Government policies matter when it comes to public health. And when a country’s economy is suffering a severe economic crisis, the decisions become even more critical. Over the past few decades, protecting social programs and spending on health has been a cornerstone of the IMF’s support for countries.
Low-income countries should build more infrastructure to strengthen growth. A new IMF analysis looks at ways to overcome obstacles.
The clock is now ticking on the 2030 Agenda for Sustainable Development, and while investment—critical to this agenda—has been rising in recent years among low-income countries, weak infrastructure is still hampering growth. Governments need to make significant improvements to lay foundations for flourishing economies: roads to connect people to markets, electricity to keep factories running, sanitation to stave off disease, and pipelines to deliver safe water. (more…)
The so-called BRIC nations—Brazil, Russia, India and China—could be a game changer for how low-income countries build their economic futures.
The growing economic and financial reach of the BRICs has seen them become a new source of growth for low-income countries (LICs).
LIC-BRIC ties—particularly trade, investment and development financing—have surged over the past decade. And the relationship could take on even more prominence after the global financial crisis, with stronger growth in the BRICs and their demand for LIC exports helping to buffer against sluggish demand in most advanced economies.
The potential benefits from LIC-BRIC ties are enormous.
But, so too are challenges and risks that must be managed if the LIC-BRIC relationship to support durable and balanced growth in LICs. (more…)
Ensuring that sub-Saharan Africa emerges strongly from global recession will require both a sustained recovery in the global economy and sound domestic policies. The good news is that domestic policies are already supporting economic activity.
Many countries entered the crisis in much better shape than in the past. The region’s fiscal position was on average in balance in 2008, compared with big deficits in past cycles. Debt levels were also much lower than in the early 1990s, supported of course by recent debt relief initiatives. Inflation had been brought under control across most of the region. And, reflecting sounder and more open policies, countries had accumulated much larger buffers of foreign reserves—the median ratio of reserves to GDP was 14 percent last year, compared to about 5 percent in the early 1970s.
This favorable starting point gave many countries in the region a fair amount of breathing space. They were able to respond to the crisis by allowing fiscal deficits to rise and interest rates to fall, reaping the rewards of previous good policies. Countries with flexible exchange rates also let them adjust to the changing external environment. Such policy responses helped economies absorb some of the impact of the external shocks. Not all countries were able to take this route, however. Faced with large macroeconomic imbalances that pre-dated the global slowdown, a few countries had to tighten their fiscal or monetary policy stance.
The shape of the global recovery is on everybody’s mind. But how will it affect sub-Saharan Africa? A key lesson from the past is that global cycles matter for Africa.
For sure, there have been definite idiosyncrasies in sub-Saharan African cycles–as will be discussed more fully in the forthcoming October issue of our Regional Economic Outlook—but the global dimension remains paramount.
Previous global cycles—and I’m talking here about the regular fluctuations in global economic growth that bottomed out in 1975, 1982, and 1991—followed some clear patterns. Typically, the end of an unsustainably high period of global growth coincided with the emergence of production bottlenecks and a burst of inflation triggered by accelerating commodity prices (particularly oil), prompting a tightening of monetary policy. The subsequent downturns were relatively short and growth rates typically bounced back fairly
quickly to previous levels.
By and large, Africa followed this pattern too. But the timing and the strength of the recovery were a bit different. Growth rates stayed high during the first year of the global slowdown, and they tended to bottom out later. The rebound was slower, lagging global growth by a year or two. Critically, when growth did recover, it was generally hesitant and low.
What can the past tell us about the present? It is clear that the initial shock to sub-Saharan Africa has been greater than in the past. This reflects both the magnitude of the global crisis and the deeper integration between the region and the world, both in trade and in financial markets.
Low-income countries face vast development needs. One of the biggest impediments to rapid growth is a massive “infrastructure deficit.”
In sub-Saharan Africa, for example, indicators of road and rail infrastructure are only about half those in developing countries as a whole—comparisons with advanced economies, of course, would look even bleaker. Insufficient power generation capacity and telecommunications networks are also a big constraint. It is clear that large-scale investment programs, sustained over many years, will be needed to close these gaps. Both private and public sectors will have a role to play.
The snag, of course, is that investment spending typically has to be financed by borrowing, and until quite recently, the ability of low-income country governments to take on more debt has been severely hampered by legacies from the past. Many had built up unsustainable debt as a result of bad borrowing and spending decisions, poor project implementation, weak revenue systems (governments could not collect the taxes needed to service the debts), and often bad luck (as their economies were hit by global shocks). In effect, these countries were caught in a debt trap.
But the world is changing. Large-scale debt relief, as well as big improvements in policies and public institutions, means that an increasing number of countries can now ramp up investment spending more efficiently than in the past, and borrow more aggressively for that purpose. They are starting with a clean slate. But not all countries are at this point. In fact, the majority still have more to do to on the policy and institution building front, and will need to borrow cautiously in the interim. Nevertheless, the greater diversity we see now among low-income countries needs to be reflected in how IMF-supported programs are designed (alert readers will notice that this has been a theme in my blogs this week).
What does this mean in practice? Well, for a start, we need a more flexible policy for setting limits on government debt in programs. For the past 30 years, the traditional low-income country program has permitted only highly concessional borrowing (that is, on subsidized terms), which generally rules out financing from the private sector, or from lenders who are not willing or able to provide sufficiently generous terms. There were case-by-case exceptions, but this was bascially the way it worked.
We are now moving (effective in December) to a new framework with built-in flexibility, linked directly to the circumstances of individual countries. Those with the lowest debt vulnerabilities and strongest capacity to manage public resources (assessed on the basis of widely-used indicators) will have much greater leeway than in the past to pursue borrowing strategies that mix concessional and nonconcessional sources of finance.
One of the great tragedies of the present crisis is that it nipped in the bud the longest and most broadly based economic expansion that low-income countries have seen in modern history. These countries were finally reaping the rewards of difficult reforms that go back to the 1980s and 1990s, helped by debt relief and other support. The results were plain to see. During 2000-07, low-income country growth was twice as high as in the previous decade, and inflation fell to single digits. As a result, these countries were finally starting to make inroads in raising living standards and reducing endemic poverty. There was great cause for optimism.
And then came the crisis. Or crises, I should say. For in fact, the low-income countries were besieged by two crises in rapid succession, as the global financial tsunami came hard on the heels of the food and fuel price shock of 2007-08. All of the hard-won gains were suddenly in jeopardy. And the stakes in this part of the world are particularly high, given the potential for human suffering on a wide scale. The effects of lower export volumes, remittances, investment flows, and prices for key export commodities could push hundreds of millions of desperately poor people back (or further) into poverty.
Victims of the crisis
We should remember also that the low-income countries were innocent victims of the crisis. They didn’t make the mistakes of some of the advanced countries, the mistakes that triggered this crisis. Instead, they did many of the right things on the policy front—fiscal positions were strengthened, debt burdens reduced, and comfortable reserve cushions built up in many countries. This makes it all the more important now for the world community to do whatever it can to help.