reforms to underpin diversification:
    1. Alleviate infrastructure bottlenecks (water and sanitation, transport and communication, energy).
    2. Tilt public spending mix toward capital investment to attract foreign investment and stimulate tourism.
    3. Improve business environment by reducing market entry barriers and scrapping restrictive foreign investment regimes.

### Financial deepening, inclusion, resilience, and financial sector policies
- Financial deepening and inclusion benefits:
  - Policies that enhance gradual financial deepening, efficiency, and access can improve resilience and boost growth.
  - Deeper financial markets allow public and private sectors to expand operations beyond self-generated resources (Sahay and others 2015a).
  - Financial inclusion can mobilize savings, improve resource allocation, and facilitate diversification and risk management.
  - When accompanied by inclusion, financial deepening can contribute to reducing income inequality and fostering inclusive growth.
- Financial inclusion facts and constraints:
  - In 2014, 2 billion “unbanked” adults remained worldwide; the number fell 20 percent since 2011 (Demirguc-Kunt and others 2015).
  - Forty-six percent of the population in developing countries is unbanked, compared with 6 percent in higher-income countries.
  - More than half of the poorest 40 percent in developing countries are without accounts, with persistent gaps by gender, urban/rural status, and income group.
  - Firm-level access facts:
    - More than a third of small firms and a quarter of large firms in developing countries cited access to finance as a major constraint.
    - 16 percent of small firms in advanced economies had problems accessing credit (Sahay and others 2015b).
    - 93 percent of firms in developing countries have a checking or savings account, but only 34 percent have a bank loan or a line of credit.
    - In SSA, the share of firms with a bank loan or line of credit is 23 percent; 41 percent of firms perceive access to finance as an obstacle.
    - Bank credit finances investment for only 11 percent of small firms, compared with 24 percent for firms with at least 100 employees.
  - Barriers: limited bank penetration, high transaction costs, paperwork, geographic access constraints, information asymmetries.
- Government roles and policy sequencing:
  - Governments can improve regulatory, legal, and institutional frameworks, banking supervision quality, information provision (credit registries), consumer education and protection.
  - Packaging and sequencing matter: reforms must be tailored to country characteristics; sequencing of registry computerization, creditor rights enforcement, and judiciary improvements affects outcomes.
- Risks and cautions:
  - Rapid credit growth without proper regulation can lead to crises (examples: microfinance crises in Bosnia, Morocco, Nicaragua; India 2010 microfinance crisis).
  - Subsidizing credit or limiting interest rates can be counterproductive, leading to overindebtedness and instability.
  - Countries with strong supervision benefit from greater credit access; those with weak supervision risk rapid erosion of capital buffers.

### Inclusion, inequality, fiscal capacity, and social policy
- Inclusion priorities:
  - Focus on inequality of income, gender inequality, and inequality in access to financial services.
- Inequality and fiscal capacity facts:
  - Despite poverty decline over the past 20 years, average inequality changed modestly and regional differences persist.
  - The inequality gap between regions: Gini index in SSA and Latin America is about 12 percentage points higher than in emerging Europe.
  - Developing countries have low tax-to-GDP ratios—at 15 to 20 percent of GDP—partly reflecting large informal sectors; advanced economies typically exceed 30 percent of GDP.
  - Differences in tax and spending explain two-thirds of the disposable income Gini coefficient difference between Latin America and advanced economies (Bastagli, Coady, and Gupta 2012).
  - Developing economies rely more on indirect taxes (generally regressive) and social protection is often not well targeted.
- Public provision of education and health services:
  - Primary health care spending is generally progressive; hospital-level care tends to be regressive.
  - Primary education spending is generally progressive; secondary and tertiary education spending is often regressive.
  - Expanding access to basic education and health is likely to be much more progressive and can lower income inequality over the medium term.
- Social spending and fiscal instruments:
  - Create fiscal space by increasing domestic revenues, cutting poorly targeted/wasteful spending, and improving public service delivery.
  - Social spending design:
    - Consolidate social assistance and improve targeting; scale down general subsidies.
    - Introduce/expand conditional cash transfer (CCT) programs as administrative capacity allows.
    - Examples: Brazil (Bolsa Familia) cost 0.5 percent of GDP in 2012 and covered one-quarter of the population; Mexico (Oportunidades) cost 0.8 percent of GDP and covered one-fifth of the population. These programs had substantial impacts on poverty, inequality, education, and health outcomes and directly accounted for one-fifth of the decrease in the Gini between 1995 and 2004 in Brazil and Mexico (Soares and others 2007).
  - Tax system recommendations:
    - Develop better-functioning personal income tax (PIT).
    - Make consumption taxes broad-based and uniform.
    - Greater use of real property taxes recommended where feasible.
- Macroeconomic variables with distributional implications:
  - Inflation:
    - Maintaining low and stable inflation benefits vulnerable populations; cross-country evidence shows a strong positive correlation between average inflation and income inequality in the post-war period.
  - Exchange rates:
    - Large exchange rate movements have distributional implications; depreciations can raise cost of imported goods (harming poor households reliant on imported food) but can foster exports (often agricultural) benefiting rural households.

### Gender inequality and policy measures
- Scope and evidence:
  - Female labor force participation (LFP) rates vary widely: participation rates above 60 percent in sub-Saharan Africa and 22 percent in the Middle East and North Africa.
  - Gap between male and female LFP rates has declined since 1990 but remains high: 39 percentage points in the Middle East and North Africa, 27 percentage points in South Asia, and 25 percentage points in Latin America and the Caribbean.
  - Almost 90 percent of countries have at least one gender-based legal restriction (World Bank 2013a).
  - In developing countries, women held less than 19 percent of parliamentary seats in 2014.
  - Account ownership gaps: in South Asia, 37 percent of women have an account vs. 54 percent of men; in the Middle East and North Africa, men are twice as likely to have an account as women (Demirguc-Kunt and others 2015).
- Drivers undermining women’s economic participation:
  - Education gaps, wage gaps in the formal sector, disproportionate unpaid work, overrepresentation in the informal sector, underrepresentation in leadership, and financial constraints for women-led businesses.
- Policy tools:
  - Gender responsive budgeting to examine government expenditures’ gender impacts (examples: Bangladesh, Morocco).
  - Legal reforms to remove discriminatory laws—evidence that non-discriminatory laws boost female LFP (examples: Namibia, Peru, Malawi).
  - Fiscal policies to increase female labor participation: replace family taxation with individual taxation; use tax credits for low-wage earners; invest in infrastructure, transport, electricity, water to free women’s time for market work.

### Financial inclusion, technology, and innovation
- Financial sector measures to promote inclusion:
  - Greater banking competition and innovation expand opportunities for the disadvantaged (Becker 1957).
  - Technological innovations (mobile banking, mobile payments, improved borrower identification) lower costs and promote inclusion (Mbiti and Weil 2015).
  - Example: in the past two years the numbers of mobile transaction service users in Uganda more than doubled, and the value of transactions increased by 75 percent (IMF 2015g).
- Regulatory role:
  - Regulators must enable competing financial service providers and consumers to leverage technological innovations.
- Usage caveat:
  - Account ownership does not imply usage; policy can use accounts to receive wages and transfers and to pay utility bills to boost usage and improve targeting of social assistance.

### Environmental sustainability, energy pricing, and water management
- Environmental risks and macroeconomic impacts:
  - Climate change, poor air quality, transportation congestion, and rising water scarcity can lower economic welfare and retard growth.
  - Vulnerabilities are rising due to concentration of population/assets in risky areas and rising frequency of climate-related natural disasters.
- Small states and disaster risk:
  - Pacific and Caribbean island countries are highly vulnerable; annual damage and losses have averaged 20 percent of GDP in the Pacific islands since 2012.
  - Strategic guidance: recognize disaster costs in macro-frameworks and debt analyses; build policy buffers; continue access to external assistance and insurance schemes.
  - Multi-pillar disaster risk-management: risk assessment; self-insurance buffers; risk reduction via preparedness and resilient infrastructure; risk transfer through private/sovereign insurance and multilateral mechanisms.
- Energy use, environmental costs, and pricing reform:
  - Fossil-fuel combustion accounts for about three-quarters of global greenhouse gas emissions; unchecked, expected to raise global temperatures by about 3–4 o C by the end of the century (IPCC 2014).
  - Air pollution from combustion contributed to 3.7 million premature deaths worldwide in 2012 (World Health Organization 2014).
  - Road-traffic fatalities: 1.2 million people a year are killed in road-traffic accidents (World Health Organization 2013).
- Energy subsidies and pre/post-tax measures:
  - “Pre-tax” subsidies were 0.7 percent of global GDP in 2011 and 2013, and are projected to decline to 0.4 percent in 2015 (Coady and others, 2015).
  - “Post-tax” subsidies are projected to rise from 5.8 percent of global GDP in 2011 to 6.5 percent in 2015.
  - Biggest source of post-tax subsidies is coal, amounting to 3.9 percent of global GDP in 2015.
  - No country imposes meaningful taxes on coal use from an environmental perspective.
- Rationale and benefits of energy price reform:
  - Let energy prices adjust to reflect supply costs and incorporate environmental costs via environmental taxes.
  - Getting energy prices right would:
    - Cut global CO2 emissions by a quarter.
    - Cut air pollution deaths by nearly three-fifths.
    - Yield on average per country revenues of 4 percent of GDP.
    - Revenue gains exceed 8 percent of GDP in emerging and developing Asia, Commonwealth of Independent States, and the Middle East, North Africa and Pakistan.
  - Potential revenue uses: alleviate other taxes or finance socially productive investments (education, health, infrastructure).
- Barriers and success factors for reform:
  - Reforms often trigger public protests; lack of confidence in governments to use savings for social ends hampers support.
  - Key ingredients for successful reform:
    - Comprehensive energy sector reform plan with consultation and clear long-term objectives.
    - Clear communication of objectives and use of savings (different messages for high-income vs developing economies).
    - Institutional reforms to depoliticize pricing (e.g., automatic pricing mechanisms).
    - Phased-in price changes where appropriate.
- Managing water resources:
  - Access gaps:
    - 547 million people lack access to a safe drinking water supply.
    - 2.4 billion people do not have access to an adequate sanitation facility (World Health Organization and UNICEF 2014).
  - Water subsidies: estimated about $456 billion or 0.6 percent of global GDP in 2012.
  - Water prices in advanced economies tend close to supply costs; some countries subsidize water for agriculture and electricity generation.
  - Underpricing encourages overuse and underinvestment and is inequitable—benefiting upper-income groups and crowding out priority spending.
- Water pricing reform objectives and measures:
  - Developing countries: strengthen public water utilities’ finances to support investment and expand poor household access; ensure adequate maintenance spending.
  - Advanced economies: reflect environmental costs in prices.
  - Where institutional frameworks are strong, water-rights markets can allocate water to highest-valued uses.
  - Complementary policies: rationalize water use across agriculture, trade, and energy; discourage excessive groundwater pumping; replace energy subsidies with targeted social assistance.

### Climate-friendly financial initiatives and catastrophe risk financing
- Role of financial sector:
  - Financial instruments can reallocate investment toward low-carbon and “green” technologies (green indices, green bonds).
  - Well-developed hedging instruments and insurance strengthen ability to insure against natural disaster risks; instruments include catastrophe bonds.
- Catastrophe risk financing examples:
  - 2012: Government of Mexico issued a $315 million catastrophe bond covering earthquakes and hurricanes.
  - September 2014: African states announced the African Risk Capacity Extreme Climate Facility to issue climate catastrophe bonds in 2016.
- Country-specific priorities:
  - Advanced economies: promote climate-friendly initiatives, measure/disclose carbon footprints, decarbonize portfolios (examples: Sweden, Norway, Danish pension funds).
  - Developing countries: support financial inclusion to enable self-insurance via savings/insurance and use hedging against weather risks.

### Concluding policy threads relevant to SDGs
- IMF focus areas in support of SDGs:
  1. Economic diversification and transformation for high and sustainable growth.
  2. Economic, gender, and financial inclusion.
  3. Environmental sustainability.
- Common policy threads:
  - Sustain macroeconomic and financial stability while pursuing structural reforms to diversify economies.
  - Increase and efficiently deploy public investment where returns support growth while managing fiscal sustainability and absorptive capacity.
  - Design fiscal, regulatory, and structural policies to reduce inequality across income, gender, and financial dimensions.
  - Implement market-based environmental policies (energy and water pricing reforms) with measures to protect the vulnerable and use financial sector tools to mitigate and adapt to climate risks.

*Source: Policies in Support of Selected Sustainable Development Goals, International Monetary Fund (content unit _sdn1518).*

### EXECUTIVE SUMMARY ________________________________________________________________________________  4

### EXECUTIVE SUMMARY

### Introduction
- September 2015 marks the formal launch of the Sustainable Development Goals (SDGs) and the start of a new global development agenda.
- The SDGs are broader in scope than the Millennium Development Goals (MDGs) and embrace the notion that development needs to be economically, socially, and environmentally sustainable.
- The IMF’s comparative advantages for supporting the SDGs: focus on macroeconomic-criticality and global membership to work directly with member countries and ensure a supportive global environment for sustainable development.
- The IMF emphasized, in its run-up to the Addis conference, two Financing for Development papers and subsequent Board decisions to:
  - increase by 50 percent the amounts that countries could borrow under the IMF’s concessional financing and emergency lending facilities;
  - set at zero the interest rate charged on lending to low-income countries hit by adverse shocks.

### Transformation for Sustainable Growth
- Core message: Macroeconomic and financial stability are necessary but not sufficient for sustained growth; for developing countries, economic diversification and structural transformation are critical.
- Key channels to support diversification and transformation:
  - strengthen infrastructure and its efficiency;
  - enhance human capital;
  - support financial deepening;
  - boost agricultural productivity.

A. Diversification and Structural Transformation in Developing Countries
- Empirical relationship: In earlier stages of development, higher income per capita is closely related to greater diversification and structural transformation (Papageorgiou and Spatafora, 2012; IMF, 2014a).
- Structural transformation typically involves shifting workers from low-productivity agriculture into higher-productivity sectors (manufacturing, trade, construction, services).
- Diversification increases resilience to commodity price variability and lowers output volatility (Figures referenced in source).
- Regional experiences:
  - South Asian, European and central Asian countries: fast export diversification with worker shifts from agriculture → manufacturing → services.
  - East Asian countries: export-oriented strategy and integration into global value chains supported transformation.
  - Sub-Saharan Africa (SSA): slower diversification and structural transformation, reflecting limited agricultural productivity growth and commodity dependence.
  - MENA and SSA oil producers: limited diversification over past two decades; exceptions include Indonesia, Malaysia, Mexico that diversified away from oil with supportive business environments and skills accumulation.

B. Economic Diversification and Structural Transformation: Policies
- No one-size-fits-all strategy; cross-country evidence points to a range of effective policies and structural reforms (IMF 2014a).
- Role of public investment:
  - The public capital stock-to-output ratio fell from 115 percent of GDP in 1960 to 88 percent of GDP by 2012, largely due to a long-term decline in public investment rates since the mid-1980s (IMF 2015d).
  - Raising public investment has significant long-term benefits for growth (model-based studies referenced).
  - Implementation challenges:
    - Fiscal transfer problem: taxes or fees may need to increase to capture private benefits of extra public capital spending and ensure sustainability.
    - Transition constraints: limited absorptive capacity can constrain positive effects; pressures on domestic resources can “crowd out” private consumption and investment.
    - Foreign borrowing can ease resource pressures but can create debt sustainability risks depending on project rates of return and fiscal policy flexibility.

### Making Growth More Inclusive
- The IMF emphasizes economic, gender, and financial inclusion as key to durable growth.
- Wider economic and social disparities can threaten durable growth by limiting skill and human capital accumulation among the less well-off.
- Policy avenues to promote inclusion include:
  - fiscal policies that balance distribution and efficiency objectives;
  - regulatory measures to increase access to finance while preserving financial stability;
  - structural reforms to promote economic participation.
- The paper links inclusion priorities to SDG attainment, specifically SDG 8, SDG 5, SDG 1, SDG 10, and SDG 13 (and notes relevance to SDG 6 and SDG 7).

### Environmental Sustainability for Macroeconomic Stability and Growth
- Environmental sustainability is integral to macroeconomic stability and growth; priorities include:
  - building resilience to climate-related events;
  - reforming energy and water prices to reflect scarcity and efficiency.
- Equity and political economy:
  - Mitigating the impact of price reforms on the most vulnerable is critical for equity and for gaining public support for reforms.
- Specific policy areas referenced for both developing and high-income countries: energy pricing reforms and water resource management (figures and tables referenced in source).

### Concluding Threads and Policy Implications
- The paper examines three areas of key relevance for achieving the SDGs:
  - (1) economic diversification and structural transformation within a stable macroeconomic framework;
  - (2) economic, gender, and financial inclusion;
  - (3) climate and environmental sustainability.
- It emphasizes synergies between economic, social, and environmental objectives while analyzing trade-offs and policies to minimize them.
- Common policy threads that can help countries implement their development agendas (with international support) include:
  - sustaining macroeconomic and financial stability while pursuing structural reforms to diversify economies;
  - increasing and efficiently deploying public investment where returns support growth, while managing fiscal sustainability and absorptive capacity constraints;
  - designing inclusion-promoting fiscal, regulatory, and structural policies to reduce inequality across income, gender, and financial dimensions;
  - implementing market-based environmental policies (including energy and water pricing reforms) with measures to protect the vulnerable.

*Source: EXECUTIVE SUMMARY, POLICIES IN SUPPORT OF SELECTED SUSTAINABLE DEVELOPMENT GOALS, INTERNATIONAL MONETARY FUND.*

### 11.      The benefits of public investment crucially depend on improving its efficiency. Roughly

### 11.      The benefits of public investment crucially depend on improving its efficiency. Roughly

### Efficiency losses and gains from improving public investment management
- Roughly 30 percent of the potential value of investment is lost due to inefficiencies in the investment process (that is, countries could increase infrastructure coverage and quality by 30 percent for the same level of inputs) (IMF 2015d).
- “Investing in investing” to increase efficiency can have substantial growth benefits and very high rates of return, even higher than the rates on raising the level of investment spending itself (Berg and others 2015).
- On average, strengthening PIM institutions could close up to two-thirds of the efficiency gap.
- Institutional areas highlighted for improvement:
  - Transparency of budget execution.
  - Openness of the procurement process.
  - Efficiency of cash management.
  - Project management, monitoring, and evaluation to strengthen incentives to deliver projects on time and on budget.
- Strengthening institutions related to investment implementation is critical for the stability and predictability of investment and for reducing opportunities for rent seeking.

### Human capital and structural transformation
- Greater investment in human capital facilitates structural transformation.
- Many developing countries increased school enrollment over the past two decades but remain far from universal coverage of quality education needed to enable shifts to more productive and higher technology sectors.

### Trade integration and external support
- Developing countries can gain from further integration into the international trade system.
- Policy reforms such as calibrated import liberalization measures are important.
- Development partners can support through “aid for trade,” trade-related capacity-building efforts, and project preparation assistance.
- International reforms are needed because high barriers to imports and domestic subsidies on agricultural products in advanced economies remain a significant obstacle to export expansion for many developing countries (IMF 2015a).

### Financial deepening, inclusion, and resilience
- Policies that enhance gradual financial deepening and efficiency, and increase access, can improve resilience and boost growth.
- Financial inclusion remains very low in many developing countries; many financial systems remain repressed.
- Greater financial access and better information sharing:
  - Mobilize savings.
  - Improve resource allocation.
  - Facilitate diversification and risk management.
- Deeper financial markets allow public and private sectors to expand operations beyond self-generated resources (Sahay and others 2015a).
- When financial deepening is accompanied by financial inclusion, it can contribute to reducing income inequality and fostering inclusive growth.

### Agriculture, productivity, and environmental constraints
- Increasing agricultural productivity may hold the key to fostering structural transformation in many developing countries.
- Average labor productivity in agriculture is lower than in other sectors in almost every country; the productivity gap is greater for developing countries than for high-income countries.
- Low labor productivity drivers include:
  - Poor irrigation.
  - Lack of fertilizer inputs.
  - Shrinking land use.
  - Persistent infrastructure constraints.
- Empirical evidence suggests increased agricultural productivity promotes labor shifts to the rest of the economy.
- Cost-effective strategies to increase agricultural productivity include:
  - Investment in rural roads.
  - Electrification.
  - Irrigation.
  - Provision of extension services.
  - R&D to develop and disseminate improved seed varieties.
- Strategies must account for spillovers on the environment:
  - Example: Indian Green Revolution boosted productivity but heavy use of water and fuel subsidies led to overuse of underground aquifers, increased soil salinity, and severe depletion of the water table in some regions.
  - Strengthening natural resource management and correcting energy and water price distortions are crucial to underpin gains in agricultural productivity.

### Diversification in small states (Box 1 summary)
- Small states defined as countries with a population less than 1.5 million.
- Agricultural sector accounts for about half of small states’ exports of goods (IMF 2015e).
- Diversification recommendations:
  - Improve product quality, especially in agriculture.
  - Diversify within and outside the tourism sector to reduce growth volatility and vulnerability to external shocks.
  - Develop domestic supply chains and expand the domestic share of tourism-related operations to enhance growth potential and limit growth volatility.
- Structural reforms to underpin diversification:
  1. Alleviate pressing infrastructure bottlenecks, including water and sanitation, transport and communication, and energy.
  2. Tilt public spending mix toward capital investment to attract foreign investment and stimulate more tourism.
  3. Improve the business environment by reducing market entry barriers for local small- and medium-sized enterprises and scrapping restrictive foreign investment regimes.

### Inclusion and growth trade-offs and complementarities
- Growth needs to be more inclusive; growing economic and social disparities can threaten social and economic stability.
- Inclusion focuses on:
  1. Inequality of income (inter-personal distribution).
  2. Gender inequality (opportunities for women in remunerated activities).
  3. Inequality in access to and use of financial services.
- Evidence indicates high levels of income inequality can be detrimental to sustainable growth (Ostry, Berg, and Tsangarides 2014; Dabla-Norris and others 2015a).
- Relatively low levels of inequality may protect both the level and sustainability of growth:
  - High inequality lowers likelihood the poor access health and education.
  - Social conflict and political instability discourage investment and entrepreneurship.
  - Redistribution through the fiscal system, if not excessive, can on net be conducive to sustainable growth.

### Poverty reduction, structural transformation, and inequality dynamics
- While high growth reduces overall poverty, it does not necessarily lower inequality; structural transformation can raise inequality even as poverty falls (examples: China and India).
- Cross-country studies find that, on average, increases in growth are not correlated with increases in inequality.
- The level of inequality affects how effectively growth reduces poverty: growth is less effective in lowering poverty where inequality is high (Ravallion 1997 and 2004).

### Gender equity and economic outcomes
- Closing gender gaps in labor force participation, entrepreneurship, and education can significantly contribute to sustainable growth (Cuberes and Teignier 2014; Elborgh-Woytek and others 2013; Esteve-Volart 2004; Klasen and Lamanna 2009).
- Women’s opportunity to earn and control income correlates positively with per capita GDP, competitiveness, and human development indicators (WEF 2014).
- Higher female labor force participation and earnings can translate into higher expenditure on children’s education.

### Financial inclusion, growth, and distribution
- Financial inclusion fosters growth and helps reduce inequality, but financial stability risks rise when credit growth expands without proper regulation and supervision (Sahay and others 2015b).
- At early stages of financial development, initial beneficiaries tend to be the better-off and productive but previously constrained individuals; as systems mature, broader benefits accrue.
- Empirical evidence:
  - Financial deepening accelerates economic growth, intensifies competition, and boosts labor demand, benefiting lower-income groups (Beck, Demirguc-Kunt, and Levine 2007).
  - Deep financial sectors that provide broader access to financial services (to firms, households, and women) are more conducive to economic growth (Sahay and others 2015b).
  - Access to credit markets increases parental investment in education and reduces child labor during adverse shocks.
  - Increasing financial opportunities for women can help reduce the gender productivity gap (Kabeer 2005).

### Trends in inequality and fiscal capacity
- Despite poverty decline in most developing countries over the past 20 years, average inequality has changed only modestly and regional differences persist.
- The inequality gap between regions: Gini index in SSA and Latin America is about 12 percentage points higher than in emerging Europe.
- Developing countries have low tax-to-GDP ratios—at 15 to 20 percent of GDP—partly reflecting large informal sectors; advanced economies typically exceed 30 percent of GDP in tax-to-GDP ratios.
- Lower tax revenues in developing countries imply lower social spending on social protection, education, and health, weakening the redistributive impact of fiscal policy.
- Differences in tax and spending can explain two-thirds of the disposable income Gini coefficient difference between Latin America and advanced economies (Bastagli, Coady, and Gupta 2012).
- Developing economies often rely more on indirect taxes, which are generally regressive, and social protection is often not well targeted, with many benefits going to higher-income groups.

*Source: IMF chapter text provided in the content unit.*

### 28.      Public provision of education and health services is often biased in favor of the better-

### 28.      Public provision of education and health services is often biased in favor of the better-off rather than the poor.

### Public provision of education and health services — key findings
- Primary health care spending is generally progressive, but spending on hospital-level care tends to be regressive.
- Primary education spending is generally progressive, while secondary and tertiary education spending is often regressive.
- Public resources geared toward increasing access to basic education and health services are likely to be much more progressive.
- Expansion of access to education and health services can lower income inequality over the medium term by reducing inequality of education and health outcomes and thus future earnings (De Gregorio and Lee 2002).

### Gender inequality — scope and evidence
- Female labor force participation (LFP) rates vary widely: participation rates above 60 percent in sub-Saharan Africa and 22 percent in the Middle East and North Africa.
- The gap between male and female LFP rates has declined since 1990 but remains high in many regions: 39 percentage points in the Middle East and North Africa, 27 percentage points in South Asia, and 25 percentage points in Latin America and the Caribbean.
- Almost 90 percent of countries have at least one gender-based legal restriction that may impede economic participation by women (World Bank 2013a).
- In developing countries, women held less than 19 percent of parliamentary seats in 2014.
- In South Asia, only 37 percent of women have an account at a financial institution versus 54 percent of men; in the Middle East and North Africa, men are twice as likely to have an account as women (Demirguc-Kunt and others 2015).

### Dimensions undermining women’s economic participation
- Education: Access to education is more constrained for women than for men in many countries, producing lower literacy rates for women especially in South Asia, the Middle East and North Africa, and SSA.
- Wages, unpaid work, and informality: In the formal sector, women’s wages are generally significantly below those for men; women account for more unpaid work and are overrepresented in the informal sector and among the poor.
- Positions of power: Underrepresentation in top business and political positions.
- Financial access: Women-led businesses are more likely to be financially constrained despite higher repayment rates by women than men (Presbitero, Rabellotti, and Piras 2014).

### Financial inclusion — facts and barriers
- In 2014, 2 billion “unbanked” adults remained worldwide, a number that fell 20 percent since 2011 (Demirguc-Kunt and others 2015).
- Forty-six percent of the population in developing countries is unbanked, compared with 6 percent in higher-income countries.
- More than half of the poorest 40 percent of the population in developing countries are without accounts, with persistent gaps by gender, urban/rural status, and income group.
- Access to finance constraints for firms:
  - More than a third of small firms and a quarter of large firms in developing countries cited access to finance as a major constraint.
  - 16 percent of small firms in advanced economies had problems accessing credit (Sahay and others 2015b).
  - 93 percent of firms in developing countries have a checking or savings account, but only 34 percent have a bank loan or a line of credit.
  - In SSA, the share of firms with a bank loan or line of credit is 23 percent; access to finance is perceived as an obstacle by 41 percent of firms.
  - Bank credit finances investment for only 11 percent of small firms, compared with 24 percent for firms with at least 100 employees.
- Barriers to financial inclusion include limited bank penetration, high transaction costs, burdensome paperwork, geographic access constraints, and large information asymmetries (lack of financial history or asset documentation). Mobile banking progress noted but rural-urban divides remain.

### Toward greater inclusion — analytical considerations
- Assessing policies to promote growth and address inequality requires understanding:
  1. The distribution of income and consumption at a micro-level;
  2. The depth, access, and efficiency of the financial sector;
  3. The impact of specific policies and structural reforms on sectors and households, including synergies and trade-offs.
- The IMF has initiated a pilot on inequality, gender, and climate to strengthen surveillance. The Ethiopia study from the 2015 Article IV consultation is cited as an example (IMF 2015f; Box 2).

### Fiscal and social policy measures to enhance redistribution and inclusion
- General principle: Enhancing redistributive impact of fiscal policy can address inequality while promoting economic efficiency; appropriate mix of tax and spending instruments depends on preferences, administrative capacity, state role, and political economy.
- Creating fiscal space: Increase domestic revenues (IMF 2015a); cut poorly targeted/wasteful spending; improve public service delivery efficiency.
- Social spending design recommendations (IMF 2014c; Clements and others 2015):
  - Consolidate social assistance programs and improve targeting to reduce costs, scale down general subsidies, and enhance distributional impact.
  - Introduce and expand conditional cash transfer (CCT) programs as administrative capacity allows. Examples and impacts:
    - Brazil (Bolsa Familia) and Mexico (Oportunidades): in 2012 cost 0.5 percent of GDP and 0.8 percent of GDP respectively and covered one-quarter and one-fifth of the population, respectively. These programs have had substantial impacts on poverty, inequality, education, and health outcomes (Fiszbein and Shady 2009).
    - Direct impact of such transfers in Brazil and Mexico accounts for one-fifth of the decrease in the Gini between 1995 and 2004 (Soares and others 2007).
    - Other CCT schemes: Chile Joven (Chile) and Jóvenes en Acción (Colombia).
- Tax system design:
  - Develop a better-functioning personal income tax (PIT) to increase revenues and contributions from high-income/high-wealth individuals.
  - Make consumption taxes broad-based and uniform; avoid differential consumption rates (IMF 2015a).
  - Greater use of real property taxes is recommended as equitable and efficient; modern valuation and identification technologies improve feasibility.
- Fiscal policies to increase labor force participation, especially for women:
  - Replace family taxation with individual taxation to reduce tax burden on predominantly female secondary earners and generate efficiency gains (Elborgh-Woytek and others 2013).
  - Use tax credits or benefits for low-wage earners to stimulate participation.
  - Invest in infrastructure and transportation, and expand access to electricity and water close to home to free up women’s time for market work.

### Macroeconomic considerations with distributional implications
- Inflation:
  - Maintaining low and stable inflation benefits vulnerable populations. Cross-country evidence shows a strong positive correlation between average inflation and income inequality in the post-war period.
  - Low-income households use cash for a greater fraction of purchases and hold fewer interest-bearing assets, making them more vulnerable to inflation (Albanesi 2007).
- Exchange rates:
  - Large exchange rate movements have distributional implications; effects depend on economic structure, openness, and pass-through to domestic prices (Simone 2008).
  - Depreciations raise cost of imported goods (potentially harming poor households reliant on imported food) but can foster exports (often agricultural) benefiting rural households (Agenor 2002).

### Improving access to education and health services
- Provision of higher education can accelerate structural transformation, but unequal access to upper-secondary and tertiary education can exacerbate inequality.
- Policies should increase access to lower levels of education and equalize enrollment rates for boys and girls to boost overall education levels.
- Expanding health coverage to low-income households can reduce inequality and lessen time burdens on women from informal health care obligations (Gonzales and others 2015a).

### Gender responsive budgeting and legal reforms
- Gender responsive budgeting examines gender impact of government expenditures, policies, and programs and can reduce gender inequalities in education, employment, and health outcomes.
  - Bangladesh began incorporating gender issues into the national budget in 2005; 20 ministries now compile gender budgeting reports (World Bank 2012a).
  - Morocco has published a gender budget report since 2006, involving more than 25 ministries and departments.
- Integrated policy package and non-discriminatory laws are important:
  - Non-discriminatory laws boost female LFP (Gonzales and others 2015). Examples:
    - Namibia equalized property rights for married women and granted multiple legal rights in 1996; female LFP increased by 10 percentage points in the following decade.
    - Peru and Malawi invalidated customary law in 1993 and 1994 respectively and both experienced significant increases in female LFP rates.

### Financial policies for inclusion and innovation
- Greater banking competition and innovation foster financial inclusion:
  - Competition expands opportunities for the disadvantaged and promotes financial innovation (Becker 1957).
  - A five-country African study (Kenya, Nigeria, Rwanda, South Africa, Tanzania) finds banking competition, especially through innovators, strongly determines banks’ involvement with SMEs (Berg and Fuchs 2013).
- Technological innovations lower costs and promote inclusion: mobile banking, mobile payments, improved borrower identification, and innovative lending products (Mbiti and Weil 2015).
  - Example: in the past two years the numbers of mobile transaction service users in Uganda more than doubled, and the value of transactions increased by 75 percent (IMF 2015g).
- Regulators have a fundamental role in allowing competing financial service providers and consumers to take advantage of technological innovations.

### Box 2 (Ethiopia): economic reforms and distributional effects — summary points
- Ethiopia’s reforms discussed in the 2015 Article IV: streamlining tax incentives and reforming funding of the Development Bank of Ethiopia (DBE) to free resources for private investment.
- Dynamic general equilibrium simulations suggest:
  - Reforming DBE funding and streamlining tax incentives would free up resources for private investment, fostering manufacturing and services and accelerating GDP growth by about 1 percent annually.
  - Private consumption would grow faster.
  - In isolation, the reform could aggravate inequality because investment concentrates in industry and may depress cash crop demand/prices and farmers’ incomes.
  - When accompanied by expansion of the existing social cash transfer program, rural-to-urban migration, and policies to increase financial inclusion, the net effect of the reform package would be progressive, with the largest gains accruing to the bottom three deciles of the consumption distribution.
- Note: Although consumption increases for every decile of rural and urban populations, the overall distributional effect on urban populations is slightly regressive because the cash transfer program targets only the rural population.

*Source: IMF. Content unit from _sdn1518 (Policies in Support of Selected Sustainable Development Goals)._*

### 45.      Governments can play an important role in expanding financial access by promoting

### _sdn1518 - 45.      Governments can play an important role in expanding financial access by promoting

### Governments’ role in expanding financial access
- Governments can promote improvements in the regulatory, legal and institutional framework to address underlying impediments to financial inclusion (Dabla Norris and others 2015b).
- Key areas for government action:
  - Establish a sound legal and regulatory framework (for example, protecting creditor rights, regulating business conduct, and overseeing recourse mechanisms to protect consumers).
  - Support improvements in the quality of banking supervision (Sahay and others 2015b).
  - Promote the provision and exchange of information (for instance, setting standards for disclosure and transparency and promoting credit-information-sharing systems and collateral registries).
  - Invest in consumer education and protection.
- Empirical evidence: Robust evidence shows that creditor protection through the legal system and information-sharing institutions promotes credit availability in developing countries (Djankov, McLiesh, and Shleifer 2007).

### Heterogeneity of country characteristics and policy sequencing
- Effects of financial inclusion policies vary across countries.
- Examples from research:
  - In a country where firms are severely constrained by high borrowing and collateral requirements, GDP is most responsive to a relaxation of the latter, while reducing intermediation costs tend to benefit only a small number of highly-leveraged firms (Dabla-Norris and others 2015b).
- Packaging and sequencing of reforms:
  - Packaging reforms together leads to scale effects—positive and negative—and to sequencing issues.
  - Example: In a country with weakly enforced creditor rights due to a poorly functioning judiciary, computerization and unification of credit registries for movable collateral would have a limited impact on the availability of credit if not combined with other supportive reforms that may take longer to implement.

### Challenges in boosting financial inclusion and usage
- Uneven expansion of banking access points, with networks concentrated in urban areas.
- Role of technology: Technological innovations such as mobile banking can facilitate inclusion in rural areas (Allen and others 2014).
- Account ownership does not imply usage:
  - Example statistics: 85 percent of firms in Uganda have a bank account, yet just 10 percent have a bank loan or use financial services to finance investment (IMF 2015g).
  - Policy implication: Using accounts to receive wages and transfers from the government and to pay utility bills could boost usage and enable better targeting of social assistance.

### Financial inclusion and financial stability risks
- Rapid credit growth without regard for financial stability can result in crises; examples include advanced-economy global financial crisis and microfinance crises:
  - 2008–09 crises in the microfinance sector in Bosnia, Morocco, and Nicaragua (Chen and others 2010).
  - 2010 microfinance crisis in India, where high profitability depended on rapid loan growth and high and rising indebtedness among clients.
- Distinguishing financial deepening versus booms is difficult, especially at low levels of depth.
- Monitoring and data improvements are crucial.
- Policy cautions:
  - Subsidizing credit or limiting interest rates could be counterproductive, leading to overindebtedness and financial instability.
  - Evidence: Countries with strong supervision could see gains in financial stability from greater credit access; countries with weak supervision could find their capital buffers eroding quickly with greater credit access (Sahay and others 2015b).

### IV. Environmental sustainability for macroeconomic stability and growth — overview
- Environmental sustainability is central to the 2030 development agenda and affects growth and inclusion.
- Key objectives: Addressing energy and water pricing and improving resilience to climate-related events.
- Importance of mitigating distributional impacts: Mitigating the impact of price reforms on the most vulnerable is important from an equity perspective.

### Environmental risks and macroeconomic impacts
- Environmental risks can lower economic welfare and retard growth over time: climate change, poor air quality, transportation congestion, and rising water scarcity.
- Climate-related events constrain production in environmentally-sensitive sectors such as agriculture, forestry, fisheries, and tourism; create health risks through exposure to air and water pollution and water stress; and disturb ecosystems and human settlements (IMF 2008; Parry and others 2014).
- Vulnerabilities are rising due to concentration of population and assets in risky areas and rising frequency of climate-related natural disasters (World Bank 2014; Cummins and Mahul 2009).
- No country is immune, although some are particularly vulnerable.

Box 3. Macroeconomic Resilience to Natural Disasters and Climate Change in the Small States
- Pacific and Caribbean island countries are among those most vulnerable to natural disasters and climate change.
- Annual damage and losses have averaged 20 percent of GDP in the Pacific islands since 2012.
- Strategic policy guidance:
  - Explicitly recognize costs of natural disasters and climate change in baseline macro-frameworks and debt sustainability analyses.
  - Build policy buffers to enhance resilience.
  - Continue access to external assistance and insurance schemes (Cabezón and others 2015).
- Multi-pillar disaster risk-management strategy:
  - Identifying and undertaking risk assessment―including explicitly integrating risks into the fiscal frameworks and budget planning.
  - Self-insuring by building buffers to enhance resilience to shocks.
  - Reducing risks by enhancing preparedness, including by investing in infrastructure that can better cope with environmental events and by enhancing debt-management capacity.
  - Transferring risk through private or sovereign insurance and through multilateral risk-sharing mechanisms, such as the Caribbean Catastrophe Risk Insurance Facility or the Pacific Catastrophe Risk Assessment and Financing Initiative (World Bank 2013b).

### Energy use, environmental costs, and the need for price reform
- Fossil-fuel combustion accounts for about three-quarters of global greenhouse gas emissions; left unchecked, expected to raise global temperatures by about 3–4 o C by the end of the century (IPCC 2014).
- Air pollution from combustion contributed to 3.7 million premature deaths worldwide in 2012 (World Health Organization 2014).
- Road-traffic statistics: 1.2 million people a year are killed in road-traffic accidents (World Health Organization 2013).

Energy subsidies and pre/post-tax measures
- “Pre-tax” subsidies (mainly reflecting undercharging for supply costs) were 0.7 percent of global GDP in 2011 and 2013, and are projected to decline to 0.4 percent in 2015 (Coady and others, 2015).
- “Post-tax” subsidies (which also account for undercharging for environmental costs) are much larger and are projected to rise from 5.8 percent of global GDP in 2011 to 6.5 percent in 2015.
- The biggest source of post-tax subsidies is coal, amounting to 3.9 percent of global GDP in 2015.
- No country imposes meaningful taxes on coal use from an environmental perspective.
- Energy subsidies:
  - Impose large fiscal costs, discourage investments in energy efficiency, renewables, and energy infrastructure, and increase vulnerability to volatile international energy prices.
  - Are an inefficient way to support the poor, as bulk of benefits are typically captured by higher-income households.

Policy rationale for energy price reform
- Countries with pre-tax subsidies should let energy prices adjust to reflect supply costs.
- Energy prices should incorporate environmental costs by applying environmental taxes to:
  1. Exploit opportunities for mitigating damage to climate change, local pollution, and congestion—if targeted at the right base (for example, emissions).
  2. Achieve environmental protection at the lowest economic cost—if revenues are used productively (for example, to cut taxes on labor and capital that harm growth).
  3. Strike the efficient balance between environmental benefits and economic costs—if taxes are aligned with environmental damages.
- Charging for pollution reduces the need for renewables subsidies, which totaled $121 billion globally in 2013 (IEA 2014).

Benefits from energy price reform
- Getting energy prices right (raising prices to reflect supply costs, environmental costs, and general consumption taxes) would:
  - Cut global CO2 emissions by a quarter.
  - Cut air pollution deaths by nearly three-fifths.
  - Yield on average per country revenues of 4 percent of GDP.
- Revenue gains are especially large (over 8 percent of GDP) in emerging and developing Asia, Commonwealth of Independent States, and the Middle East, North Africa and Pakistan, reflecting either high coal use (and environmental costs) relative to GDP or currently heavy subsidies for petroleum and natural gas.
- Potential uses for savings: alleviate the burden of other taxes or finance socially productive investments (for example, in education, health, and infrastructure).

Barriers and strategies for subsidy reform
- Reform difficulties: Increasing energy prices has often led to widespread public protests.
- Public support is hampered by lack of confidence that governments will use savings for socially beneficial ends, including protecting the poor.
- Concerns: higher energy prices can contribute to higher inflation and adversely affect competitiveness; subsidy reform can be complex in sectors like electricity.
- Key ingredients for successful reform (Clements and others 2013):
  - Develop a comprehensive energy sector reform plan in consultation with key stakeholders, with clear long-term objectives and analysis of impact.
  - Clear communication regarding reform objectives.
    - High-income countries: link higher fuel taxes to reductions in other harmful taxes or health benefits of lower emissions.
    - Developing economies: communicate plans that expand programs to protect the most vulnerable and commit fiscal savings to growth-enhancing expenditures, including basic education and health.
  - Commit to institutional reforms that depoliticize energy pricing—such as introduction of automatic pricing mechanisms (higher priority for developing countries).
  - Consider phased-in price changes to allow firms and households time to adjust.

### Managing water resources
- Access gaps:
  - It is estimated than 547 million people still lack access to a safe drinking water supply.
  - 2.4 billion people do not have access to an adequate sanitation facility (World Health Organization and UNICEF 2014).
- Water subsidies and underpricing:
  - Recent IMF work estimates that water subsidies provided through public utilities totaled about $456 billion or 0.6 percent of global GDP in 2012.
  - On average, water prices for household and industry use tend to be close to supply cost levels in advanced economies, but some countries continue to provide subsidized water for agriculture and electricity generation.
  - Underpricing of water creates incentives for overuse and underinvestment.
  - Water subsidies are inequitable, disproportionately benefiting upper-income groups, and crowd out other priority spending such as public investment (Kochhar and others 2015).
- Policy implication: Reforming water pricing to get incentives right can help rationalize water use and promote needed investment.

*Source: Excerpt from IMF document _sdn1518 (selected sections 45–60 and associated boxes and figures).*

### 61.      The most desirable approach to water pricing reform will vary by country. Effective and

### _sdn1518 - 61.      The most desirable approach to water pricing reform will vary by country. Effective and

### Water pricing reform: objectives and country differentiation
- The most desirable approach to water pricing reform will vary by country.
- In developing countries:
  - Reforms should strengthen the finances of public water utilities to support investment and expand access to water and sanitation for the poor.
  - Ensuring adequate maintenance spending is a priority.
- In advanced economies:
  - Reforms should be geared toward reflecting environmental costs in prices.
- Under the right circumstances, and where institutional and policy frameworks are strong:
  - Establishing markets for water rights can help allocate limited water to the highest-valued uses.

### Integrated and complementary policies for sound water management
- Achieving sound water management requires an integrated and holistic approach that goes beyond the water sector itself.
- Water pricing reforms should be complemented by policies that rationalize water use in areas such as agriculture, trade, and energy, while redirecting achieved gains toward protecting the poor.
- Key contextual fact:
  - Agriculture accounts for 70 percent of all water withdrawn.
- Examples of complementary measures:
  - Discourage excessive groundwater pumping by improving regulations.
  - Replace energy subsidies with targeted social assistance to remove disincentives for efficient water use in agriculture.

### Mitigating adverse environmental events—role of the financial sector
- Financial markets have an important role in supporting environmental sustainability:
  - Well-designed financial instruments can help shift investment from industries with a heavy carbon footprint to sectors developing “green” technologies.
    - Development of green investment vehicles—such as stock indices that include only green technology companies or bonds financing “green” projects—helped channel savings into climate-friendly sectors.
    - De-carbonization initiatives have also created greener portfolios in some countries.
  - Well-developed financial markets and hedging instruments can strengthen countries’ ability to insure against risks associated with natural disasters.
    - Access to credit and market insurance, self-insurance through bank deposits, and self-protection through safe and efficient payments systems can help businesses and households mitigate and reduce the cost of some climate change-related risks.
    - Availability of disaster risk insurance, and related hedging instruments help protect countries and individuals from the economic costs of natural disasters.
    - Instruments developed include catastrophe bonds that mitigate natural disaster risks by sharing the risk of a disaster with financial market participants.

### Examples and developments in catastrophe risk financing
- 2012:
  - The Government of Mexico issued a $315 million catastrophe bond that provides coverage against earthquakes and hurricanes.
- September 2014:
  - African states announced the African Risk Capacity Extreme Climate Facility, a multi-year funding mechanism that will issue climate change catastrophe bonds in 2016 to provide additional financing to participating countries to enhance adaptation investments in case extreme climate shocks increase in frequency and intensity in Africa.

### Priorities for climate-friendly financial initiatives and country-specific approaches
- Priorities require a country-specific approach:
  - In advanced economies:
    - Promotion of climate-friendly initiatives by public and private sectors can be helpful.
    - Examples cited:
      - Decarbonization of the Fourth Swedish National Pension Fund based on available green stock indices that track carbon footprints of polluting industries.
      - Measurement and disclosure of carbon footprints, and drastic reduction of holdings in coal mining companies, in Norway’s Sovereign Wealth Fund portfolio.
      - Decision of six Danish pension funds to divest from fossil fuels, based on indices reporting carbon footprints.
  - In developing countries:
    - Policies to support financial inclusion could help individuals self-insure against natural disasters through savings or insurance and use hedging instruments against weather risks.

### Concluding policy themes relevant to sustainable development goals (SDGs)
- IMF’s areas of focus in support of the SDGs highlighted in the text:
  1. Economic diversification and transformation for high and sustainable growth.
  2. Economic, gender, and financial inclusion.
  3. Environmental sustainability.
- Common policy threads identified:
  - Policies and reforms to promote high and sustainable growth in developing countries, including measures to increase agricultural productivity, create fiscal space for public infrastructure, invest in education (including girls), strengthen institutions and governance, improve tax systems, reduce barriers to entry, and increase banking competition and innovation while preserving financial stability.
  - Supporting economic, gender, and financial inclusion by enhancing the distributive role of fiscal policy—raising tax revenues, cutting wasteful and poorly targeted spending (including energy subsidies), strengthening public service delivery, and expanding financial inclusion.
  - Enhancing climate and environmental sustainability by reducing inefficient and poorly-targeted energy subsidies, getting energy prices right, employing pricing policies accompanied by regulations for efficient water management, and using financial sector policies to mitigate and adapt to adverse climate-related events.

*Source: IMF content unit _sdn1518 - pages excerpted.*

### REFERENCES

### _sdn1518 - REFERENCES

### Major thematic areas covered by the references
- Inequality, redistribution, and fiscal policy
- Gender gaps, female labor force participation, and women’s empowerment
- Financial inclusion, financial deepening, and access to credit
- Public investment, growth, debt sustainability, and absorptive capacity
- Energy subsidies, climate change, and energy pricing
- Economic diversification, structural transformation, and trade
- Microfinance, social protection (including conditional cash transfers), and poverty reduction
- Health, water, and broader development indicators
- Methodological and country-specific studies (including small states and low-income countries)

### Key references by theme (authors, year, and exact titles as listed)
- Inequality, redistribution, and fiscal policy
  - Bastagli, F., D. Coady, and S. Gupta. 2012. “Income Inequality and Fiscal Policy.” Staff Discussion Note 12/08, International Monetary Fund, Washington.
  - Dabla-Norris, E., K. Kochhar, N. Suphaphiphat, F. Ricka, and E. Tsounta. 2015a. “Causes and Consequences of Inequality: A Global Perspective.” Staff Discussion Note 15/13, International Monetary Fund, Washington.
  - Clements, B., R. de Mooji, S. Gupta, and M. Keen, 2015, Inequality and Fiscal Policy, International Monetary Fund, Washington.
  - Ostry, J., A. Berg, and C. Tsangarides. 2014. “Redistribution, Inequality, and Growth.” Staff Discussion Note 14/02, International Monetary Fund, Washington.
  - Galor, O., and J. Zeira. 1993. “Income Distribution and Macroeconomics.” Review of Economic Studies 60(1): 35–52.
  - Ravallion, M. 1997. “Can High-Inequality Developing Countries Escape Absolute Poverty?” Economics Letters 56(1): 51–7.
  - Ravallion, M. 2004. “Pro-Poor Growth: A Primer.” Policy Research Working Paper 3242, World Bank, Washington.

- Gender gaps and women’s empowerment
  - Duflo, E. 2012. “Women Empowerment and Economic Development.” Journal of Economic Literature 50(4): 1051–79.
  - Elborgh-Woytek, K., M. Newiak, K. Kochhar, S. Fabrizio, K. Kpodar, P. Wingender, B. Clements, and G. Schwartz. 2013. “Women, Work, and the Economy: Macroeconomic Gains from Gender Equity.” Staff Discussion Note 13/10, International Monetary Fund, Washington.
  - Gonzales, C., S. Jain-Chandra, K. Kochhar, M. Newiak, and T. Zeinullayev. 2015a. “Catalyst for Change: Empowering Women and Tackling Income Inequality.” Staff Discussion Note (forthcoming), International Monetary Fund, Washington.
  - Gonzales, C., L., Chandra S. J., K. Kochhar, and M. Newiak. 2015b. “Fair Play: More Equal Laws Boost Female Labor Force Participation.” Staff Discussion Note 15/02, International Monetary Fund, Washington.
  - Klasen, S., and F. Lamanna. 2009. “The Impact of Gender Inequality in Education and Employment on Economic Growth: New Evidence for a Panel of Countries.” Feminist Economics 15(3): 91–132.
  - Becker, G. 1957. The Economics of Discrimination. Chicago: University of Chicago Press.
  - Miller, Grant. 2008. “Women's Suffrage, Political Responsiveness, and Child Survival in American History.” Quarterly Journal of Economics 123(3): 1287–327.
  - World Economic Forum (WEF). 2014. The Global Gender Gap Report 2014. Geneva.

- Financial inclusion, financial deepening, and access to credit
  - Demirguc-Kunt, A., L. Klapper, D. Singer, and P. Van Oudheusden. 2015. “The Global Findex Database 2014—Measuring Financial Inclusion around the World.” Policy Research Working Paper 7255, World Bank, Washington.
  - Beck, T., A. Demirguc-Kunt, and R. Levine. 2007. “Finance, Inequality and the Poor.” Journal of Economic Growth 12(1): 27–49.
  - Sahay, R., M. Cihak, P. N’Diaye, A. Barajas, B. Ran, D. Ayala, Y. Gao, A. Kyobe, L. Nguyen, C. Sabarowski, K. Svirydnezka, and S. R. Yousefi. 2015a. “Rethinking Financial Deepening: Stability and Growth in Emerging Markets.” Staff Discussion Note 15/08, International Monetary Fund, Washington.
  - Sahay, R., M. Cihak, P. N’Diaye, A. Barajas, S. Mitra, A. Kyobe, Y. Mooi, and S. R. Yousefi. 2015b. “Financial Inclusion: Can’t Meet Multiple Macroeconomic Goals?,” Staff Discussion Note 15/17, International Monetary Fund, Washington.
  - Djankov, S., C. McLiesh, and A. Shleifer. 2007. “Private Credit in 129 Countries.” Journal of Financial Economics 84(2): 299–329.
  - Townsend, R. 2011. Finance in Developing Economies: Evaluation of Policy on Growth, Inequality, and Poverty in Thailand. Oxford/New York: Oxford University Press.
  - Dabla-Norris, E., Y. Ji, R. Townsend, and D.F. Unsal. 2015b. “Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy.” Working Paper 15/22, International Monetary Fund, Washington.
  - Mbiti, I., and D. N. Weil. 2015. “Mobile Banking: The Impact of M-Pesa in Kenya.” In NBER Volume on African Economic Successes, edited by S. Edwards, S. Johnson, and D. Weil, forthcoming, University of Chicago Press, Chicago.

- Public investment, growth, debt sustainability, and absorptive capacity
  - Buffie, E., A. Berg, C. Pattillo, R. Portillo, and F. Zanna. 2012. “Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces.” Working Paper 12/144, International Monetary Fund, Washington.
  - Berg, A., E., Buffie, C. Pattillo, R. Portillo, A. Presbitero, and F. Zanna. 2015. “Some Misconceptions about Public Investment Efficiency and Growth.” Working Paper (forthcoming), International Monetary Fund, Washington.
  - Presbitero, A. 2015. “Too Much and Too Fast? Public Investment Scaling-Up and Absorptive Capacity.” Working Paper, forthcoming, International Monetary Fund, Washington.
  - Melina, G., S. Yang, and L.-F. Zanna. 2014. “Debt Sustainability, Public Investment, and Natural Resources in Developing Countries: The DIGNAR Model.” Working Paper 14/50, International Monetary Fund, Washington.
  - Cabezón E., P. Tumbarello, and Y. Wu. 2015. “Strengthening Fiscal Frameworks and Improving the Spending Mix in Small States.” Working Paper 15/124, International Monetary Fund, Washington.

- Energy, climate change, and subsidies
  - Clements, B., D. Coady, S. Fabrizio, S. Gupta, T. Alleyne, and C. Sdralevich. 2013. Energy Subsidy Reform—Lessons and Implications, International Monetary Fund, Washington.
  - Coady, D., I. Parry, L. Sears, and B. Shang. 2015. “How Large Are Global Energy Subsides?” Working Paper 15/105, International Monetary Fund, Washington.
  - Parry, I., D. Heine, S. Li, and E. Lis. 2014. Getting Energy Prices Right: From Principle to Practice. Washington: International Monetary Fund.
  - Intergovernmental Panel on Climate Change (IPCC). 2014. “Climate Change 2014: Synthesis Report.” Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, IPCC, Geneva.
  - International Energy Agency (IEA). 2014. Annual Energy Outlook. Paris: International Energy Agency.
  - International Monetary Fund (IMF). 2008. “Climate Change and the Global Economy.” In World Economic Outlook, April 2008, Housing and the Business Cycle, Chapter 4, 133–90. Washington: IMF.

- Economic diversification, structural transformation, and trade
  - Callen, T., R. Cherif, F. Hasanov, A. Hegazy, and P. Khandelwal. 2014. “Economic Diversification in the GCC: Past, Present, and Future.” Staff Discussion Note 14/12, International Monetary Fund, Washington.
  - Papageorgiou, C., and N. Spatafora. 2012. “Economic Diversification in LICs: Stylized Facts and Macroeconomic Implications.” Staff Discussion Note 12/13, International Monetary Fund, Washington.
  - Chen, H., L. Rauqeuqe, S. Singh, Y. Wu, and Y. Yang. 2014. “Pacific Island Countries: In Search of a Trade Strategy.” Working Paper 14/158, International Monetary Fund, Washington.
  - ———. 2015c. “Reaping the Benefits from Global Value Chains.” Chapter 2 in Regional Economic Outlook: Asia and Pacific: Stabilizing and Outperforming Other Regions. May 2015. Washington: IMF.
  - Dollar, D., and A. Kraay. 2002. “Growth Is Good for the Poor.” Journal of Economic Growth 7: 195–225.
  - Topalova, P. 2004. “Trade Liberalization, Poverty, and Inequality: Evidence from Indian Districts.” In Globalization and Poverty, edited by A. Harrison. Chicago: University of Chicago Press.

- Microfinance, cash transfers, and social protection
  - Chen, G., S. Rasmussen, and X. Reille. 2010. “Growth and Vulnerabilities in Microfinance.” Focus Note 61, CGAP, World Bank, Washington.
  - Kabeer, N. 2005. “Is Microfinance a ‘Magic Bullet’ for Women’s Empowerment? Analysis of Findings from South Asia.” Economic and Political Weekly, October 29, 4709–18.
  - Fiszbein, A., and N. Shady. 2009. Conditional Cash Transfers: Reducing Present and Future Poverty. Washington: World Bank.
  - Garcìa, M., and C. Moore. 2012. The Cash Dividend: the Rise of Cash Transfer Programs in Sub-Saharan Africa. Washington: World Bank.
  - Soares, S., R. Osorio, F. Soares, M. Medeiros, and E. Zepeda, 2007, “Conditional Cash Transfers in Brazil, Chile, and Mexico: Impact on Inequality,” IPC Working Paper 35, International Poverty Center, Brasilia.

- Agriculture, productivity, and development
  - Gollin, D. 2010. “Agricultural Productivity and Economic Growth.” In Handbook of Agricultural Economics Volume 4, edited by R. Evenson and P. Pingali. Oxford: Elsevier.
  - Restuccia, D., D. T. Yang, and X. Zhu. 2008. “Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis.” Journal of Monetary Economics 55(2): 234–50.
  - Loko, B., and M. A. Diouf. 2009. “Revisiting the Determinants of Productivity Growth: What’s New?” Working Paper 09/225, International Monetary Fund, Washington.

- Health, water, and development indicators
  - Miller, Grant. 2008. “Women's Suffrage, Political Responsiveness, and Child Survival in American History.” Quarterly Journal of Economics 123(3): 1287–327.
  - World Health Organization. 2013. Global Health Data Repository. Geneva.
  - World Health Organization. 2014. Public Health, Environmental and Social Determinants of Health. Geneva.
  - World Health Organization and UNICEF. 2014. Progress on Drinking Water and Sanitation—2014 Update. Geneva: World Health Organization.
  - World Bank. 2015. World Development Indicators. Washington.

- IMF and World Bank policy/working papers cited
  - IMF policy papers and staff discussion notes spanning 2008–2015 on topics including jobs and growth, low-income country macroeconomic developments, structural transformation, fiscal policy and income inequality, financing for development, public investment efficiency, and small developing states (exact titles and years preserved in the list).
  - World Bank publications on gender mainstreaming, Women, Business and the Law 2014, World Development Report 2014―Risk and Opportunity, and Global Financial Development Report—Financial Inclusion.

### Notable working paper and discussion note identifiers preserved exactly
- Policy Research Working Paper 2788
- Staff Discussion Note 12/08
- Working Paper 12031
- Focus Note 61
- Working Paper 14/158
- Working Paper 12/144
- Working Paper 15/124
- Staff Discussion Note 14/12
- Policy Research Working Paper 7255
- Working Paper 09/225
- Working Paper 14/50
- Staff Discussion Note 15/08
- Staff Discussion Note 15/17
- Staff Discussion Note 15/13
- Staff Discussion Note 15/11
- Staff Discussion Note 15/02
- Staff Discussion Note 14/02
- IPC Working Paper 35
- Policy Research Working Paper 3242
- Working Paper 15/105
- Working Paper 15/22

*Source: _sdn1518 - REFERENCES (IMF PDF chapter).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1518.pdf_