Macroeconomics of Inclusive Growth

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D Lledó, International Monetary Fund Rodrigo Garcia-Verdu,

1 International Monetary Fund From the SelectedWorks of Rodrigo Garcia-Verdu February, 2011 Macroeconomics of Inclusive Growth Victor D Lledó, International Monetary Fund Rodrigo Garcia-Verdu, International Monetary Fund Available at:

2 Macroeconomics of Inclusive Growth Victor Lledó and Rodrigo Garcia-Verdu February 2011

3 Outline of Presentation 1. Definition and Rationale of Inclusive Growth 2. How Inclusive has Growth Been in Mozambique? 3. Inclusive Growth Strategies 4. Policies and Institutions for Inclusive Growth 5. Conclusion and Next Steps 2

4 Definition and Rationale of Inclusive Growth Inclusive growth is defined as growth that is sustained over several years, is broad-based across economic sectors, and creates productive employment opportunities for the majority of the country s population Elements of Economic Growth Macroeconomic stability: Moderate fiscal and current account deficits Low debt to GDP ratio Low and stable inflation Adequate level of reserves High investment and savings rates Openness to trade Enforcement of property rights Good governance Declining population growth rate Elements of Inclusive Growth High growth rates for several years Sustained growth accelerations Avoid growth collapses Structural transformation: Output and export diversification Broad-based productive employment Significant reduction in poverty Propitious business environment Efficient natural resource management Equality of opportunity through basic education, health and infrastructure Sources: own definition based on Commission on Growth and Development (2008), The Growth Report. Strategies for Sustained Growth and Inclusive Development, and Ianchovichina and Lundstrom (2009), Inclusive Growth Analytics. Framework and Application, World Bank. 3

5 GDP per capita (2000 US$) Definition and Rationale of Inclusive Growth How long should growth be sustained for? All countries considered by the Growth Commission as successful cases of Inclusive Development have sustained high growth rates for at least three decades 12,000 10,000 Korea ( ) 8,000 6,000 4,000 Malaysia ( ) Brasil ( ) Botswana ( ) 2,000 0 Thailand ( ) China ( ) Indonesia ( ) Years after takeoff Source: World Development Indicators World Bank. 4

6 How Inclusive has Growth Been in Mozambique? Percent Liberia Guinea-Bissau Burundi CAR DRC Eritrea Sierra Leone Comoros Côte d'ivoire Seychelles Togo Swaziland Lesotho South Africa Madagascar Guinea Kenya Niger Zambia Namibia Senegal Mauritius STP Benin The Gambia Mali Ghana Botswana Malawi Tanzania Burkina Faso Ethiopia Cape Verde Uganda Mozambique Rwanda The growth rate of real GDP in Mozambique over the period has been the second highest among non-oil exporting countries in the Sub-Saharan Africa region Growth rate of real GDP: average Average for non-oil exporters Source: Crispolti (2010), Economic Growth in Mozambique. Experiences and Policy Challenges, IMF presentation. 5

7 How Inclusive has Growth Been in Mozambique? Real GDP (Index, Takeoff year = 100) Despite Mozambique s impressive performance over the past two decades, growth still needs to be sustained for several more years, and be broader and more diverse Growth Takeoffs Asean-5 (1973) Uganda (1982) Vietnam (1989) Mozambique (1992) Tanzania (1995) India (1982) Sub-Saharan Africa (1973) Years after takeoff Source: Clément and Peiris (2008), Post-Stabilization Economics in Sub-Saharan Africa: Lessons from Mozambique, IMF. 6

8 How Inclusive has Growth Been in Mozambique? Percent Growth also needs to be accelerated to counter a declining downward trend of potential output growth 16 Actual and potential growth rate of real GDP in Mozambique: Actual Trend Source: Crispolti (2010), Economic Growth in Mozambique. Experiences and Policy Challenges, IMF presentation. 7

9 How Inclusive has Growth Been in Mozambique? Herfindahl-Hirschmann Index (0= Not Concentrated, 1= Most Concetrated) Unlike other successful cases, Mozambique growth takeoff has not been accompanied by significant export or economic diversification. In fact the export base has become more concentrated 0.7 Export Concentration Index Mozambique Uganda Vietnam Mozambique (Average ) Source: UNCTAD-STAT, United Nations Conference on Trade and Development (UNCTAD). 8

10 How Inclusive has Growth Been in Mozambique? Critically, growth in Mozambique has been less pro-poor than in other successful countries, and such pro-poor characteristics appear to be declining over time Elasticity of headcount poverty rate with respect to growth in real GDP per capita Mozambique (1996/ /03) Botswana ( ) dollars per day 1.25 dollars per day Elasticity of Mozambique's national poverty line headcount poverty rate with respect to growth in real GDP per capita 2002/ / Vietnam ( ) / / Uganda ( ) China ( ) / / Source: Own estimates based on data from the World Development Indicators World Bank. 9

11 How Inclusive has Growth Been in Mozambique? Annual growth rate % The growth incidence curve for Mozambique also confirms that growth was not pro-poor between 2002/03 and 2008/09 Households in the first three deciles experienced negative growth in expenditure per capita, while others benefited from positive growth 5 Total (years 2008 and 2002) Growth-incidence Growth in mean 95% confidence bounds Mean growth rate Expenditure percentiles Sources: own estimates using ADePT based on data from IOF and IAF

12 How Inclusive has Growth Been in Mozambique? In contrast, China is an example of a sustained growth country that registered a pattern of highly pro-poor growth between 1993 and 1996 Growth Incidence Curve for China: Source: Ravallion (2004), Pro-Poor Growth: A Primer, mimeo, Development Research Group, World Bank. 11

13 How Inclusive has Growth Been in Mozambique? Brazil is one of the countries which has registered the most progressive or pro-poor growth pattern, with the poorest households experiencing a growth rate of income per capita nearly 6 times higher than the richest households Source: Paes de Barros, Ricardo (2009), Sobre a Evolução Recente da Pobreza e da Desigualdade, Instituto de Pesquisa Econômica Aplicada, based on data from the Pesquisa Nacional por Amostra de Domicílios (PNAD),

Inclusive Growth Strategies Elements Sustained Growth Structural Transformation Productive Employment Equality of Opportunities Significant

Strategies Opportunities Sea Access, Neighbors Mineral Wealth Skills Inequality Key Foster a competitive and diversified export base Boost

14 Inclusive Growth Strategies Elements Sustained Growth Structural Transformation Productive Employment Equality of Opportunities Significant poverty reduction. Strategies Opportunities Sea Access, Neighbors Mineral Wealth Skills Inequality Key Foster a competitive and diversified export base Boost production and productivity in labor intensive sectors Supporting Improve management of natural resources Strengthen social cohesion Policies Fiscal Policy, including to address poverty and inequality. Monetary Policy Exchange Rate Policy Trade Policy Structural Reforms 13

Policies and Institutions for Inclusive Growth In all these endeavors, Mozambique should preserve one of its key assets: Macroeconomic stability Preserving Macroeconomic Stability Key Policies Pursue

15 Policies and Institutions for Inclusive Growth In all these endeavors, Mozambique should preserve one of its key assets: Macroeconomic stability Preserving Macroeconomic Stability Key Policies Pursue prudent fiscal policy that preserves debt sustainability and raise country's long-term growth factors. Create fiscal space through revenue effort and prudent borrowing to help finance well-targeted spending. Pursue prudent monetary policy to keep inflation low -> Inflation hurts the poor Monitor, but do NOT manage, the Real Effective Exchange Rate (REER) Element Avoid growth decelerations through bad policies 14

Policies and Institutions for Inclusive Growth Key Strategies Opportunities Sea Access, Proximity to

laborintensive sectors Policies and Institutions Step up public investment to remove infrastructure

business environment - Growth, Transformation, Employment, Equality Promote financial inclusion

16 Policies and Institutions for Inclusive Growth Key Strategies Opportunities Sea Access, Proximity to South Africa Foster a competitive and diversified export base Boost production and productivity in laborintensive sectors Policies and Institutions Step up public investment to remove infrastructure and skills gaps - Growth, Transformation, Employment Accelerate regulatory reforms to improve the business environment - Growth, Transformation, Employment, Equality Promote financial inclusion Growth, Employment, Equality Optimize market access and regional integration Growth, Transformation, Employment 15

17 Percent Policies and Institutions for Inclusive Growth Public Investment Percent of GDP Mozambique s public investment is falling behind the curve Max Min Real GDP growth Max Min average of non-fuel exporting SSA Mozambique Max Min Max Gross lnvestment Rate Max average non-fuel exporting SSA Mozambique Max Min Min Min Source: Crispolti (2010), Economic Growth in Mozambique. Experiences and Policy Challenges, IMF presentation. 16

18 Policies and Institutions for Inclusive Growth Regulatory and Labor Reforms Diversification into light manufacturing and other labor intensive industries in Mozambique hampered by high indirect costs in the form of burdensome regulations Cost structure, firm-level average, by country Mozambique Kenya Tanzania Zambia Uganda Nigeria Ethiopia Materials Labor Capital Indirect India China Morocco Senegal 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Eifert, Gelb, and Ramachandran (2005) based on World Bank Investment Climate Assessment data. 17

19 Policies and Institutions for Inclusive Growth Financial Inclusion and one of the highest rates of financial exclusion among SADC countries FinScope Survey Results: Comparative Access to Finance in African Countries Mozambique Uganda Zambia Malawi Tanzania Nigeria Namibia Rwanda Botswana Kenya South Africa % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Banked Other Formal Informal Excluded Source: Mozambique Fin Scope. 18

20 Policies and Institutions for Inclusive Growth Economic Diversification in Uganda Uganda constitutes a very relevant case study for Mozambique of successful economic diversification: Both countries started their growth takeoffs around the same time after emerging from a protracted civil war Uganda has a more disadvantageous initial condition than Mozambique, since it is landlocked, yet it has been a more aggressive economic reformer Botswana Mauritius South Africa Namibia Uganda Ghana Cape Verde Senegal Burkina Faso Kenya Gabon Mali Tanzania Mauritania Benin Zambia Madagascar Malawi Swaziland Mozambique Gambia, The Lesotho Niger Togo Cote d'ivoire Cameroon Seychelles Sao Tome and Principe Estimate of Regulatory Quality: average (Lower values indicate lower regulatory quality) Source: World Development Indicators World Bank. 19

Policies and Institutions for Inclusive Growth Managing Natural Resources Well Opportunities/Constraints Mineral wealth Improve the management of natural resources Policies and Institutions

21 Policies and Institutions for Inclusive Growth Managing Natural Resources Well Opportunities/Constraints Mineral wealth Improve the management of natural resources Policies and Institutions Appropriate resource taxation systems, model contracts Transparent budgets Stabilization Funds Sovereign Wealth Funds Enhance the monetary policy framework and operations and monitor, but do not manage, the exchange rate Element Avoid growth decelerations through bad policies and institutions Finance growth accelerations 20

22 Million pula Policies and Institutions for Inclusive Growth Managing Natural Resources in Botswana 20,000 18,000 16,000 Recovery of resource rent and taxes by state from mining in Botswana, 1980 to 2005 Mineral Rents Mineral Taxes 4.00 Growth of real, per capita wealth and GDP in Botswana and Namibia, 1980 to 2005 (1980 = 1.00) 14,000 12,000 10,000 8, Bots. real percapita wealth Bots. real percapita GDP 6,000 4,000 2, Namibia real percapita wealth Namibia real percapita GDP 0.00 Source: Lange (2011), The Changing Wealth of Nations. Measuring Sustainable Development for the New Millennium, World Bank. 21

23 Policies and Institutions for Inclusive Growth Managing Natural Resources in Botswana Manage fluctuations in revenues from natural resources rents through the use of stabilization funds and rules for smoothing public expenditure Government created three funds -the Domestic Development Fund, the Revenue Stabilization Fund, and the Public Debt Service Fund- which have allowed it to avoid the boom-bust cycles in commodity prices Transform revenue from natural resources into sustained economic growth by effectively reinvesting in additional productive capacity, including education, training, health, and infrastructure Government limits current expenditure and debt payment and devotes close to 40% of government revenues allocated to infrastructure and human capital expenditures Fair price for mineral resource use Government has been able to form stable, long-lasting partnerships with mining companies, leaving company management in the hands of private sector firms. It has effectively negotiated equity and business shares, instead of outright nationalization, and increased its share of equity and revenue 22

Policies and Institutions for Inclusive Growth Strengthening Social Cohesion Opportunities/Challenges Income inequality, unemployment Strengthening social cohesion

24 Policies and Institutions for Inclusive Growth Strengthening Social Cohesion Opportunities/Challenges Income inequality, unemployment Strengthening social cohesion Policies and Institutions Implement sustainable and well-targeted social safety nets Preserve macroeconomic stability Element Avoid growth decelerations though conflict 23

25 Conclusions and Next Steps Thanks! Mozambique growth needs to become more inclusive to reinvigorate the poverty reduction process. The country s strong track record of macroeconomic stability needs to be preserved. It has provided the country with a sound base for economic development -> Scaling up public investment in infrastructure is feasible Preserving macroeconomic stability will create a framework for private sector activity A more inclusive growth strategy could rest on two key pillars: Fostering a competitive and diversified export base Boost production and productivity in labor intensive sectors -> Catch up with faster reformers in Africa and worldwide Inclusive growth strategies should be supported by policies and institutions that strengthen natural resource management an social cohesion. 24

Regional outlook Sub-Saharan Africa 24/11/2015. Share commodities in good exports. Share commodities in goods imports

Regional outlook Sub-Saharan Africa 24/11/2015. Share commodities in good exports. Share commodities in goods imports Table 1: Economic structure indicators Number of Inhabitants (m.) Size of the economy (in USD bn.) Size of the economy (% of world GDP) Share commodities in good exports Share commodities in goods imports