Macroeconomics of Inclusive Growth Victor Lledó and Rodrigo Garcia-Verdu February 2011

Macroeconomics of Inclusive Growth

Victor Lledó and Rodrigo Garcia-Verdu

February 2011

Outline of Presentation

2

1. Definition and Rationale of Inclusive Growth 2. How Inclusive has Growth Been in

Mozambique?3. Inclusive Growth Strategies4. Policies and Institutions for Inclusive Growth5. Conclusion and Next Steps

Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

Inclusive growth is defined as growth that is sustained over several years, is broad-based across economic sectors, and creates productive employment opportunities for the majority of the country’s population

Elements of Economic Growth Macroeconomic stability:

Moderate fiscal and current account deficits

Low debt to GDP ratio Low and stable inflation Adequate level of reserves

High investment and savings rates

Openness to trade Enforcement of property rights Good governance Declining population growth

rate

Elements of Inclusive Growth High growth rates for several years

Sustained growth accelerations Avoid growth collapses

Structural transformation: Output and export diversification

Broad-based productive employment

Significant reduction in poverty Propitious business environment Efficient natural resource

management Equality of opportunity through

basic education, health and infrastructure

3Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

Sources: own definition based on Commission on Growth and Development (2008), The Growth Report. Strategies for Sustained Growth and Inclusive Development, and Ianchovichina and Lundstrom (2009), “Inclusive Growth Analytics. Framework and Application,” World Bank.

Definition and Rationale of Inclusive Growth

Definition and Rationale of Inclusive Growth

4

How long should growth be sustained for? All countries considered by the Growth Commission as successful cases of Inclusive Development have sustained high growth rates for at least three decades

Source: World Development Indicators 2010. World Bank.


Botswana (1960-2005)

Brasil (1960-1980)

China (1961-2005)Indonesia (1966-

1997)

Korea (1960-2001)

Malaysia (1967-1997)

Thailand (1960-1997)

0

2,000

4,000

6,000

8,000

10,000

12,000

0 5 10 15 20 25 30 35 40 45

GD

P p

er c

apit

a (2

000

US

$)

Years after takeoff

How Inclusive has Growth Been in Mozambique?

5

The growth rate of real GDP in Mozambique over the period 1995-2010 has been the second highest among non-oil exporting countries in the Sub-Saharan Africa region

Source: Crispolti (2010), “Economic Growth in Mozambique. Experiences and Policy Challenges,” IMF presentation.

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1

2

3

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7

8

9

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Mad

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inea

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ibia

Sen

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Mau

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PB

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Gh

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ana

Mal

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Cap

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erd

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Mo

zam

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ue

Rw

and

a

Pe

rce

nt

Growth rate of real GDP: average 1995-2009

Average for non-oil exporters



6

Despite Mozambique’s impressive performance over the past two decades, growth still needs to be sustained for several more years, and be broader and more diverse

Source: Clément and Peiris (2008), Post-Stabilization Economics in Sub-Saharan Africa: Lessons from Mozambique, IMF.


Sub-Saharan Africa (1973)

Uganda (1982)

Asean-5 (1973)

Vietnam (1989)

Tanzania (1995)

India (1982)

Mozambique (1992)

0

100

200

300

400

500

600

700

800

0 5 10 15 20 25 30 35

Re

al G

DP

(In

de

x,

Tak

eo

ff y

ea

r =

10

0)

Years after takeoff

Growth Takeoffs


7

Growth also needs to be accelerated to counter a declining downward trend of potential output growth


0

2

4

6

8

10

12

14

16

2001 2002 2003 2004 2005 2006 2007 2008 2009

Pe

rce

nt

Actual and potential growth rate of real GDP in Mozambique: 2001-2009

Actual Trend


8

Source: UNCTAD-STAT, United Nations Conference on Trade and Development (UNCTAD).

Unlike other successful cases, Mozambique growth takeoff has not been accompanied by significant export or economic diversification. In fact the export base has become more concentrated


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.719

96

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Her

fin

dah

l-H

irsc

hm

ann

Ind

ex

(0=

No

t C

on

cen

trat

ed,

1= M

ost

Co

nce

trat

ed)

Export Concentration Index Mozambique Uganda Vietnam Mozambique (Average 1996-2009)



9

Critically, growth in Mozambique has been less pro-poor than in other successful countries, and such pro-poor characteristics appear to be declining over time

Source: Own estimates based on data from the World Development Indicators 2010. World Bank.


1.21

0.55

1.41

0.33

0.30

0.77

0.24

0.74

0.26

0.11

0.0 0.5 1.0 1.5

China (1993-2005)

Uganda (1989-2005)

Vietnam (1993-2006)

Botswana (1986-1994)

Mozambique (1996/07-2002/03)

Elasticity of headcount poverty rate with respect to growth in real GDP per capita

2.50 dollars per day1.25 dollars per day

0.86

0.44

0.04

0.0 0.2 0.4 0.6 0.8 1.0

1996/07-2002/03

1996/97-2008/09

2002/03-2008/09

Elasticity of Mozambique's national poverty line headcount poverty rate with respect to

growth in real GDP per capita


10

The growth incidence curve for Mozambique also confirms that growth was not pro-poor between 2002/03 and 2008/09 Households in the first three deciles experienced negative growth in

expenditure per capita, while others benefited from positive growth

Sources: own estimates using ADePT based on data from IOF 2008-09 and IAF 2002-03.

-5

-3

-1

1

3

5

Ann

ual

gro

wth

rat

e %

1 10 20 30 40 50 60 70 80 90 100

Expenditure percentiles

Growth-incidence 95% confidence bounds

Growth in mean Mean growth rate

Total (years 2008 and 2002)



11

In contrast, China is an example of a sustained growth country that registered a pattern of highly pro-poor growth between 1993 and 1996

Source: Ravallion (2004), “Pro-Poor Growth: A Primer,” mimeo, Development Research Group, World Bank.

Growth Incidence Curve for China: 1993-1996



12

Brazil is one of the countries which has registered the most progressive or pro-poor growth pattern, with the poorest households experiencing a growth rate of income per capita nearly 6 times higher than the richest households

Source: Paes de Barros, Ricardo (2009), “Sobre a Evolução Recente da Pobreza e da Desigualdade,” Instituto de Pesquisa Econômica Aplicada, based on data from the Pesquisa Nacional por Amostra de Domicílios (PNAD), 2001-2008.


Inclusive Growth Strategies

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Elements Sustained GrowthStructural TransformationProductive Employment Equality of OpportunitiesSignificant poverty reduction.

Opportunities Sea Access, Neighbors Mineral WealthSkillsInequality

StrategiesKey Foster a competitive and diversified export base Boost production and productivity in labor intensive sectorsSupporting Improve management of natural resourcesStrengthen social cohesion

Policies Fiscal Policy, including to address poverty and inequality.Monetary PolicyExchange Rate PolicyTrade PolicyStructural Reforms


Policies and Institutions for Inclusive Growth

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In all these endeavors, Mozambique should preserve one of its key assets: Macroeconomic stability

Preserving Macroeconomic Stability – Key PoliciesPursue prudent fiscal policy that preserves debt

sustainability and raise country's long-term growth factors.

Create fiscal space through revenue effort and prudent borrowing to help finance well-targeted spending.

Pursue prudent monetary policy to keep inflation low -> Inflation hurts the poor

Monitor, but do NOT manage, the Real Effective Exchange Rate (REER)

Element• Avoid growth

decelerations through bad policies


Policies and Institutions for Inclusive GrowthKey Strategies

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OpportunitiesSea Access, Proximity to South

Africa

Foster a competitive and diversified export baseBoost production and productivity in labor-intensive sectors

Policies and Institutions Step up public investment to remove infrastructure and skills gaps - Growth, Transformation, EmploymentAccelerate regulatory reforms to improve the business environment - Growth, Transformation, Employment, EqualityPromote financial inclusion Growth, Employment, EqualityOptimize market access and regional integration Growth, Transformation, EmploymentMozambique: Seminar on Growth, Economic Transformation, and Job Creation

Policies and Institutions for Inclusive GrowthPublic Investment

16

Mozambique’s public investment is falling behind the curve


-15

-10

-5

0

5

10

15

20

1995-99 2000-04 2005-09

Pe

rce

nt

Real GDP growth

average of non-fuel exporting SSAMozambique

Min

Min

Min

Max

MaxMax

0

10

20

30

40

50

60

1995-99 2000-04 2005-09

Pe

rce

nt

of

GD

P

Gross lnvestment Rate

average non-fuel exporting SSAMozambique

Max

Max

Max

Min MinMin


Policies and Institutions for Inclusive GrowthRegulatory and Labor Reforms

17

Diversification into light manufacturing and other labor intensive industries in Mozambique hampered by high indirect costs in the form of burdensome regulations …


Source: Eifert, Gelb, and Ramachandran (2005) based on World Bank Investment Climate Assessment data.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Senegal

Morocco

China

India

Ethiopia

Nigeria

Uganda

Zambia

Tanzania

Kenya

Mozambique

Materials

Labor

Capital

Indirect

Cost structure, firm-level average, by country

Policies and Institutions for Inclusive GrowthFinancial Inclusion

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… and one of the highest rates of financial exclusion among SADC countries

South Africa

Kenya

Botswana

Rwanda

Namibia

Nigeria

Tanzania

Malawi

Zambia

Uganda

Mozambique

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

63

17

44

14

45

21

9

19

15

18

12

3

2

5

7

0

2

2

7

12

3

1

11

38

5

26

22

24

35

19

11

17

9

24

43

46

52

52

53

54

55

61

62

78

FinScope Survey Results:Comparative Access to Finance in African Countries

Banked Other Formal Informal Excluded


Source: Mozambique Fin Scope.

Policies and Institutions for Inclusive GrowthEconomic Diversification in Uganda

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Uganda constitutes a very relevant case study for Mozambique of successful economic diversification: Both countries started their growth takeoffs around the same time after

emerging from a protracted civil war Uganda has a more disadvantageous initial condition than Mozambique,

since it is landlocked, yet it has been a more aggressive economic reformer

Source: World Development Indicators 2010. World Bank.

-1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Sao Tome and PrincipeSeychellesCameroon

Cote d'IvoireTogoNiger

LesothoGambia, TheMozambique

SwazilandMalawi

MadagascarZambia

BeninMauritania

TanzaniaMali

GabonKenya

Burkina FasoSenegal

Cape VerdeGhana

UgandaNamibia

South AfricaMauritius

Botswana

(Lower values indicate lower regulatory quality)

Estimate of Regulatory Quality: average 1998-2009


Policies and Institutions for Inclusive GrowthManaging Natural Resources Well

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Opportunities/ConstraintsMineral wealth

Improve the management of natural resources

Policies and Institutions Appropriate resource taxation systems, model contracts Transparent budgets Stabilization Funds Sovereign Wealth Funds Enhance the monetary policy framework and operations and monitor, but do not manage, the exchange rate

Element Avoid growth decelerations through bad policies and

institutions Finance growth accelerations


Policies and Institutions for Inclusive GrowthManaging Natural Resources in Botswana

21

1980

/81

1982

/83

1984

/85

1986

/87

1988

/89

1990

/91

1992

/93

1994

/95

1996

/97

1998

/99

2000

/01

2002

/03

2004

/05

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Recovery of resource rent and taxes by state from

mining in Botswana, 1980 to 2005

Mineral RentsMineral Taxes

Million p

ula

1980

1983

1986

1989

1992

1995

1998

2001

2004

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Growth of real, per capita wealth and GDP

in Botswana and Namibia, 1980 to 2005

(1980 = 1.00)Bots. real percapita wealthBots. real percapita GDPNamibia real percapita wealthNamibia real percapita GDP

Source: Lange (2011), The Changing Wealth of Nations. Measuring Sustainable Development for the New Millennium, World Bank.


22

Manage fluctuations in revenues from natural resources rents through the use of stabilization funds and rules for smoothing public expenditure Government created three funds -the Domestic Development Fund,

the Revenue Stabilization Fund, and the Public Debt Service Fund- which have allowed it to avoid the boom-bust cycles in commodity prices

Transform revenue from natural resources into sustained economic growth by effectively reinvesting in additional productive capacity, including education, training, health, and infrastructure Government limits current expenditure and debt payment and devotes

close to 40% of government revenues allocated to infrastructure and human capital expenditures

Fair price for mineral resource use Government has been able to form stable, long-lasting partnerships

with mining companies, leaving company management in the hands of private sector firms. It has effectively negotiated equity and business shares, instead of outright nationalization, and increased its share of equity and revenue


Policies and Institutions for Inclusive GrowthManaging Natural Resources in Botswana

Policies and Institutions for Inclusive GrowthStrengthening Social Cohesion

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Opportunities/ChallengesIncome inequality, unemployment

Strengthening social cohesion

Policies and Institutions

Implement sustainable and well-targeted social safety nets Preserve macroeconomic stability

Element Avoid growth

decelerations though conflict


Conclusions and Next Steps – Thanks !

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Mozambique growth needs to become more inclusive to reinvigorate the poverty reduction process.

The country’s strong track record of macroeconomic stability needs to be preserved.

It has provided the country with a sound base for economic development-> Scaling up public investment in infrastructure is feasible

Preserving macroeconomic stability will create a framework for private sector activity

A more inclusive growth strategy could rest on two key pillars: Fostering a competitive and diversified export base Boost production and productivity in labor intensive sectors

-> Catch up with faster reformers in Africa and worldwide

Inclusive growth strategies should be supported by policies and institutions that strengthen natural resource management an social cohesion.


Documents

Macroeconomics of Inclusive Growth Victor Lledó and Rodrigo Garcia-Verdu February 2011