VI. How Can the Poorest Countries Catch Up More Quickly?
Growth in living standards springs from the accumulation of physical capital (investment) and human capital (labor), and through advances in technology (what economists call total factor productivity).3 Many factors can help or hinder these processes. The experience of the countries that have increased output most rapidly shows the importance of creating conditions that are conducive to long-run per capita income growth. Economic stability, institution building, and structural reform are at least as important for long-term development as financial transfers, important as they are. What matters is the whole package of policies, financial and technical assistance, and debt relief if necessary.
Components of such a package might include:
Macroeconomic stability to create the right conditions for investment and saving;
Outward oriented policies to promote efficiency through increased trade and investment;
Structural reform to encourage domestic competition;
Strong institutions and an effective government to foster good governance;
Education, training, and research and development to promote productivity;
External debt management to ensure adequate resources for sustainable development.
All these policies should be focussed on country-owned strategies to reduce poverty by promoting pro-poor policies that are properly budgeted—including health, education, and strong social safety nets. A participatory approach, including consultation with civil society, will add greatly to their chances of success.
Advanced economies can make a vital contribution to the low-income countries’ efforts to integrate into the global economy:
By promoting trade. One proposal on the table is to provide unrestricted market access for all exports from the poorest countries. This should help them move beyond specialization on primary commodities to producing processed goods for export.
By encouraging flows of private capital to the lower-income countries, particularly foreign direct investment, with its twin benefits of steady financial flows and technology transfer.
By supplementing more rapid debt relief with an increased level of new financial support. Official development assistance (ODA) has fallen to 0.24 percent of GDP (1998) in advanced countries (compared with a UN target of 0.7 percent). As Michel Camdessus, the former Managing Director of the IMF put it: "The excuse of aid fatigue is not credible—indeed it approaches the level of downright cynicism—at a time when, for the last decade, the advanced countries have had the opportunity to enjoy the benefits of the peace dividend."
The IMF supports reform in the poorest countries through its new Poverty Reduction and Growth Facility. It is contributing to debt relief through the initiative for the heavily indebted poor countries.4