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Economists care about growth. Governments care about what it can achieve: more jobs and more income for more people. An increasing number of African countries have been growing robustly for more than a decade. But while growth is a necessary condition for poverty reduction and employment creation, is it also sufficient?
When growth first takes off, it is typically associated with steady progress in several dimensions of poverty reduction: incomes rise and countries are able to finance more spending on health and education, which translates into much-needed progress toward the Millennium Development Goals. But after this initial spurt, other questions arise. In particular, a number of countries are increasingly concerned about how inclusive growth is; are the benefits well-spread or do they accrue only to the few?
Inclusive growth that creates jobs and raises income matters not only because of issues of social justice, peace and political stability.
Inclusive growth matters because it can start a virtuous growth circle. The poor typically spend more of their income to meet basic needs, so if a poor person’s income rises, they will spend most of it, creating a ripple effect. Rising incomes and rising profits support demand, which in turn fuels more growth in incomes and profits. In addition, production on a larger scale, along with better health and nutrition, improve worker productivity, making products cheaper and more plentiful still.
Studies also suggest that high income inequality, especially in low income countries, inhibits growth.
Two factors may have played a role in limiting the benefits of economic growth:
- In some cases, growth has been concentrated in the natural resource sector. But mining and oil enterprises are capital intensive, meaning they create little domestic employment. They can also be difficult to tax, and only a small share of the profits is retained in the country and used to reduce poverty.
- The flip side of large natural resource sectors with limited employment opportunities is that the majority of the population in most African countries continues to depend on small-scale or subsistence agriculture. With relatively little investment in public infrastructure in recent decades, and limited access to financing, agricultural productivity has often remained low and households have remained cash poor.
A number of African countries are now taking on the fundamental challenge to bring about more inclusive growth, drawing on the successful programs in other countries with large poor populations, such as Brazil, China and India. Some examples:
- Countries are implementing policies to create jobs by increasing productivity and diversifying economic activity, particularly in agriculture, public infrastructure, such as transportation, water, and energy, as well as regulatory reforms. For example, Mozambique’s new poverty reduction action plan increases spending for job-creation in agriculture, while Uganda has earmarked public savings to finance a new hydro-electric project. Tanzania is redoubling efforts to eliminate red tape impeding private enterprise.
- Countries are weaving stronger social safety nets – public resources transferred directly to the poorest – to reduce income inequality and help protect people who are vulnerable during economic downturns. For example, Ethiopia created a cash and food transfer program that improved food security and retained livestock holdings. Rwanda established cash transfer and public works programs that reduced extreme poverty dramatically.
- Numerous countries are looking at introducing or changing tax regimes for natural resources to ensure that more profits stay in the country, including Democratic Republic of the Congo, and Liberia. At the same time, countries are putting in place more transparent procedures to manage these resources.
The IMF is working with its member countries to support their quest for more inclusive growth:
- Programs and policy advice to reinforce countries’ existing efforts to boost productivity and diversify production, such as processes to identify and select investment projects with widespread returns, as well as simple and transparent rules for starting businesses.
- Technical assistance to manage natural resources, from redesigning tax systems to establishing sovereign wealth funds – special accounts to manage and safeguard the monies until needed – as well as rules for spending them as intended, and mandatory public monitoring.
- The design and financing of social safety nets, to provide social protection, and create automatic stabilizers, which rapidly expand government spending to contain the impact of economic shocks.
The IMF’s next Regional Economic Outlook for Africa, which will be released in October of this year, will explore these questions in more depth. For many countries, the first priority remains to establish economic stability and create the conditions for robust economic growth. But for an increasing number of countries, the distribution of the benefits of growth has started to dominate the agenda. As countries strive for progress toward the Millennium Development Goals by 2015, these questions are of critical importance.
Filed under: Advanced Economies, Africa, Economic Crisis, growth, IMF, Inequality, International Monetary Fund, LICs, Low-income countries Tagged: | Africa, Democratic Republic of Congo, education, Ethiopia, growth, health, inclusive growth, income, income inequality, jobs, Liberia, low income countries, Millenium Development Goals, Mozambique, natural resources, oil, Rwanda, social justice, social safety nets, Tanzania, tax regimes, Uganda, virtuous growth cycle