Transcript Gear Financial Policies to Investment

Economic Alternatives
for Sub-Saharan Africa:
MDG-Based Policy Implications
Terry McKinley
International Poverty Centre, Brasilia
MDG-Based National Development Planning
Training Workshop, Dar es Salaam, Tanzania
27 February – 3 March 2006
1
Does Africa Suffer from
a ‘Poverty Trap’?
Gross domestic savings are low: 17% of GDP in
2003
Net National Savings are lower: 6% of GDP
The Implication: ODA is necessary to scale up
public investment
What will be the impact of a ‘Big Push’ in ODA
on National Savings?
How can domestic resources be:
1) raised and 2) directed to investment?
2
Gross and Net National Savings
(% of GNI, 2003)
LowIncome East Asia
Countries & Pacific
Gross
National
Savings
Net
National
Savings
South
Asia
SubSaharan
Africa
23.1
41.8
24.9
16.9
14.2
32.6
15.9
6.3
3
Did Domestic Savings Contribute
to Growth in ‘Success Cases’?
14 African countries are on track to halve
extreme income poverty by 2015 (1.5% per
capita yearly growth, 1990-2003)
Their investment is relatively high (20% of GDP)
But little correlation exists between their
Growth and Domestic Savings
ODA (& FDI) have financed investment
Over time Domestic Savings has not improved
4
Country
Gross Domestic
Savings
% of GDP, 1990
Gross Domestic
Savings
% of GDP, 2003
Benin
2
5
Ghana
5
11
Tanzania
1
10
Uganda
1
7
Burkina Faso
5
4
Ethiopia
7
1
Guinea
18
7
Mauritania
5
3
5
Growth-Oriented Policies for Africa
Need for a ‘Post-Stabilization’,
MDG-Oriented Policy Agenda
Move From Stabilization to Capital
Accumulation:
1.
2.
3.
4.
5.
Improve Public Finance
Focus on Public Investment
Avoid ‘Inflation-Targeting’
Gear Financial Policies to Investment
Spend and Absorb ODA
6
Improve Public Finance
The Revenue Base of most developing
countries is too small, not too big
Revenue needs to reach 20-25% of GDP
Many African states command less than 15%
A priority is to boost revenue to this minimum
threshold
So avoid Potential Revenue Losses:
1.
2.
VAT compensates for only 30% of lost tariff revenue
after trade liberalization in poor countries
Do not greatly reduce top rates on corporate and
personal income (this is ineffective)
7
Improve Public Finance
Maintain vertical equity in tax
systems where possible
Property taxes, such as on urban real estate
Excise taxes on luxury items
Maintain moderately high rates on corporate
profits (except for small enterprises)
4. Direct and Indirect taxes will grow as the
formal sector grows
1.
2.
3.
-- Build and maintain a buoyant system
8
Expanding ‘Fiscal Space’
Governments should be able to run
moderate ‘fiscal deficits’ (3% of GDP)
Monetization of deficits: under-funded
states need revenue from an inflation tax
Africa: primary deficits 1.6% of GDP but
overall deficits 5% of GDP
The large external debt remains the initial
problem for expanding ‘fiscal space’
9
Fiscal Deficits in Africa
(% of GDP)
Primary Deficit
1979-1989
Primary Deficit
1990-2002
-3.58
-1.63
Overall Deficit
1979-1989
Overall Deficit
1990-2002
-6.45
-4.99
10
Improve Public Finance
How to Add Revenue of 5-6% of GDP:
1. About 2% of GDP from relieving debt
service
2. About 2% of GDP from restoring, at the
minimum, 1990 levels of ODA
3. 2-3% of GDP from additional domestic
revenue
(adding revenue of 2% of GDP is common
over the medium term and easier below 15%)
11
Focus on Public Investment
The Central Role of Public Investment
1.
2.
3.
Stimulate Aggregate Demand
Expand Productive Capacity
Focus Resources on the Poor
Public Investment has been in long-term
decline in many countries—e.g., Africa
By raising private-sector productivity,
public investment can ‘crowd-in’ private
investment
12
The Decline of Public Investment
Region
1970s
1980s
1990s
East Asia
3.4
3.9
4.1
Latin America
4.0
2.7
2.8
Middle East
11.7
9.2
6.8
South Asia
2.4
2.5
2.6
Sub-Saharan
Africa
4.7
3.6
3.3
13
Focus on Public Investment
The state has to ensure adequate economic and
social infrastructure:
This is part of accelerating capital accumulation
Fiscal retrenchment has led to depletion of
public capital stock
In low-income countries, the ratio of public
investment to GDP should be higher than in rich
countries
Public investment is one of the most concrete
ways to stimulate ‘private-sector’ development
14
Avoid Inflation Targeting
Moderate Rates of Inflation (5-15%) are
compatible with growth
Targeting 3-5% can dampen growth
(through high real rates of interest)
In Africa, part of inflation is cost-push
(Food, ToT shocks, rising oil prices)
Role Reversal needed: Monetary policy
should be subordinate to fiscal policy
Gear the interest rate to long-term growth
15
Avoid Inflation Targeting
The real interest rate should equal the
sustainable growth rate of GDP per capita
(No more than 3%?)
Average inflation in Africa was under 12%
in 2000-2003 and under 8% in 2004
Cost-push factors can keep inflation higher
than 5%
Raising interest rates to keep inflation low
cannot address demand shocks (oil prices)
16
CPI Inflation Rates (% per year)
1990-94 1995-99
2000-03
Africa
39.8%
20.6%
11.8%
Developing
Countries
53.2%
13.1%
5.7%
17
Avoid Inflation Targeting
High real rates of interest (e.g., 10%) are
grossly misaligned
Gear monetary policy, as well, to real
variables: growth, employment, income poverty
Poor households suffer from underemployment and lack of income as well as
high prices
Why do we focus only on inflation as the
primary problem?
18
Exchange Rate and Capital
Management Policies
Policy instruments are needed to balance
both the current and capital accounts
Since the exchange rate is not wholly
‘market-determined’, use a managed float
Combine a managed float with regulation
of the capital account (e.g., capital outflows)
Otherwise there can be no independent
monetary policy
19
Link Macro-policies to Growth
Four policy instruments: fiscal, monetary,
exchange-rate and capital-account policies
Fiscal policies (mostly public investment)
should focus on growth
Previously, macro-policies were focused
on stabilization: none were focused on
growth
Financial policies should focus on private
investment
20
Gear Financial Policies
to Investment
Financial liberalization has been neither
pro-growth nor pro-poor
Banks provide short-term, high-cost credit:
working capital, T-Bills, consumer durables, trade
High and Rising Interest-Rate Spreads
(from 8 to 12 ppts) have dampened
savings and investment
Banks hold large amounts of excess
reserves (idle national savings)
21
Gear Financial Policies
to Investment
Banks Short-Circuit Capital Accumulation
(Even the accumulation of public revenue)
Why is this the case? What can be done to
improve their functioning?
Two Strategic Options:
1) Provide incentives to private banks to lend for
productive investment and social purposes
2) strengthen public banks to serve these objectives
22
Gear Financial Policies
to Investment
Various Policy Options:
Develop longer-term public debt instruments:
relieve short-term pressure of domestic debt
Experiment with deposit insurance programmes:
the need to boost savings
Use differential reserve requirements: direct
credit to certain sectors (those with employment
intensity or high employment multipliers)
23
Gear Financial Policies
to Investment
Provide partial loan guarantee schemes
Example: Recent recommendations from a
UNDP draft Report on an “Employment Targeted
Economic Program” for South Africa
Proposal provides guarantees for 25% of
productive investment in the country
Guarantees cover 75% of loans and assume a
15% default rate
Projected Cost: 1-2% of national budget
24
Gear Financial Policies
to Investment
Publicly Owned or Controlled Banks:
What have been their strengths and
weaknesses?
Strengthen Agricultural Banks and SME
Banks: for pro-poor growth
Strengthen Development Banks where
feasible: satisfy the urgent, unfulfilled need
for long-term loans
25
Spending and Absorbing ODA
Key Question: will an upsurge of ODA
weaken international competitiveness?
ODA should enable the government to
spend more (run a larger deficit)
ODA should finance a larger trade gap
(more imports, less exports)
Some appreciation of the exchange rate is
likely to accompany this process
26
Spending and Absorbing ODA
Bottlenecks in Domestic Policymaking:
1. Governments are unwilling to spend ODA
2. Central Banks are unwilling to sell forex
What Are the Reasons?
1. Governments fear higher inflation and
crowding out of private investment
2. Central Banks, fearing financial instability,
would rather sterilize (sell bonds), driving up
real rates of interest
27
Spending and Absorbing ODA
Governments should use ODA to finance
increased public investment
Governments should use ODA to finance
imports of technology and capital goods
The private sector should be encouraged
to do the same
There need be no trade-off between
current human well-being and long-term
growth
28
The Tragedy of HIV/AIDS
ODA is available, in some cases, but
cannot be disbursed
The Reason: Restrictive Macroeconomic
Policies are a roadblock (e.g., budget ceilings)
Will such ODA destabilize the economy?
Contradiction: This Human Development Crisis
has to be addressed quickly
Answer: Directly import if possible, spend aid
(effectively) and carefully manage the sale of
foreign exchange
29