MEFMI Conducts Course on Economic Growth Analysis in its Region

MEFMI conducted a regional course on Advanced Macroeconomic Analysis and Management from 23 March to 3 April 2015, in Victoria Falls, Zimbabwe. The focus of the course was on economic growth analysis in the MEFMI region. 24 participants from the level of Senior Economist, 17 males (71%) and seven (7) females (29%) attended the course. Ten (10) out of the 14 MEFMI countries were represented. Institutions represented included Central Banks, Ministries of Finance and Parliament. The course was facilitated by Professor Alemayehu Geda (Lead Consultant), Mr. Joseph Mverecha (Accredited MEFMI Fellow), Dr. Sehliselo Mpofu (MEFMI Director-Macroeconomic Management Programme) and Mr. Jean-Baptiste Havugimana (MEFMI Programme Officer, Macroeconomic Management Programme).

The course was delivered through short lecture presentations, review of notable case studies, group assignments, country presentations and plenary policy discussions. A reflection on economic growth theories was made with focus on the contribution of physical and human capital, technology, research and development, and natural resources to economic growth. The main policy discussions centred on economic growth drivers in the region, barriers and potential risks to growth, economic policies and other mechanisms to foster sustained economic growth in the region. Case studies of progressive countries in other regions were also reviewed in a bid to draw lessons for the MEFMI countries in their efforts to sustain growth, reduce poverty and improve living standards of the majority of the population. Following the comprehensive country presentations, participants had the opportunity to discuss progress on economic growth in the region,

Notably, the MEFMI region grew by 5.3% in 2013. Growth is estimated at 5.1% in 2014, and is projected at 5.1% and 5.6% in 2015 and 2019, respectively. Average real per capita GDP growth is estimated at 3.2% in 2015, from 2.9% in 2013 and 2014, respectively. Economic growth in the region has been associated with low and stable inflation, with most countries reporting single-digit inflation, which is encouraging.

Major factors driving economic growth in the region that were discussed include exploitation of natural resources, recent discoveries of oil and natural gas, growth in the mining industries, increased foreign direct investment (FDI) inflows into the extractive industries, huge infrastructure projects, prudent fiscal policies that have provided scope for monetary policy to reduce interest rates and stability in the macroeconomic environment, among other factors. Participants shared experiences of their individual countries in discussing factors that have supported growth in the region.

Barriers to economic growth in the region that were discussed include high import cost for production inputs, power shortages, infrastructure deficits, unfavourable “Ease of Doing Business” conditions.  Also discussed was the volatile global financial environment, lack of irrigation facilities, the effects of HIV/AIDS and low value addition on primary commodity exports.  The effects of the global recession, volatility in external aid and trade flows, poor agricultural harvests, weak export and economic diversification were also pointed out as having negative effects to economic growth. Participants shared experiences of their individual countries on how these negative factors have affected the growth process in their individual countries.

It became apparent from the discussions that despite positive economic growth achievements in the MEFMI region, some challenges still persist. Major ones include high poverty levels, slow reduction in poverty in some of the countries, unemployment and income inequality. It was also noted that economic growth in the region is arguably not inclusive. In addition, economic growth in the region has not translated into improvements in welfare indicators such as poverty, life expectancy and educational attainment. Poverty is still high, with a significant population living below the international poverty datum line of US$1.25 per day. Even in some of the countries where poverty has been declining, the rate of decline is still slow, warranting further policy actions to fight poverty in the region.

Discussions revealed that income inequality in the region is still high in the region, with an average Gini Coefficient of about 0.5. In addition, the trickle down effects of the rich minority to the poor majority are considerably absent, implying a need for more concerted efforts to fight inequality in the region. The economic growth being experienced in the region has not led to job creation. During the discussion it emerged that much of the foreign direct investment (FDI) in the extractive industries has not created enough jobs because of its capital-intensive nature, among other factors perpetuating unemployment. The mismatch between the education system and industry requirements of graduates was also cited as one of the major contributors to high graduate unemployment in the region. These outcomes, it was discussed, warrant enhanced policy actions to fight unemployment in the region.

Case studies of China, Indonesia and Malaysia were presented as lessons on how MEFMI countries could stimulate economic growth. The case of China demonstrated the importance of focus and long-term vision in planning and managing the economic growth process, key role of maintaining macroeconomic stability and hard work. These factors were noted as crucial for sustained economic development and poverty reduction exhibited by China.   

The case of Indonesia demonstrated government policy focus on four key policy objectives including food self-sufficiency (particularly in rice), progressive diversification in agricultural production, improvements in competitiveness and export of agricultural commodities and an increase in the welfare of farmers. Given that the Indonesian economy was mainly agriculture-based, the focus of industrialisation in early stages was based on agro-processing. Indonesia used the sector that was already dominant in the economy to kick-start the process of massive industralisation. The case of Indonesia demonstrated the importance of focus and vision in designing and implementing good economic policies that transformed the economy from a rural agriculture based economy into an industrial one.

The case of Malaysia demonstrated how a country which had a similar economic structure to those of most Sub-Saharan African countries at independence managed to transform itself into an emerging industrial country. Other key factors that underpinned the growth strategy of Malaysia include political stability, sustained implementation of good economic policies and macroeconomic stability.  

The case of the South East Asian economies demonstrated a notable feature of the involvement of government in driving economic growth and development. Government intervention in the economy within the broader market-driven development framework was key in maintaining the growth momentum. In the industrialization drive of these economies, governments provided incentives to both domestic and foreign investors, which facilitated investment in the manufacturing industries.

Case studies of Brazil, Viet Nam and Ghana that were also reviewed suggested three key areas that may deliver growth that is inclusive, namely a proper redistributive agenda; appropriate macroeconomic prudence and a pro-poor private sector.

In terms of future prospects, economic growth in the MEFMI region is expected to be enhanced in the medium-term. Factors underpinning the positive economic growth prospects that were discussed include improved macroeconomic fundamentals, increased investment in natural resources, enhanced financial inclusion, exploitation of new technologies, improvements in access to external financing that include the issuance of Euro bonds in some of the countries, inflows of international remittances, low and stable inflation, expected increase in FDI, expansion in infrastructure expenditure, on-going regional integration initiatives, shift towards expenditure on infrastructure, expected cheaper energy from gas discoveries, increase in demand associated with the increasing size of the middle class, among other factors.

However, despite the positive growth prospects, the group also noted some downside risks that could stall economic growth in the region. Notable risks include delays in mineral exploitation, effects of failure to develop other sectors of the economies, fluctuations in global commodity prices, volatile global financial markets, reduction in aid flows, slow pace in economic diversification, risks if economic growth in China and the United States is less than expected, spread of the Ebola disease, pre-election spending and associated pre and post government credit cycles, shocks to food and oil prices, and effects of climate change on agricultural production, among other factors.

In terms of the way forward, it was concluded that MEFMI countries require to address certain challenges within their economies. Suggestions include export diversification, reduction of overdependence on a few primary commodity exports and on finite minerals, prioritization of value addition on exports, identification and support to growth-enhancing industries, consolidation of macroeconomic stability, investment in human skills and infrastructure, improvements in the “Ease of Doing Business” conditions, continous investment in natural resources as they are discovered, investment of revenues generated from non-renewable resources into social and physical infrastructure, establishment and management of Sovereign Wealth Funds, shift towards agricultural commercialization and diversification, revenue mobilization and expenditure prioritization, design of well-targeted social safety nets, among other factors. It was noted that while most countries have good strategies, implementation of these strategies has been a challenge, resulting in stalling economic growth in some cases.

Essentially, MEFMI countries should continue with fiscal consolidation to enhance resilience to external shocks, intensify regional harmonization policies and maintain macroeconomic stability to continue attracting FDI.