Productivity is Key to Growth in Small Mid-Income Countries

Productivity is Key to Growth in Small Mid-Income Countries

• Return to strong growth performance of past will require innovative policies
• Deeper financial inclusion should be part of efforts to preserve financial stability
• Labor market policies should aim to protect the worker rather than the job

Africa’s small middle-income countries must find ways to boost the contribution of productivity to growth, since they can no longer rely on capital deepening as a growth driver, a Washington conference heard.

The conference, held on the sidelines of the 2013 IMF-World Bank Spring Meetings, focused on policy priorities for small middle-income countries in sub-Saharan Africa in a rapidly changing external environment.

Delegates heard that these countries’ positive growth record had raised overall incomes and delivered positive economic outcomes, reflecting sound policies that included keeping inflation low and pursuing fiscal prudence. However, speakers also noted that trend growth has softened in recent years, and returning to an era of strong growth and transitioning to high-income status would require a different set of reform-oriented and innovative policies to boost productivity.

Cape Verde Finance Minister Cristina Duarte acknowledged that Africa’s small middle-income countries were searching for new ideas. “We are at a new starting point in our growth process - we need efficiency-driven growth and a shared vision to deliver an innovation-based economy,” she told participants.

Better productivity

Improving productivity is key to enhancing competitiveness in small middle-income countries to enable them to compete in a rapidly changing global economy, the conference was told. Speakers said better productivity could be achieved through

• Increasing the effectiveness of public spending

• Improving the efficiency and effectiveness of the tax system; and

• Deepening structural reforms including easing the cost of doing business.

At the same time, small middle-income countries need to minimize the impact of macroeconomic volatility on growth in their economies including through

• Rebuilding sufficient policy buffers to deal with shocks

• Reducing dependence on trade taxes; and

• Diversifying the economy and trade.

Financial inclusion and stability

While financial soundness indicators are benign in many small middle-income countries, issues such as shadow banking could affect financial stability, especially given that the supervision of this sector is in its infancy. Efforts by governments to deepen financial inclusion as part of a broader development strategy need be pursued in a manner that preserves financial stability, especially in a global financial system where new challenges are rapidly emerging.

Bank of Namibia Deputy Governor Ebson Uanguta told the conference that central banks had a role to play. “Striking the balance between financial inclusion and financial stability is particularly prominent in Namibia, which suffers from one of the most uneven distributions of income in the world.” Banks need to be vigilant with regard to risks - especially elevated levels of household indebtedness at historically low interest rates - and respond to new supervisory demands, Uanguta added.

Jobs and growth

The concept of inclusive growth is desirable as a goal but elusive to realize, the conference heard. Policies that aim to enhance inclusive growth need to be flexible and adaptable to country circumstances.

Echoing a point raised by IMF staff that labor market policies should aim to protect the worker, and not the job, Mauritius Financial Secretary Ali Mansoor noted that his country has embraced and followed such measures. Policies should aim to help the worker to transition during bad times through social insurance and job training programs, but should not keep nonviable industries open merely to protect the job, Mansoor said.

The state should retain a role, but rather than being an all-encompassing guarantor of outcomes, it should provide minimum safety nets, complemented by an increasing role for the private sector.

Capacity building

Small middle-income countries’ relatively large wage bills are partly driven by intense competition for scarce skilled labor in the region, the conference heard. Wage decompression would allocate higher wages to higher-skilled staff, who could be further motivated through nonmonetary benefits such as training abroad.

By concentrating on capacity building, these countries could develop leaner, smarter and more effective governments to help support both macroeconomic policy implementation and long-term growth speakers said.

Priority areas would include budget preparation, sound medium-term fiscal framework, budget reporting, tax administration, and quality of macroeconomic statistics. These efforts should aim to improve the quality of public spending as well as help strike an appropriate balance between enhancing financial inclusion and minimizing risks to financial stability.

Peer support, learning

Delegates noted that “peer support and peer learning” could be used to further explore synergies among small middle-income countries. This could be done both through peer-to-peer learning among policymakers and peer learning among technicians, Mauritius Financial Secretary Mansoor told conference participants. Capacity building and training institutions could become vehicles for peer-to-peer learning, and these countries could set common policy goals among themselves, with those doing well helping those that are lagging behind.

Source: IMF Survey