The Fruits of Growth: Economic Reforms and Lower Inequality

IMF Blog, January 26, 2017

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Growth is essential for improving the lives of people in low-income countries, and it should benefit all parts of society.
The IMF staff analysis shows that reforms that promote growth (such as those in agriculture, the financial sector, and public investment) can sometimes widen inequality in lower-income countries.
Pro-growth policies can be truly inclusive only if they are designed with careful attention to who gains and who loses.
Well-targeted measures can ensure that everyone gains from essential economic reforms and strengthen the case for pursuing reforms.

Mobility and structural differences:
- Lifting growth and reducing inequality is especially hard where workers cannot relocate easily and there are big productivity differences between services, industry, and agriculture.
- A large informal economy, poor infrastructure and lack of financial services worsen the challenge.
Specific statistics and comparisons:
- Uganda has more than halved its absolute poverty rate to about 35 percent from close to 90 percent in 1990.
- In sub-Saharan Africa, it is more than twice as expensive to move from rural to urban areas than it is in China.
- Only a third of sub-Saharan African households have electricity, compared to 85 percent in the rest of the world.
- In low-income countries, only about 20 percent of the adult population has a bank account, compared to more than 80 percent in the rest of the world.
Reform trade-offs:
- Infrastructure development and financial sector reforms can raise productivity and mobility, but they can also increase inequality if some sectors become more competitive and labor mobility is limited.
- Financial reforms may lower borrowing costs and boost private investment, but unless deep enough they may not expand access to credit and financial services for poorer segments.

General approach:
- Policymakers should not delay productivity-boosting reforms; instead, they should design reforms alongside measures that mitigate adverse distributional impacts.
- The IMF staff paper examines country cases showing how well-targeted measures can complement reforms and offset adverse distributional impacts.
Examples of targeted measures:
- Malawi (hypothetical policy case): If maize subsidies were reduced to enhance agricultural productivity, targeted cash transfers to affected households would provide immediate support to farmers who may be hurt by the change.
- Ethiopia (financial-sector and labor mobility case): Increasing credit to the private sector to promote manufacturing should be complemented by broadening financial access to the rural population and increasing labor mobility through:
- Easier transport connecting rural and urban areas
- Affordable urban housing
- Training programs
- Myanmar (agricultural productivity case): With half the workforce on farms, targeted investment in electrification, irrigation, and research and development for improved seed varieties could sharply improve agricultural productivity.
Evidence of effectiveness:
- Targeted cash transfer approaches have been successful in reducing poverty and inequality in countries such as Ethiopia, which has one of the largest social transfer programs in Africa.

Building consensus:
- Governments will face challenges in building a consensus for bold policies to boost growth.
- The IMF will continue to work with member countries, advocating reforms designed to deliver benefits broadly across society.

Source: The Fruits of Growth: Economic Reforms and Lower Inequality — IMF blog post by Christine Lagarde, January 26, 2017.