Small Middle-Income Countries Conference – Gaborone, Botswana, 29 January 2016

In recent years, small middle-income countries (SMICs) in sub-Saharan Africa have enjoyed stronger growth and economic development than most other countries in the region. More recently, however, a number of external developments have led to headwinds and a slowdown in economic activity.

As a result, SMICs in the region need to adjust their policies to preserve stability and restore growth, while at the same time decide on the structural reforms that would set the basis for long-term growth and transition to high-income status. This high-level conference aims to take stock of recent developments and provide a forum to policy makers to exchange views on the above challenges and the policies needed to confront them.

Against this background, the conference will comprise three sessions and a roundtable discussion. The sessions will deal with the following themes:

• Session 1. Recent developments and prospects. What are the main economic challenges and prospects for SMICs in the region given the decline in commodity prices and the slowdown in China’s economy? How does a normalization of monetary policy in the US affect them? For countries that are close trading partners with South Africa, what are the potential spillovers from the slowdown in growth, lower customs revenues, and the depreciation of the rand? What is/has been the response with respect to monetary, fiscal, and exchange rate policies? Should the policy mix be adjusted? How do these developments impact on growth and development objectives in the medium-term?

• Session 2. Financing for development: fiscal and resource mobilization challenges. Several SMICs are facing worsening fiscal pressures from reduced revenues and high capital and social spending needs. How should countries address these challenges? What can be done to mobilize more revenue and protect the budget from revenue volatility? How can countries meet their social spending and investment needs? How should the spending mix respond to revenue declines? What can be done to promote a greater role for the private sector in infrastructure provision? What other sources of financing can be leveraged while preserving debt sustainability?

• Session 3. Labor markets, structural constraints, and reform options. High unemployment persists in many SMICs, with youth unemployment remaining a serious challenge. What policies should governments pursue to foster job creation? To what extent should governments be directly involved in absorbing the unemployed? How can the private sector best create jobs? How to address the youth unemployment challenge and skills mismatches?

• High-level (Ministers/Governors) Round Table. This session will distill the main messages from the conference and provide for a forum to exchange views on the policy and reform challenges and the road ahead to ensure that SMICs in the region can avoid the socalled “middle income trap. The discussion will cover lessons from other countries that have transited to high income group and the policies and reforms needed to reignite and sustain growth and employment creation.

Africa on the Move: Unlocking the Potential of Small Middle-Income States

Foreword

The small middle-income countries (SMICs) in sub-Saharan Africa have delivered impressive economic performance in the past few decades. They have sustained growth while preserving macroeconomic stability. In general, their governments have also effectively addressed those countries’ development challenges, including narrowing the infrastructure gap and improving access to education and health. The current challenge for SMICs is how best to consolidate the gains made during the past few decades and move to the high-income level and eventually to advanced economy status.

This book analyzes macroeconomic and structural issues facing SMICs from the perspective of IMF staff and draws on input from country officials to offer a number of policy options for addressing these challenges and realizing future opportunities. The areas covered in the book include the macroeconomic vulnerability faced by SMICs and how to enhance their resilience to shocks, an assessment of how labor market outcomes can be improved by reforms that cut spending and crowd in private initiative, structural policies and institutional frameworks that could boost productivity growth in SMICs, financial inclusion policies that are stability and growth friendly, and finally how political economy constraints could be relaxed to pave the way for gradual but systematic implementation of reforms. The policies discussed in the book lay out a possible road map for the implementation of reforms in all these areas to eventually propel SMICs to advanced economy status.

The findings in each chapter offer specific insights for the convergence process to advanced economy status. Chapter 1 starts by providing an overview of the impressive achievements made by SMICs and their common policy challenges. It compares the SMICs with countries that have succeeded in becoming high income to identify applicable policy lessons and institutional arrangements.

Despite the progress made, evidence suggests that a number of SMICs are facing residual macroeconomic challenges that make them vulnerable to global spillovers. Chapter 2 uses self-insurance models to assess the adequacy of reserves in SMICs. The chapter finds that even though international reserves held by some of the SMICs are broadly adequate to smooth large shocks, other SMICs do not have sufficient reserve buffers to withstand such shocks. Implications are drawn for medium-term fiscal and structural policies in SMICs.

Chapter 3 notes that high unemployment persists in many SMICs despite public employment that contributes to relatively large governments. The analysis shows that high public employment is not only costly but may have a counterproductive impact on labor market outcomes in SMICs. The chapter concludes by assessing how labor market outcomes can be improved by reforms that cut spending and crowd in private initiative.

The book proceeds in Chapter 4 to explore structural policies and institutional frameworks that could boost productivity growth. The analysis shows that the decline in the contribution of total factor productivity (TFP) to growth is largely responsible for the slowdown in trend growth in many SMICs, highlighting the need for policy actions to reinvigorate productivity growth, including by improving the quality of public spending, addressing the skills mismatch in the labor market, reducing the regulatory burden on firms, and facilitating structural transformation in these economies.

The financial sector in SMICs continues to deepen and broaden, with global regulatory reform providing input to national regulatory settings. Although financial deepening is broadly similar to that in other middle-income countries, financial inclusion tends to lag in many SMICs in sub-Saharan Africa. Accordingly, many SMICs are pursuing policies to enhance financial inclusion as part of their efforts toward more inclusive growth. Chapter 5 notes that welldesigned, market-conforming programs to enhance financial inclusion could work, especially with input from stakeholders; however, programs to increase access to credit through public sector institutions have so far generally been costly with little sustained impact. Addressing the supply-side and demand-side constraints to lowering intermediation costs and the better pooling of risks would provide a more sustainable basis for enhancing financial inclusion in a stability- and growth-friendly manner.

In view of the main economic challenges in the region, no assessment would be complete without addressing the thorny issue of how to overcome the political economy constraints to reforms in SMICs. Drawing on policy lessons from successful countries that have managed to overcome some of those constraints and moved to advanced economy status, Chapter 6 lays out how political economy constraints could be relaxed by capacity building centered on peer learning and gradual but systematic implementation of reforms.

The book has benefited from a wide range of discussions with public officials in SMICs, including at a seminar held in Mauritius in November 2014 that relied on multistakeholder cooperation to bring together 18 high-level economic officials from seven sub-Saharan African SMICs to examine how to avoid the “middle-income trap.” At this event, SMIC authorities saw merit in pursuing peer learning – a combination of policy dialogue and capacity development that has been used relatively rarely by the IMF – to help move reforms forward in their countries and considered the book a useful tool in this effort.

The book also has broader applicability to sub-Saharan Africa because it highlights what lies ahead for a number of fast-growing frontier market economies in the region that are on their way to graduating to middle-income status and may well experience challenges similar to those faced by the SMICs in the region.

Finally, this book represents an excellent collaborative effort with country officials in SMICs and what I hope is the beginning of a deeper policy dialogue between these members and the IMF on ways to implement reforms that would unlock their potential. As demonstrated by the IMF’s involvement in other peer groupings (for example, the Group of 20, the Group of 24, the BRICS [Brazil, Russia, India, China, and South Africa], and the UN Small States), the expertise of IMF staff can assist country authorities in realizing their potential. We trust that this book can contribute in a similar way to SMICs as they try to break the glass ceiling of the middle-income trap and move to advanced economy status.