Macroeconomics and Sustainable Development--Address by Alassane D. Ouattara
IMF News, October 7, 1997
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- Published: October 7, 1997
Definition and framing of sustainable development
- Cites a World Bank study (1992) that found "at least 33 definitions" of sustainable development.
- IMF-preferred economist-centered definition: prioritize economic growth and efficient use of resources while allowing simultaneous pursuit of social and ecological objectives.
- Advocates complementary policies where tradeoffs exist: targeted social safety nets, protection of essential public education and health care expenditures, and fiscal and non-fiscal measures to conserve natural resources and control pollution.
- Introduces IMF concept of "high quality growth" defined as "economic growth that brings lasting employment gains and poverty reduction; provides greater equality of income through greater equality of opportunity, including for women; and protects the environment."
Link between macroeconomics and the environment
- Asserts that macroeconomic stability is a minimum and necessary condition for preserving the environment.
- Mechanisms described:
- Stability enhances growth prospects, increases employment and incomes, and ensures price incentives that preserve the environment.
- Macroeconomic instability undermines environmental strategies.
- Macroeconomic policy reforms may hurt the environment only when sound environmental policies are lacking.
- Environmental degradation harms growth via:
- Ill health and premature mortality that reduce human welfare.
- Higher outlays to mitigate health and welfare impacts, constraining growth.
- Lost labor productivity from ill health, forgone crop output from soil degradation, and lost fisheries output and tourism receipts from coastal erosion.
Financing sustainable development — needs and prospects
- Agenda 21 estimate: annual cost for developing countries about $600 billion, with about $125 billion needed as grants or concessional external financing.
- Official development assistance (ODA) context:
- Rio pledges: increase ODA to 0.7 percent of GNP from 0.34 percent.
- Actual: ODA reached an historical low of 0.25 percent in 1996.
- Debt context:
- Progress mixed; middle-income countries improved but many low-income countries remain heavily indebted.
- HIPC Initiative purpose: ensure heavily indebted poor countries that pursue strong reform policies reach sustainable external debt positions and exit debt rescheduling.
- HIPC status examples: Uganda, Bolivia, Burkina Faso have commitments; preliminary discussions held for Côte d’Ivoire, Guyana, Mozambique; expected next in line in 1998: Ethiopia, Guinea Bissau, Mauritania.
- Private capital flows:
- Surge in private capital flows to developing countries, "more than doubling since Rio."
- Poorest countries have not attracted these flows; middle-income countries see little flow to social and environmental sectors.
- Domestic resource mobilization emphasized as the main hope through better use of existing resources and mobilizing additional ones.
Three areas with potential to raise domestic finances
- 1) Raising additional fiscal revenues
- Developing countries typically have complex tax systems with a narrow tax base, poor tax and customs administration, high collection costs, high tax evasion, and low tax revenues.
- Scope to increase tax-to-GDP ratios not principally by raising rates but by broadening the tax base, simplifying tax structures, and improving tax and customs administration.
- If developing countries raised their tax-to-GDP ratios by perhaps 1 percent, it "could yield some $65 billion."
- Revenue-raising via user fees and charges for energy, water, forests, fisheries, and mining resources where fees are often set too low.
- Environmental taxes (e.g., on energy use and carbon emissions) as another revenue source; where regressive incidence may occur, part of revenues should compensate the poor.
- Notes slow progress on energy/carbon taxation and the potential welfare gains from harmonizing such taxes across countries.
- 2) Increasing public saving by rationalizing expenditures
- Reduce unproductive expenditures, in particular military expenditures; curtail excessive government bureaucracies.
- Remove or reduce costly subsidies detrimental to environmental or social objectives.
- World Bank estimate: global resource cost of subsidies for energy, transportation, water, agriculture, and fisheries exceeds $870 billion—split 50-50 between developed and developing countries.
- 3) Macroeconomic and structural reforms
- Indirect path: redirect existing financial resources toward the private sector to generate additional savings.
- Evidence that sound macroeconomic policies often result in higher economic growth.
- Structural reforms (trade reform, restructuring and privatizing public enterprises, financial sector reform, improving environment for private investment) most effective when undertaken with macroeconomic stabilization.
IMF role, policy agenda, and instruments
- IMF main contribution: encourage policies that foster a stable macroeconomic environment.
- Broadened reform agenda (noted as evident at recent Annual Meetings in Hong Kong) includes:
- Orderly liberalization of capital markets to better allocate saving and investment.
- Encouragement of good governance: transparency, accountability, and the rule of law.
- Emphasis on "second generation" reforms as essential to high quality growth: comprehensive trade reform, restructuring and privatizing public enterprises, reforming the financial sector, and improving the environment for private investment.
- Social objectives and monitoring:
- Notes criticism that structural adjustment harms human development but presents data for 27 countries using concessional facilities showing average real spending increases: education up 5 percent per year and health up 7.5 percent per year during the program period.
- Social indicators (literacy, primary and secondary enrollments, infant mortality, life expectancy, access to health care and safe water) have shown gains.
- IMF actions to strengthen social focus:
- More attention to improving data on government spending on health and education.
- Strengthening monitoring of social policies and basic social indicators, including social spending targets in Fund-supported programs.
- Programs under HIPC to incorporate monitorable targets for social spending and social indicators.
- Managing Director issued guidelines to IMF staff to strengthen work on health and education outlays.
- Environmental integration into IMF policy dialogue:
- "Win-win" policies in IMF-supported programs that benefit economy and environment (e.g., curbing environmentally damaging subsidies, stabilizing farm prices).
- Recognizes significant macroeconomic implications of environmental issues in some developing countries (weak forestry management, severe air and water pollution).
- IMF and World Bank cooperation: joint preparation of Policy Framework Papers that incorporate economic, social, and environmental concerns.
- Examples of country programs with environmental elements:
- Cambodia: forest management code as a program benchmark; mid-term review hinged on effective forestry policy implementation.
- Mauritania: preservation of fishing resources as an important element of medium-term adjustment.
- Lao People’s Democratic Republic: development of hydropower to reduce dependence on timber and conserve forest resources.
- IMF has initiated country-specific studies analyzing links between macroeconomics and the environment and assessing scope for improving environmental conditions through policy and institutional reform.
- In talks with industrial countries, energy taxation and ecological tax reform have been key concerns.
Conclusions and recommendations
- Environmentally and socially sustainable development requires an unprecedented global partnership and urgent action.
- Governments must take objectives seriously, commit politically, and be willing to redesign policies.
- Specialized institutions must provide consistent advice; international financial institutions must ensure adequate funding; NGOs should inform debates and help build national consensus.
- IMF commits to advising on macroeconomic policies and structural reforms—including good governance—to mobilize maximum financial and economic support.
- Final appeal: collective action can "change the way we live on this planet."
Macroeconomics and Sustainable Development--Address by Alassane D. Ouattara, October 7, 1997.