IMF Survey : Strong Reforms Offer Countries Path to High-income Status

IMF News, December 17, 2014

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Bibliographic details

• Authors: Lamin Leigh, Marshall Mills IMF African Department December
• Published: December 17, 2014

Overview

• Publication: IMF Survey
• Authors: Lamin Leigh and Marshall Mills, IMF African Department
• Date: December 17, 2014
• Event: Seminar organized by the IMF African Department and the Africa Training Institute (November 18–21)
• Focus: Policy challenges and reform approaches for seven small middle-income countries in sub-Saharan Africa aiming for high-income status and seeking to avoid the “middle-income trap.”

Small middle-income countries and context

• Countries examined: Botswana, Cabo Verde, Lesotho, Mauritius, Namibia, Seychelles, and Swaziland.
• Background: Seminar built on initial discussions during two earlier high-level meetings on the sidelines of the 2013 and 2014 IMF–World Bank Spring Meetings and on joint work toward a forthcoming book titled “Africa on the Move: Unlocking the Potential of Small Middle Income Countries (SMICs).”
• Sponsorship: IMF’s African Technical Assistance Centers in Ghana and Mauritius, the Africa Training Institute in Mauritius, the Regional Multi-Disciplinary Center of Excellence in Mauritius, and the European Union.

Avoid the trap

• Key concern: The “middle-income trap” — middle-income countries graduate to high-income status far less often than low-income countries graduate to middle-income status.
• Historical statistic: From 1960–2012, fewer than 20 percent of middle-income countries—and none from sub-Saharan Africa—became high-income states, compared with more than half of low-income countries graduating to middle-income status.
• Current challenge: While growth remains positive, growth has slowed as previous growth drivers weaken and the rise in per capita income wanes.

Boosting growth — seminar focus areas

Participants explored policy responses in five key areas:

• Macroeconomic vulnerability
• Employment and inclusiveness
• Productivity growth
• Financial inclusion
• Political economy of economic reform

Seminar format: Peer-to-peer learning with small breakout sessions, group discussions, and country presentations reviewing experience and failures of specific policy initiatives.

Consensus findings and policy implications

• Macroeconomic buffers and trade-offs:
  • Small middle-income countries are highly vulnerable to shocks.
  • Importance of building sufficient policy buffers to absorb external shocks, especially since official financing flows for these countries will fall over time.
  • Recognition of significant opportunity costs of buffers such as holding large reserves, given important infrastructure gaps that restrain long-term growth.
• Labor markets and diversification:
  • Need for policies to reduce skills mismatch to promote diversification.
  • Properly designed policies could “crowd in” private sector employment while the state fosters labor market functioning and provides safety nets.
  • Need to implement public employment and wage policies that improve labor market outcomes and avoid the government becoming the “employer of last resort”.
• Productivity and public spending:
  • Returning to strong growth is necessary to achieve high-income status and will require deeper reforms and innovative policies to boost productivity.
  • Quality of public spending—especially for education and economic governance—is an important tool for supporting productivity growth.
• Financial inclusion:
  • Emerging evidence that financial inclusion is crucial for structural transformation and inclusive growth.
  • Small middle-income countries have some of the most uneven distributions of income in the world.
  • Need to go beyond relaxing financing constraints (e.g., loan subsidy programs) to address underlying market failures and structural weaknesses that keep intermediation costs high.
  • Efforts to promote financial inclusion should be pursued in a manner that preserves financial stability.
• Political economy of reform:
  • Effective communication important to build support for reforms.
  • Appropriate sequencing can reduce chances of reform fatigue.
  • Value of “reform champions” insulated from short-term political cycles.
  • Strategies to advance reforms need to be driven by country-specific circumstances.

Benefits of peer learning and next steps

• Peer learning viewed as an untapped potential to help move reforms forward in these countries.
• The forthcoming book was seen as a vehicle to foster peer learning; country participants offered to contribute experiences to enrich analysis.
• Interest in cost-effective knowledge-sharing tools, including online platforms, which the IMF African Department and the Africa Training Institute will help explore.
• Capacity building and regional training institutions could become vehicles for peer-to-peer learning and support.
• Long-term vision: Countries could set common policy goals among themselves, with better-performing countries helping those lagging behind.

Source: IMF African Department; December 17, 2014.

References

• https://www.imf.org/en/News/country-focus
• PRESS CENTER
• IMF Country Focus
• Turkey’s middle-income recipe
• Productivity key to growth
• Ghana’s middle-income target
• Rwanda’s middle income aim
• African Technical Assistance Centers
• https://www.imf.org/en/home