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IMF Survey : How to Achieve Durable Development Despite Hard Times

April 14, 2016

  • Resilient and inclusive growth remains key to development of low-income countries
  • Infrastructure gaps must be closed, while maintaining debt sustainability
  • Countries should tap both domestic and external resources to sustain growth

Low-income developing countries need to diversify their economies, promote inclusion, and close infrastructure gaps by tapping both domestic resources and foreign funding to sustain growth.

Seminar panelists discussing how to ensure sustainable growth in low-income developing countries in an unfavorable global environment (photo: IMF)

Seminar panelists discussing how to ensure sustainable growth in low-income developing countries in an unfavorable global environment (photo: IMF)

Conference on Low-Income Developing Countries

This was the main lesson of the conference “Sustainable Economic Development in a Challenging Global Environment” on low-income developing countries organized as part of the IMF-World Bank Spring Meetings in Washington, D.C. on April 14.

“The global environment is clearly causing some real difficulties in low-income and developing countries. This is partly due to lower commodity prices, which have been declining for more than a year and a half. For countries which are reliant on the extraction of resources, this is a major problem,” said IMF Managing Director Christine Lagarde in her opening remarks, adding that low commodity prices are here to stay. She also noted the economic slowdown of China—a significant client of and direct investor in many low-income and developing countries—created further difficulties.

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

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DMD Min Zhu (photo: IMF)

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

Moral imperative of equality

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

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MD Christine Lagarde and Professor Larry Summers (photo: IMF)

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

“Inequality and a lack of resilience, a lack of sustained growth may really be the two sides of the same coin,” said Jonathan Ostry, Deputy Director of the IMF’s Research Department. “When inequality is rampant, all sorts of individuals are excluded from education, credit markets, adequate health, and nutrition.” Inequality does not have a single solution, Ostry emphasized.

Not doomed to be poor

Fighting inequality on a micro level works, as long as help comes in a big enough push, underlined Massachusetts Institute of Technology Professor Abhijit Vinayak Banerjee, in his presentation of efficient ways to help the poorest. “Cash to buy assets, with some training and hand-holding brings results. The poor are able and willing to grab real opportunities,” he said, citing positive examples from Indonesia and India.

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Minister Okonjo-Iweala (photo: IMF)

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

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

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

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

Infrastructure development without jeopardizing debt sustainability

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

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

Convergence with a vengeance

While challenges to maintain growth abound, some consider pessimism out of place. “One should not forget about the exciting heavy development in Africa in the last 20-25 years,” said Arvind Subramanian, Chief Economic Advisor in the Indian Ministry of Finance. “It was what I call unconditional convergence with a vengeance: many emerging countries are catching up,” he added.

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

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LICs panelists (photo: IMF)