The next Frontier

• Author: Masood Ahmed
• Position: Director of the IMF's Middle East and Central Asia Department
• Pages: 9-14

Low-income countries gain ground in a globalized world, but they still face major challenges

Page 9

By THE time East Africa's biggest initial public offering debuted in June, shares in Kenya's Safaricom mobile phone company were oversubscribed by more than 500 percent. With over 860,000 shareholders, Safaricom now has the widest shareholder base of any Kenyan company. Media reports said growth potential for the sector is high, because only a third of Kenyans have a mobile phone. Just eight years ago, fewer than 1 percent of Kenyans had a mobile phone.

Throughout the developing world-from the rice paddies of Vietnam to the tropical coastline of Mozambique-countries are making strides in their drive to raise living standards, becoming in the process the next frontier for investors. In Vietnam, the income poverty rate declined from about 58 percent in 1993 to about 16 percent in 2006, and some 34 million people have been lifted out of poverty; while in Mozambique, infant mortality has been cut from 126 per thousand in 2000 to 96 per thousand in 2006.

Given the now near-universal consensus that sustained faster growth is essential for reducing poverty in poor countries, the recent economic performance of many low-income countries, especially in Africa, has been most encouraging. Underlying sub-Saharan Africa's average economic growth of 5.6 percent in 2003-07 are better economic policies (a far cry from the stop-go economic policies that resulted in little or no growth and high inflation through much of the 1980s and 1990s) and improved terms of trade resulting from the most favorable international economic environment since the 1960s.

But this is only one side of the story (see Box 1 on diversity among low-income countries). For the "bottom billion" (Collier, 2007) of this world, the prospects still look bleak. In some sub-Saharan countries, particularly the conflict-ridden "fragile" states with weak institutional structures, it increasingly seems that the economic and social targets embedded in the Millennium Development Goals (MDGs) will not be met. Even South Asia, which is expected to contribute most to global poverty reduction in the next decade, is likely to fall short in meeting agreed targets on primary education, gender parity in tertiary education, and child mortality and malnutrition.

Page 10

Are these projected outcomes inevitable? No. They depend on how low-income countries respond and how effectively the rest of the world supports their efforts. This article identifies four major macroeconomic policy challenges facing low-income countries today-tackling rising food and fuel prices, making the changing face of aid work to their advantage, developing a stronger private sector and deeper financial markets, and strengthening the quality of their institutions. Some of these challenges do not look new-they are not. But defined by history, timing, and location, they have taken on particular nuances and emphases. Addressing them by implementing the right policies will also require sensitivity to the history, context, and traditions of each country.

Tackling soaring food and fuel prices

Tackling the economic and social impact of soaring food and fuel prices is an immediate priority for low-income countries, some of which are at a tipping point as they confront higher inflation, balance of payments problems, and worsening poverty. These developments threaten to undermine several of the gains made recently by these countries.

Higher food prices have a larger direct effect on the purchasing power of poor households, because these households typically spend more than half of their income on food, compared with less than 10 percent on fuel. The urban poor are the worst affected. When poor families are unable to feed themselves adequately, the share of the undernourished can rapidly rise, and malnutrition among children and pregnant women can have lasting consequences on human development. And, as the report of the Commission on Growth and Development (2008) points out, malnutrition can also affect long-term growth by lowering productivity.

"Higher food prices have a larger direct effect on the purchasing power of poor households, because these households typically spend more than half of their income on food, compared with less than 10 percent on fuel."

Without a timely and targeted collective response, the rise in global food prices could result in an additional 100 million people in low-income countries falling beneath the poverty line. The responses need to focus on immediate and long-term measures. The first priority is for the international community to help poor countries cover additional financing needs from higher food import bills and the fiscal cost of actions that help the poor.

What are low-income countries?

Economists often use the label "low-income countries" as shorthand for countries whose average per capita income is below a certain threshold. The World Bank, for instance, puts 49 countries in this grouping; a citizen in one of these countries earns, on average, less than $935 (in 2007 terms) a year, although significant income inequalities mean that many people earn much less than this amount and some can earn many times more. Like all income-or GDP-based groupings, this label has its advantages (one of which is it allows us to discuss, in a somewhat less fragmented way, the shared problems facing these countries), but it belies the profound diversity of these countries. This diversity is related both to static factors of circumstance-for example, geography-and to more dynamic factors of economic progress-that is, how they have fared in their journey toward development (see table).

It is useful then to think of "low-income countries" not in terms of a monolith but a spectrum of development. In terms of their economic performance over the past decade, about a quarter of these countries have seen at least a 50 percent increase in average incomes, another half have seen some improvement in their living standards, while the remaining countries have seen their average incomes stagnate or fall. The idea of a spectrum helps to highlight the unique social and economic contexts and circumstances of low-income countries, but it should not obscure the countries' shared economic goal: to raise the living...