Macroeconomic Research In Low Income Countries

Despite strong economic growth since 2000, many low-income countries (LICs) still face numerous macroeconomic challenges, even prior to the COVID-19 pandemic. Despite the deceleration in real GDP growth during the 2008 global financial crisis, LICs on average saw 4.5 percent of real GDP growth during 2000 to 2014, making progress in economic convergence toward higher-income countries. However, the commodity price collapse in 2014–15 hit many commodity-exporting LICs and highlighted their vulnerabilities due to the limited extent of economic diversification. Furthermore, LICs are currently facing a crisis like no other—COVID-19, which requires careful policymaking to save lives and livelihoods in LICs, informed by policy debate and thoughtful research tailored to the COVID-19 situation. There are also other challenges beyond COVID-19, such as climate change, high levels of public debt burdens, and persistent structural issues.

Summarizes the for ward-looking analytical work program on macroeconomic issues related to the Poverty Reduction Strategy Paper approach. The program is evolving through a process that began with a technical workshop; participants from low-income countries, donors, academia, and civil society drafted guidance on selected issues and identified priority research topics. Partners, policymakers, and economic scholars are encouraged to share their perspectives and findings through respective team leaders, whose e-mail addresses are provided. The publication also summarizes IMF analytical work, and contains a bibliography of nearly 1,000 papers.

Despite sustained economic growth and rapid poverty reductions, income inequality remains stubbornly high in many low-income developing countries. This pattern is a concern as high levels of inequality can impair the sustainability of growth and macroeconomic stability, thereby also limiting countries’ ability to reach the Sustainable Development Goals. This underscores the importance of understanding how policies aimed at boosting economic growth affect income inequality. Using empirical and modeling techniques, the note confirms that macro-structural policies aimed at raising growth payoffs in low-income developing countries can have important distributional consequences, with the impact dependent on both the design of reforms and on country-specific economic characteristics. While there is no one-size-fits-all recipe, the note explores how governments can address adverse distributional consequences of reforms by designing reform packages to make pro-growth policies also more inclusive.

While the impact of the global crisis has been severe, real per capita GDP growth stayed positive in two-thirds of low-income countries (LICs), unlike in previous global downturns, and in contrast to richer countries. The crisis affected LICs not so much through the terms of trade or global interest rates, but rather through a sharp contraction in export demand, foreign direct investment, and remittances (oil exporters also suffered from a sharp fall in oil prices). LICs saw the sharpest decline in their economic growth rate over the last four decades. However, this slowdown followed a period of strong expansion, and real per capita GDP growth has generally held up in LICs, remaining well above growth in richer countries.

This paper provides deeper insights on a few themes with regard to the experience with macroeconomic management in resource-rich developing countries (RRDCs). First, some stylized facts on the performance of these economies relative to their non-resource peers are provided. Second, the experience of Fund engagement in these economies with respect to surveillance, programs, and technical assistance is assessed. Third, the experience of selected countries with good practices in the management of the natural resource wealth is presented. Fourth, the experience of IMF advice in helping RRDCs set up resource funds is discussed. Finally, the main themes and messages from the IMF staff consultation with external stakeholders (CSOs, policy makers, academics) are presented.

This paper is the sixth in a series that examines macroeconomic developments and prospects in low-income countries (LICs). LICs are defined in this report as the countries eligible to PRGT facilities (69 countries). The first section of the paper discusses recent macroeconomic developments and trends across LICs. The second section estimates LICs’ financing needs up to 2025 to resume and accelerate their income convergence with advanced economies (AEs). It does this by estimating the additional financing that would enable LICs to step up spending response to COVID, including vaccination needs, while rebuilding or keeping external buffers to enhance resilience, and then the paper considers the financing needed to allow LICs to accelerate convergence with AEs. The paper then discusses a mix of financing options, including concessional financing from the international financial institutions, grants and loans from bilateral donors, private financing and debt operations, but also domestic reforms within LICs themselves as a key component to foster growth, enhance private investment, raise public revenues, and increase efficiency of spending.

This paper studies the short and longer-term impact of IMF engagement in Low-Income Countries (LICs) over nearly three decades. In contrast to earlier studies, we focus on a sample composed exclusively of LICs and disentangle the different effects of IMF longer-term engagement and short-term financing using a propensity score matching approach to control for selection bias. Our results indicate that longer-term IMF support (at least five years of program engagement per decade) helped LICs sustain economic growth and boost resilience by building fiscal buffers. Interestingly, the size of IMF financing has no significant impact on economic growth, possibly pointing to the prominent role of IMF policy advice and institutional capacity building in the context of longer-term engagement. We also present evidence that the short-term IMF engagement through augmentations of existing programs or short-term and emergency facilities is positively associated with a wide range of macroeconomic outcomes. Notably, the IMF financial support has the greatest impact on short-term growth when LICs are faced with substantial macroeconomic imbalances or exogenous shocks.

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