Macroeconomics of Inclusive Growth

1. Macroeconomics of Inclusive Growth Johannes Mueller, IMF Mission Chief February 2011

2. How Inclusive has Growth Been in Mozambique? Average for non-oil exporters Source: Crispolti (2010), “Economic Growth in Mozambique. Experiences and Policy Challenges,” IMF presentation. The growth rate of real GDP in Mozambique over the period 1995-2009 has been the second highest among non-oil exporting countries in the Sub-Saharan Africa region Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

3. How Inclusive has Growth Been in Mozambique? Impact of growth on poverty is lower in Mozambique than elsewhere Impact of growth on poverty was large in the 1990s, but very low after 2002/03 Source: Own estimates based on data from the World Development Indicators 2010. World Bank. • Growth in Mozambique has been less pro-poor than in other successful countries, and such pro-poor characteristics appear to be declining over time Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

4. How Inclusive has Growth Been in Mozambique? Growth Incidence Curve for China: 1993-1996 Growth Incidence Curve for Mozambique: 2002-2008 • The distribution of growth in Mozambique 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 In contrast, China is an example of a sustained growth country that registered a pattern with highly pro-poor growth between 1993 and 1996 Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

5. How Inclusive has Growth Been in Mozambique? Source: Paes de Barros, Ricardo (2009), “Sobre a Evolução Recente da Pobreza e da Desigualdade,” Instituto de Pesquisa Econômica Aplicada, basedon data fromthePesquisa Nacional por Amostra de Domicílios (PNAD), 2001-2008. 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 Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

6. Strategies for Inclusive Growth 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. Mozambique meets many characteristics for a country with a strong track record of economic growth, but does not show many of the elements that are often associated with inclusive growth. Elements of Inclusive Growth • High growth rates for decades • Sustained growth accelerations • Avoid growth collapses • Structural transformation: • Output and export diversification • Broad-based productive employment • Significant poverty reduction • Propitious business environment • Efficient natural resource management • Equality of opportunity through basic education, health and infrastructure More needs to be done without abandoning what has served the country well. Mozambique: Seminar on Growth, Economic Transformation, and Job Creation 6

7. Strategies for Inclusive Growth Source: Clément and Peiris (2008), Post-Stabilization Economics in Sub-Saharan Africa: Lessons from Mozambique, IMF. 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 to become more inclusive Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

8. Strategies for Inclusive Growth Source: Crispolti (2010), “Economic Growth in Mozambique. Experiences and Policy Challenges,” IMF presentation. At the same time, there has been a declining downward trend of potential output growth, which complicates any efforts to sustain growth. Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

9. Strategies for Inclusive Growth • Elements • Sustained Growth • Structural Transformation • Productive Employment • Equality of Opportunities • Significant Poverty Reduction • Opportunities • Sea Access, Neighbors • Mineral Wealth • Strategies • Key • Foster a competitive and diversified export base • Boost production and productivity in labor-intensive sectors • Supporting • Improve management of natural resources • Strengthen social cohesion • Policies • Fiscal policy • Monetary and exchange rate policy • Trade policy • Structural reforms Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

10. Policies and Institutions for Inclusive Growth The Importance of Macroeconomic Stability • Preserving Macroeconomic Stability – Key Policies • Pursue prudent fiscal policy that safeguards debt sustainability • Create fiscal space through continued revenue effort and prudent borrowing • Pursue prudent monetary policy to keep inflation low -> Inflation hurts the poor • Monitor, but do not manage, the real effective exchange rate • Elements • Avoid growth decelerations through bad policies • Create stable framework for private sector to flourish • (including foreign investment) • In all these endeavors, Mozambique should preserve one of its key assets: Macroeconomic stability Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

11. Policies and Institutions for Inclusive GrowthThe Special Role of Fiscal Policy • Policies and Institutions • Pursue prudent borrowing policy • Limit domestic borrowing to avoid competing with private sector for resources • Borrow externally at largely concessional terms • Improve tax policy • Continue efforts to improve direct taxes • Eliminate tax incentives and exemptions (CIT, fuel, food, megaprojects) • Improve spending • Step up targeted public investment to remove infrastructure and skills gaps • Boost social spending in a well-targeted and effective way (including social protection systems) • Public wages are not the right instrument to combat inequality Elements Sustained growth. Support structural transformation and productive employment. Equality of opportunities. Significant reduction in poverty and inequality. Fiscal policy is key tool for government to help shape economy Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

12. Policies and Institutions for Inclusive GrowthStructural Reforms Opportunities Sea Access, Proximity to South Africa, Shortage of Skills • Foster a competitive and diversified export base • Boost production and productivity in labor-intensive sectors • Policies and Institutions • Accelerate regulatory reforms to improve the business environment • Develop skills • Promote financial inclusion • Optimize market access and regional integration Sustained Growth, Structural Transformation, Productive Employment, Equality, Poverty Reduction Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

13. Policies and Institutions for Inclusive GrowthEconomic Diversification in Uganda Source: World Development Indicators 2010. World Bank. • 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 Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

14. Policies and Institutions for Inclusive GrowthManaging Natural Resources Well Opportunities Mineral wealth Improve the management of natural resources • Policies and Institutions • Appropriate resource taxation systems, model contracts • Transparent budgets • Stabilization Funds –> smooth intertemporal allocations of revenue and spending • Sovereign Wealth Funds –> invest revenue in an intelligent way • Enhance the monetary policy framework and operations • Element • Avoid growth decelerations through bad policies and institutions • Finance growth accelerations Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

15. Policies and Institutions for Inclusive GrowthManaging Natural Resources in Botswana Source: Lange (2011), The Changing Wealth of Nations. Measuring Sustainable Development for the New Millennium, World Bank. Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

16. Policies and Institutions for Inclusive GrowthStrengthening Social Cohesion Challenges Income inequality, poverty, unemployment Strengthening social cohesion • Policies and Institutions • Implement sustainable and well-targeted social safety nets • Build on existing social assistance programs and consider introducing “productive” programs that support long-term growth • Public works programs • Conditional Cash Transfer Systems (like Brazil’s “BolsaFamilia”) fight current poverty--by providing cash grant--while fighting future poverty by boosting health and education and thus strengthening long-term growth factors • Element • Avoid growth decelerations though conflict Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

17. Conclusions and Next Steps • Despite the remarkable performance over the last two decades, economic 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 • Preserving macroeconomic stability will create a framework for private sector activity • Fiscal policy is key tool to help shape economy • Strengthen revenue base through further improvements in tax policy • Spending should reflect the government’s priorities, such as investment • 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 and social cohesion. Mozambique: Seminar on Growth, Economic Transformation, and Job Creation

18. Kanimambo! Moçambique: Seminário sobre Crescimento, Transformação Económica e Criação de Empregos