Productivity Is Key to Growth in Small Mid-income Countries

SUMMARY

Africa’s small middle-income countries must boost the contribution of productivity to growth, since they can no longer rely on capital deepening as a growth driver, a Washington conference hears. Better productivity will also make these countries globally competitive.

 
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  • 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
  • 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.

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