By IMFBlog| 2017-04-14T01:38:44+00:00 June 22nd, 2015|Advanced Economies, Africa, Asia, Civil Society, Economic research, Emerging Markets, Europe, Globalization, growth, IMF, Inequality, International Monetary Fund, Latin America, LICs, Low-income countries, Middle East, Politics, Reform|0 Comments
The gap between the rich and the poor is at its widest in decades in advanced countries, and inequality is also rising in major emerging markets (Chart 1). It is becoming increasingly clear that these developments have profound economic implications.
The world is now in a much better situation than six months ago when it comes to policy solutions, according to Tharman Shanmugaratnam, Singapore's Deputy Prime Minister and Minister for Finance , who is Chair of the IMF's policy-setting committee, the IMFC, speaking about the outcome of the IMF-World Bank annual meetings in Tokyo.
Across the world, surging international food prices have become a major cause for concern and topic of debate. This is especially so in the Arab world, which is home to some of the largest food importers and where rising food prices have been one of the factors in recent political unrest. In the context of ongoing political developments, governments across the region are responding to the rise in commodity prices with hikes in fuel and food subsidies, civil service wage and pension increases, additional cash transfers, tax reductions, and other spending increases. These measures will help poor households maintain their purchasing power and limit further increases in domestic food prices.
Last week, my colleague Hugh Bredenkamp talked about how the IMF is helping the low-income countries overcome the global economic crisis. This week, I want to follow this theme, but hone in more on sub-Saharan Africa. I know this region reasonably well, both from current and past vantage points. In my present role, I am the director of the IMF’s African department. Previously, I was minister of finance in Liberia and, before that, I spent a significant part of my long World Bank career working on African countries. Grappling with the kinds of economic challenges that affect the lives of millions of Africans is a passion for me.
In this first post, I want to talk about growth prospects for Africa. Let’s take a step backwards. Before the global recession, sub-Saharan Africa was generally booming. Output grew by about 6½ percent a year between 2002 and 2007—the highest rate in more than 30 years. This acceleration was broader than ever before, going beyond the typical short-lived commodity driven booms and touching many more countries. Hopes were high that the region was slowly but surely turning the corner.
Then, in a great reversal of fortune, the global economy went into a tail-spin. Initially, we hoped that the fallout in Africa would be limited. And, indeed, when the global financial tsunami made landfall, it first hit the relatively small number of countries with well-developed financial linkages to international capital markets. South Africa in particular faced difficult challenges as portfolio outflows spiked. Together with Ghana, Uganda and several other frontier markets, its currency plunged, confidence dipped, and foreign direct investment slowed.
But the impact didn’t stop there. Falling export demand and commodity prices battered economic activity in many more countries, including oil exporters in western and central Africa, causing fiscal and external balances to deteriorate significantly. Remittances from the diaspora shrank and credit dried up. The result, in many countries, was stalled growth.
In my previous postings this week, I have talked about the “double whammy” that low-income countries have faced over the past 2-3 years—the surge in food and fuel prices and global financial crisis—and how the IMF has stepped up its support to help them cope with these shocks. Without this support, and that of other agencies and rich-country donors, governments would have to slash spending as their tax revenues slumped. This, of course, is the exact opposite of what any government should be doing in a recession—it would add fuel to the fire.
But preserving or even increasing spending when revenues are declining means larger budget deficits, and more borrowing. Doesn’t the IMF always preach tight budgets? The answer is “not always.” Fiscal discipline and carefully-managed borrowing policies are essential for long-term economic health. But when economies are hit by temporary shocks—and the current recession, though severe, will surely be temporary—it makes sense for governments to use policy to limit the short-term damage.