Moving On Up: The Growth Story of Frontier Economies

IMF Blog, December 16, 2014

Source details

Author: Min Zhu
Date: December 16, 2014
Core claim: Frontier economies have a distinct growth path from past examples like China in the last two decades or the United States a hundred years ago; they are growing across agriculture, manufacturing, and services simultaneously rather than following a single-sector transition.

Growth across all sectors:
- Frontier economies (examples cited: Bangladesh, Tanzania, and Mozambique) are growing across agriculture, manufacturing, and services rather than shifting sequentially from agriculture to manufacturing to services.
- A chart in the source illustrates this multi-sector expansion.
Convergence in economic size:
- Many frontier economies have made progress in economic size relative to advanced economies (process described as convergence).
- Contributing factors listed: more stable and predictable fiscal and monetary policies, strong investment and exports, better debt management, less red tape, stronger institutions, strong productivity gains, and access to capital markets.

Demographics and endowments:
- Large, young, working-age populations will provide benefits for years to come.
- Countries are well endowed with natural resources.
Global integration and domestic demand:
- Making inroads in global ties.
- A growing middle class that creates potential for new markets.

External shocks and commodity dependence:
- Weak global demand, tumbling oil prices, and the expected end to unconventional monetary policies in the United States could pose risks.
- Many frontier economies are established or prospective commodity exporters and have benefited from high commodity prices; a sharp decline in commodity prices could:
- Adversely affect export earnings.
- Derail investment programs.
- Raise risks associated with foreign borrowing.
Sovereign bond and rollover risks:
- Recent surge in sovereign bond issuances by frontier economies could leave them vulnerable to rollover risks when bonds mature, particularly given the large size of these issuances relative to countries’ reserve and other foreign assets.
Narrow export bases and product quality:
- Historically dependent on a narrow range of primary products for export, increasing vulnerability to commodity price movements.
- Need to diversify exports; a chart in the source shows progress on diversification over recent decades.
- Need to increase the quality of production and “move up the ladder” because faster growth in quality is associated with higher per capita incomes and higher economic stability.
- Opportunities to upgrade product quality are strongest in manufacturing but also exist in agriculture, which is important given large employment shares in agriculture in many frontier economies.

Maintain macroeconomic stability:
- Continue appropriate monetary and fiscal policies to maintain stability and manage risks associated with foreign borrowing.
Implement next-generation reforms:
- Pursue difficult reforms such as improvements in public finance management.
- Avoid policies that can exacerbate downturns, for example, cutting back on spending during adverse times.
Deepen sectoral linkages and diversification:
- Deepen linkages between sectors (for example, agriculture and manufacturing) to support structural transformation.
- Promote diversification away from narrow primary-product export bases.
Improve public investment efficiency and product quality:
- Continued public finance management reforms to ensure public investments are efficient and balanced against debt sustainability risks.
- Use public investment and policy to improve the quality of products across all sectors and strengthen exports.

Source: Moving On Up: The Growth Story of Frontier Economies — Min Zhu, December 16, 2014