The Unassuming Economist

A new IMF report “quantifies the effect of gender inequality in Morocco on growth, compared to groups of faster growing countries. It also estimates income losses due to low female labor force participation. The results highlight that closing overall gender gaps would help Morocco close its GDP per capita gap with benchmark countries in other regions by up to 1 percentage point. Simulations also show that gradually closing gender gaps in the labor force participation rate could lead to significant income gains over the long term. Policy recommendations to promote gender equality include investing in secondary education for women and in infrastructure, and reforming gender-discriminatory tax policies and laws.”

Here is a revised version of my paper with Larry Ball and Daniel Leigh and the dataset and programs needed to reproduce the results.

“After a decade of a vibrant development Turkish tourism sector was hit by a major fall in foreign tourists’ arrivals. This [IMF] study takes stock of recent developments and considers potential spillovers from tourism sector to other parts of the economy. It finds that a negative shock to foreign arrivals had a significant impact on the economic activity in 2016, while the recovery prospects remain subdued”, says IMF report on Turkey.

A new IMF report analyzes the lowering of the Gini coefficient in Uruguay during the last six years. Social policies and transfers have played a significant role in reducing poverty and inequality. While income dispersion has decreased across Latin America over the last decade, Uruguay stands out as the country with the largest drop in the Gini coefficient between 2009 and 2014, and to the lowest level. This reflects both government guidelines to bolster low wages, and increased redistribution through income taxes and transfers. However, looking ahead, the positive effects of further redistributive policies may be weighed against their fiscal costs and by a possible trade-off between income compression and incentives for labor supply and education and training. Work incentives among women can be strengthened further via reforms of parental leave, to reduce the remaining gender wage gap, and would diminish future pressures on public finances due to population ageing.

New IMF work on inequality was showcased by IMF Managing Director Christine Lagarde in an iMFdirect post:

“Growth is essential for improving the lives of people in low-income countries, and it should benefit all parts of society.

Traveling through Africa in the last few days, I have been amazed by the vitality I have witnessed: business startups investing in the future, new infrastructure under construction, and a growing middle class. Many Africans are now making a better living and fewer are suffering from poverty. My current host, Uganda, for example, has more than halved its absolute poverty rate to about 35 percent from close to 90 percent in 1990.

But we have also seen a flip side. Poverty, of course, but inequality as well remain stubbornly high in most developing countries, including in Africa, and too often success is not shared by all. 

We have learned, both from working with our member countries, and from our research, that sharing the fruits of growth—what we call inclusion—is key to achieving sustainable economic growth. All segments of society should feel that they have an opportunity to make a better life for themselves.

Our new staff analysis, released today, uncovers the various channels through which critical reforms that promote growth (such as those in agriculture, the financial sector, and public investment) can sometimes widen inequality in lower-income countries. The study also illustrates how additional measures can mitigate such growth and equality trade-offs.

The bottom line is this: First, pro-growth policies can be truly inclusive only if policies are designed with careful attention to the details of who gains and who loses. Second, well-targeted measures can ensure that everyone gains from essential economic reforms—and help further strengthen the case for pursuing reforms.

A look at who gains and loses

Lifting growth and reducing inequality is especially hard in countries where workers cannot relocate easily and there are big productivity differences between services, industry, and agriculture. A large informal economy, poor infrastructure and lack of financial services make the task even more difficult. Yet, in many of the IMF’s poorest member countries, this is often the case.

In sub-Saharan Africa, for example, it is more than twice as expensive to move from rural to urban areas than it is in China. Only a third of sub-Saharan African households have electricity, compared to 85 percent in the rest of the world. And in low-income countries, only about 20 percent of the adult population has a bank account, compared to more than 80 percent in the rest of the world.

Such barriers get in the way of successful and equitable reforms. Infrastructure development and financial sector reforms are examples.

More, and more efficient, spending on roads, airports, power grids and education help an economy grow more productive and make it easier for people to relocate from farms to cities. But infrastructure investment can also increase inequality if some sectors of the economy become more competitive than others, particularly if labor mobility is limited.

The case is similar for financial sector reforms. On the positive side, these reforms could make it cheaper to borrow, thereby stimulating private investment and boosting growth. But unless financial reforms are deep enough, they may not help poorer segments of the population obtain access to credit and financial services.

How to deliver strong, but inclusive growth

So, what can be done? The answer is not for policymakers to hold off on reforms that boost productivity and growth. Rather, policymakers should consider options that make these reforms more palatable from both a growth and distributional perspective.

With this in mind, our staff paper looks at a number of country cases and analyzes how well-targeted measures can complement reforms and offset adverse distributional impact.

For instance, if Malawi were to consider reducing subsidies for maize production to enhance productivity in the agricultural sector, then targeted cash transfers to affected households would help provide immediate support to farmers who may be hurt by this move. This approach has been successful in reducing poverty and inequality in countries such as Ethiopia, which has one of the largest social transfer programs in Africa.

Similarly, with regard to financial sector reform, if Ethiopia were to increase credit to the private sector to promote manufacturing and boost growth and employment, complementing this by broadening financial access to the rural population and increasing labor mobility—through easier transport that connect rural and urban areas, affordable urban housing, and training—would help reduce inequality across sectors. Rural workers would then be able to find better paying jobs in more modern and competitive sectors, such as manufacturing and services.

Governments can also target investment to improve productivity in disadvantaged sectors, and even out the impact of other reforms. In Myanmar, for example, where half the workforce is on farms, investment in electrification, irrigation, and research and development for improved seed varieties could sharply improve agricultural productivity.

There is no doubt that governments will face challenges in building a consensus for bold policies to boost growth. The IMF will continue to work with them, advocating reforms that bear fruits for everybody to enjoy.”