Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey : Strong Reforms Offer Countries Path to High-income Status
December 17, 2014
- Seven small middle-income countries in Africa aim for high-income status
- Growth drivers weaken, incomes rise slowly: possible “middle-income trap”
- Peer learning could help advance reforms in region’s middle-income countries
Sub-Saharan Africa’s small middle-income countries should implement strong reforms to boost growth and avoid the “middle-income trap,” seminar participants concluded in Mauritius.
Tailor shop in Gaborone, Botswana—one of Africa’s small middle-income countries that face middle-income trap (photo: Heiner Heine/Newscom)
SMALL MIDDLE-INCOME COUNTRIES
At an event featuring peer-to-peer learning, 18 senior officials from seven small middle-income countries in Africa came together at the Africa Training Institute in Mauritius to discuss their common macroeconomic and structural challenges. They agreed that peer learning offers untapped potential to help move reforms forward in their countries.
Organized by the IMF African Department and the Africa Training Institute, the November 18–21 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 joint work with the authorities in the context of a forthcoming book titled “Africa on the Move: Unlocking the Potential of Small Middle Income Countries (SMICs).”
The seminar involved multiple stakeholders and received broad sponsorship from the IMF’s African Technical Assistance Centers in Ghana and Mauritius, from the Africa Training Institute in Mauritius, from the Regional Multi-Disciplinary Center of Excellence in Mauritius, and from the European Union.
Avoid the trap
Building on past success, small middle-income countries in sub-Saharan Africa have now set themselves the challenge of reaching high-income status and avoiding the middle income trap. While still positive, growth has slowed, as previous growth drivers weaken and the rise in per capita income wanes (see chart).
The concept of a middle income trap grew from the observation that middle-income countries graduated to high-income status far less often than low-income countries became middle-income countries. 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.
The seven small middle-income countries facing this trap in sub-Saharan Africa are Botswana, Cabo Verde, Lesotho, Mauritius, Namibia, Seychelles, and Swaziland. The seminar examined common policy challenges these countries face, reviewed what individual countries have done to address them, and how IMF surveillance can build on successful approaches to help countries move forward.
Boosting growth
Opening the seminar, IMF African Department Deputy Director Anne-Marie Gulde-Wolf noted that while sub-Saharan Africa remains the second fastest–growing region in the world, the small middle-income countries are among the slowest growing in the region, and there are significant downside risks to this outlook.
Participants then explored policy responses to challenges to boosting growth in five key areas—macroeconomic vulnerability, employment and inclusiveness, productivity growth, financial inclusion, and the political economy of economic reform. To allow for peer learning—an approach which to date has been used relatively rarely by the IMF—small breakout sessions among country participants were a key feature of the program, with group discussions and presentations leading to review of country experiences and failure using specific policy initiatives.
Consensus emerged on the following points:
• Like many small states, small middle-income countries are highly vulnerable to shocks, and there was broad agreement on the importance of building sufficient policy buffers to absorb external shocks—especially since official financing flows for these countries will fall over time. At the same time, there are significant opportunity costs of buffers such as holding large reserves, especially in view of important infrastructure gaps that restrain long-term growth in such countries.
• To promote diversification there is a need for policies to reduce skills mismatch. If done right, these policies could help “crowd in” private sector employment, as supported by the analytic work in the book, while the state continues to foster smooth functioning of the labor market and provides safety nets. However, there is also a need to implement public employment and wage policies that will improve labor market outcomes, and to avoid the government becoming the “employer of last resort”.
• Returning to an era of strong growth is necessary to achieve high-income status. This will require deeper reforms and innovative policies to boost productivity. In particular, the quality of public spending, especially for education and economic governance, was considered an important tool for supporting productivity growth.
• Discussion on financial inclusion highlighted emerging evidence that financial inclusion is crucial for structural transformation and inclusive growth—while noting that small middle-income countries have some of the most uneven distributions of income in the world. Many country participants emphasized the need to go beyond relaxing financing constraints for small and medium-sized enterprises, such as loan subsidy programs, to address underlying market failures and structural weaknesses in the financial sector that keep intermediation costs high. At the same time, efforts by governments to promote financial inclusion need be pursued in a manner that preserves financial stability.
• In the discussion of political economy constraints on reform, country participants highlighted the importance of effective communication in building support. Appropriate sequencing could reduce the chances of reform fatigue in small middle-income countries. They also agreed on the usefulness of “reform champions” that are insulated from short-term political cycles. Ultimately, they recognized that strategies to advance reforms need to be driven by country-specific circumstances.
Benefits of peer learning
Looking ahead, country participants felt that peer learning could help move reforms forward in their countries. They also concurred on the value of the forthcoming book as a vehicle to further foster peer learning among this group and offered to contribute their own country experiences and perspectives—which will enrich the analysis and improve traction.
The peer group is also eager to pursue cost-effective tools for knowledge sharing, including online, which the IMF African Department and the Africa Training Institute will help explore. More broadly, seminar participants noted that capacity building and training institutions in the region could become vehicles for peer-to-peer learning and support. They envisaged that these countries could eventually set common policy goals among themselves, with those doing well helping those that are lagging behind.