LICs Session I: Inequality, Growth and Resilience

Growth in low-income (LICs) and developing countries slowed sharply in 2015, following a decade of sustained growth, reflecting the weakened external environment and domestic macroeconomic imbalances. In addition, there has been limited policy space to pursue development objectives, including infrastructure investment, and to support more inclusive policies. Against this background, the session explored issues facing these countries and key aspects of the development agenda.

Key Points:

Obstacles to sustainable development. Low commodity prices are expected to persist, resulting in lower revenues for LICs and developing countries, many of which need to diversify. In addition, tighter financing conditions and the slowdown in China are expected to negatively affect growth in these countries (Lagarde).

Importance of reducing inequality. Policies that reduce inequality can also contribute to higher growth, particularly when countries are demand constrained, as the poor generally spend a larger proportion of their income. Accordingly, policy should also focus on the broader objective of facilitating a greater flow of capital and resources to developing countries from developed countries (Summers).

Demand-side structural reform. The current low interest rate environment suggests that the global economy is defined by a lack of demand. Accordingly, the current emphasis should be on structural reforms that boost demand, including removing barriers to investment and product market liberalization, as efforts to increase supply could magnify deflationary pressures (Summers).

Importance of public investment. Enhanced public investment not only increases output in the short run and improves capacity in the medium term, but importantly, it reduces the burden for future generations (Summers). While agreeing with the Managing Director on the need for efficiency in public investment, he noted that now is not the time for austerity and that these concerns should not lead to inaction.

Fragility in developed countries. One important lesson from the last decade is that developed countries also require institutional transformation and policies to address previously unseen fragilities. In addition, he highlighted that several of the problems noted in developing countries are also currently being seen in advanced economies, including the inadequacy of public infrastructure, the role of elites, and the dissatisfaction with political leadership (Summers).

The role of economics. In response to a question on how economics has helped address social and environmental issues, Mr. Summers noted that economic research has successfully brought attention to broader social and environmental issues by emphasizing the economic benefits from addressing these issues (Summers).

Quotes:

“The cost for the next generation of issuing and rolling over 2 percent debt (financed by printing money) is nothing compared to the liability from deferring maintenance, which results in compounding cost” Larry Summers, Professor of Economics, Harvard University

The seminar focused on gearing macroeconomic and structural policies in developing countries towards balancing growth and efficiency gains, and reducing inequality and maintaining economic resilience. Panelists discussed the cost of a lack of resilience, and agreed on the importance of well-targeted intervention to reduce inequality, and the need to manage resources prudently in booms and for policies that encourage greater financial inclusion.

Key Points:

Growth resilience. Downturns that result in a long-term change in trend growth reflect a lack of resilience rather than a cyclical shock around trend. Countries that produce growth but lack political legitimacy, due to inequality of opportunity and outcomes, are less likely to be resilient. The magnitude of losses related to downturns can be significant, underscoring the need for policies focused on reducing the probability of major downturns and increasing the speed of recovery (Pritchett).

Redistributing income. Criticisms against redistributive policies have been shown to be unfounded in many case studies. Transfers have been successful at permanently raising incomes when they are part of a “big push” that provides an asset, necessary training, and temporary consumption support until the asset begins to provide returns. The main issue is one of targeting, which can be partly addressed by public information on programs (Banerjee).

Resilience in Africa. The African context underscores the need for advice (from multilateral institutions) on mechanisms to smooth consumption and avoid a deceleration of growth. Nigeria’s experience highlights the importance of mechanisms that compensate for a lack of political will and ensure that resources are managed prudently during times of accelerated growth.  Building resilience requires efforts to diversify economies and reduce inequality through well-targeted transfers. Technological tools, such as biometric cards, can support better targeting of transfers (Okonjo-Iweala).

Role of Financial Inclusion.  An inability to access financial services reduces economic opportunities and generates income inequality, more so than nepotism and social status. Policy should focus less on increasing access to credit (which poses risks to stability) and lending through public banks (which can be inefficient) and more on addressing market failures that reduce access to services (Demirguc-Kunt).

Quotes:

“When regimes that produce growth without legitimacy are hit by a growth shock, this can unravel not only the growth process but also the political process,” Lant Pritchett, Professor of the Practice of International Development at the Kennedy School of Government, Harvard University

“Transferring an asset alone does not work, but if you give an asset and also do some handholding, four years later people are richer, happier, and more productive” Abhijit Banerjee, Ford Foundation International Professor of Economics, MIT

“To build resilience, African countries need the right tools/mechanisms. The fact that we have not been able to advise them well is something we ought to interrogate ourselves about” Ngozi Okonjo-Iweala, Distinguished Visiting Fellow, Centre for Global Development, and Former Minister of Finance, Nigeria

“It is the extent to which individuals and firms are able to access and use financial services that determines who can start a business, access education, and who can fulfil their economic aspirations” Asli Demirguc-Kunt, Director of Research World Bank

“ [The issue of inequality and sustained growth] is such a complicated problem, economists need to throw everything in the book at it, and not pit one solution against the other,” Jonathan Ostry, Deputy Director of Research Department, IMF