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Does Economic Growth Alleviate Poverty in Developing Countries?

Enrique Muñoz-Salido

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[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] P [/yt_dropcap]overty alleviation has implied an important goal for developing countries and policy-makers throughout the last century. Recently, organisations such as the United Nations and the World Bank have reported an increasing necessity for centring efforts on facing determinant factors of poverty growth in such countries.

In light of this claim, the Organisation for Economic Co-operation and Development has reminded the paramount role of the economic growth as a powerful factor for reducing poverty in developing countries. Incidentally, this positive effect can be drawn from empirical evidence such as the unprecedented poverty reduction associated with economic growth in the India since 1980, the poverty reduction—from 69% to 54%—in Mozambique caused by a 62% economic growth between 1996 and 2002, or the Chinese’s economic growth, which have lifted 450 million of people out of poverty since 1979.

Since back in time, a set of growth models have tried to address the complex mechanics of economic growth. Albeit started with a neo-Keynesian focus on savings (Harrod’s model in 1939 and 1948; and Domar’s model in 1946 and 1947), the dominant economic-growth strand over time has been that based on the exogenous Solow-Swan’s model, of 1956 and 1957, and the endogenous model proposed by Paul Romer and Robert Lucas, in 1986 and 1988, respectively. Solow-Swan’s states the capital accumulation—allowing for slow-down returns in capital and labour as it continues—as the main factor for boosting economic growth, which leads to a steady-state where, without technological progress, a country’s economic growth does stop. As that neo-classical model exogenously assumes the technological advance, this deficiency led economists Paul Romer and Robert Lucas to calibrate the economic growth theory by mathematically demonstrating the endogeneity of technological progress, which assumes the human capital and the technological change (i.e. investment in Research & Development) as main causal determinants.

Subsequently, traditional policy recommendations towards increasing economic growth have been aligned with the aforesaid factors drawn from such models, i.e. foreign direct investment, international trade, fiscal measures, etc. Nevertheless, since recent evidence drawn from the seminal work of Dani Rodrik, which points to the undervaluation of a country’s currency as a robust, determinant factor for boosting economic growth, his consistent real-exchange-rate-based endogenous model has brought much of the aforesaid traditional literature into disrepute. Incidentally, the real exchange rate not only achieves to accelerate economic growth but also has a positive impact boosting export flows.

In order to put this mechanics into context, let us reflect upon the undervaluation (also called real-depreciation) of a country’s currency within an international arena. In such context, if a country’s currency becomes undervalued/real-depreciated, the international arbitrage does play a crucial role that results in boosting economic growth. This hypothetical prediction associates the misallocation of an economy’s resources—when taxes on tradable goods are higher than those on non-tradable goods—with a suboptimal economic growth—which is a consequence of the resulting small dimensions of the economy’s tradable sector—setting a set of conditions for real-depreciations to boost economic growth if considering the comparative advantage that it might result for international arbitrage.

In short, the calibration of Dani Rodrik demonstrates that real-depreciations can boost economic growth under the assumption that taxes on tradable goods are higher than those on non-tradable goods, which also increases profits on the tradable sector.

In light of the common claims in research, such as that by Anna Buchanan in her paper “Impact and knowledge mobilisation: what I have learnt as Chair of the Economic and Social Research Council Evaluation Committee”, it can be identified a paramount necessity for economic policies to be based on empirical evidence, which is suggested by the governments’ particular inclination for this type of policy recommendations. Such preferences can be understood as the evidence-based policies are more likely to succeed and have a real impact on the target issue, which contributes to avoid eventual risks and difficulties that may arise from well-intentioned policies without a scientific root.

The conclusion arising from this article is the following. First, there exist an obvious empirical linkage between poverty alleviation and economic growth. Second, since back in time, traditional models have sown the seeds of a theoretical controversy and hence of a controversial effectiveness of the economic growth in fighting poverty. Third, Rodrik’s proposed misallocation of economy’s resources has implied an answer for disentangling theory from pragmatism. To sum up, Rodrik’s well-managed real exchange rate might imply an excellent evidence-based tool for future, powerful measures aimed at effectively alleviating countries’ poverty with such particular characteristics, which might allow public policies to go beyond traditional paradigms.

Enrique is an MSc Candidate in Social Anthropology at Regent’s Park College, University of Oxford. His research interests lie at the intersection of human behaviour and social interactions and his top analytical skills comprise macro and micro data analysis and statistical methods. Prior to joining Oxford, Enrique completed his MSc in Economics (distinction) at the University of Brighton, UK, where he was a Santander Scholar, and his undergraduate degree at the Autonomous University of Barcelona, Spain.

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Economy

Afreximbank Meets Ahead of Russia-Africa Summit

Kester Kenn Klomegah

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The African Export-Import Bank (Afreximbank) plans to hold its 26th annual meeting in Moscow on 18-22 June. A series of closed sessions will be held as part of the event including the meeting of Board of Directors of Afreximbank and a meeting of Shareholders of Afreximbank, as well as the open Russia-Africa Economic Conference.

The African Export-Import Bank, the Roscongress Foundation, the Ministry of Finance of the Russian Federation, and the Russian Export Centre are the key organizers of this event. The Afreximbank Annual Meetings is a high-level event, bringing together political and business leaders from across Africa to discuss the issues of trade, industrialization, export, and financial stability and efficacy.

Key themes planned for the economic conference are: State of Russia-Africa Relations: An Overview; Mining Industry: An Integrated Approach to the Fields Development; Prospects for Multilateralism in an Era of Protectionism; Railways Infrastructure as the Key Element for Development in Africa; South-South Trade: Path for Africa Integration into the Global Economy.

The other topics are Emerging Trends in Sovereign Reserves Management; Reflections on the Transformative Power of South-South Trade; Launch Afreximbank ETC Strategy; Cyber Solutions and Cyber Security for Solving Governmental and Municipals Tasks; Financing South-South Trade in Difficult Global Financing Conditions; The Future of South-South Trade and Infrastructure Financing.

Over 1,500 delegates are expected to attend the economic conference, including shareholders and bank partners, government representatives, members of the business community and media representatives. The conference will be a crucial stage in preparation for the full-scale Russia-Africa political summit and the accompanying economic forum, scheduled for October 2019 in Sochi.

“Russian and African countries are basically on the track of bilateral strategic partnership and alliance based on openness and trust. The fact that the Afreximbank Annual Meeting is to be held in our country gives a positive momentum for the mutually beneficial cooperation of the parties ahead of the full-scale Russia-Africa Political Summit that will take place in Sochi in October, and will add to the inclusive nature of the events,” emphasized Anton Kobyakov, Advisor to the President of Russian Federation.

Following the setup of the Organizing Committee for the Russia – Africa summit and other Russia–Africa events in Russia in 2019, Russian officials have described that this year truly as a year of Africa for Russia.

“We witness the clear growing interests from the both sides to establish the new level of relationships, which means a perfect timing to boost the economic agenda. All economic events planned for this year will become a platform to vocalize these ideas and draw a strong roadmap for the future,” Russian Export Center’s CEO, Andrei Slepnev, argued in an emailed interview with Buziness Africa.

In December 2017, Russian Export Center became a shareholder of Afreximbank. Russian Export Center is a specialized state development institution, created to provide any assistance, both financial and non-financial, for Russian exporters looking for widening their business abroad.

On March 19, the Organizing Committee on Russia-Africa held its first meeting in Moscow. President Vladimir Putin put forward the Russia-Africa initiative at the BRICS summit (Russia, Brazil, India, China, and South Africa) in Johannesburg in July 2018.

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The silent revolution

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Jamaica is well known for its beautiful beaches, Bob Marley, and reggae music. But what is less known is that the Caribbean island started a silent revolution after being one of the most indebted developing countries in the world. Jamaica has shown a macroeconomic turnaround that is quite extraordinary.

As Bob Marley said, “It takes a revolution to make a solution”. After decades of high debt and low growth Jamaica has changed its growth trajectory, with positive economic growth for 16 consecutive quarters and growth getting closer to two per cent.

During that period, the Jamaica Stock Exchange went up more than 380 per cent.The credit agency Fitch upgraded the island’s debt to B+ rating with a stable fiscal outlook, and unemployment hit eight per cent in January, the lowest in decades.

The Government had a wake-up call when its debt overhang peaked at almost 150 per cent of GDP in 2013. With the support of the International Monetary Fund, the World Bank and the Inter-American Development Bank, the country embarked on an ambitious reform programme. These efforts have paid off. Jamaica is now one of the few countries that has successfully cut public debt by the equivalent of half its gross domestic product in a short time frame.

The fiscal turnaround and economic transformation were possible because of the strong commitment across political parties over two competing administrations and electoral cycles. The country also critically benefited from a sustained social consensus for change and the strong backing of the private sector.

The country has generated primary fiscal surpluses of at least seven per cent of GDP for the last six years, and remains steadfast in its commitment to fiscal discipline. These fiscal results make Jamaica a top performer internationally.

For this silent revolution to continue and bring greater prosperity to all its people, Jamaica will need to further boost the investment climate, strengthen economic and climate resilience and invest more in its people to build human capital. These are necessary complements to the maintenance of a strong macroeconomic framework and would help boost economic growth and job creation. There are encouraging signs that Jamaica is taking action in these areas.

With regard to the business climate, the National Competitiveness Council has adopted a road map to fast-track reforms to improve the business environment. Jamaica features in the top 20 countries in the world for its comprehensive credit reporting systems and ranks among the best globally in the area of starting a business, according to the World Bank’s 2019 Doing Business report. It only takes two procedures and three days for an entrepreneur to start and formally operate a business.

There have been advancements on public-private partnership investments. For instance, the Norman Manley International Airport public-private partnership was recently completed with advisory support from the International Finance Corporation — the private sector arm of the World Bank Group.

Jamaica is also a front-runner among Caribbean countries in promoting climate and financial resilience in the face of natural disasters. The economic cost of these disasters for the Caribbean is substantial, exceeding US$22 billion between 1950 and 2016, compared with US$58 billion for similar disasters globally. One serious storm or natural disaster could set back the country’s growth prospects and development achievements of recent years. To tackle this, the Government has adopted a Public Financial Management Policy Framework for Natural Disaster Risk Financing to facilitate the availability of dedicated resources for recovery in the face of disaster risks.

In order to further support Jamaica in its efforts to strengthen the economy, build resilience, and support human capital development, the World Bank will expand its financing by US$140 million. This financing package will be for a series of two operations to help Jamaica be better prepared to mitigate the financial impact of natural disasters and build stronger infrastructure, and an additional project to strengthen social protection.

Despite unemployment at a new low, still too many young people are struggling to find a job. For Jamaica to continue to grow and prosper, it also needs to develop the skills for the workforce of tomorrow, especially in the areas of technology and digitalisation. This requires a sharp focus on creating the conditions for youths to strive and succeed in the modern business world and close cooperation with the private sector in this respect.

Today, more than ever before, young Jamaicans can dream of a brighter future where “every little thing is gonna be alright”. This is the generation that must aim higher and can write a new chapter for its country.

As we celebrate the 55th anniversary of the World Bank-Jamaica partnership, we look forward to working together to build on the success of the past few years and promote growth, jobs and resilience for Jamaica.

World Bank

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With or without sanctions, Iran needs to say goodbye to oil money

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Except Norway, almost all oil producing countries have made themselves more or less reliant on oil money.

Only oil producing countries with a small population, such as Kuwait and Qatar which is also a great gas exporter, have so been safe from fluctuations in the oil market. But, countries with large population, such as Iran, are prone to volatility in the oil market, let alone the mad sanctions introduced against the country.

There is no doubt that oil money has affected politics, economy, management system, culture, spending and consumption habits and many other issues in oil rich countries.

For example, Iran now has one of the cheapest energy prices in the world. This has led to an extravagant use of energy, especially an excessive use of private car, in the country.

Let’s make an example to clarify that oil money is not the road to progress and a vibrant economy. In the 1970s, Iran was more developed than South Korea, but now South Korea is much more successful than Iran in terms of economy and technology. South Korea does not have oil, but it has provided an opportunity for a competitive economy and capitalized on its talents.

It is true that the war imposed on Iran in the 1980s hindered Iran’s progress and inflicted about 1 trillion dollar in damages on the country, yet officials failed to take serious steps toward creating a competitive economic atmosphere with a focus on research and technology. The oil money has been the main blame for such an economic approach.

According to the successive five-year development plans which end on 2021, Iran had to reduce dependence on oil to a great extent, however, successive administrations, with varying degrees, did not fully act based on the development plan.

Iran is now subject to the toughest ever illegal sanctions by the Trump administration. Just on April 22, the United States ended sanctions waivers on Iran’s exports and announced it wants to zero out Iran’s oil exports by May 1.

Whether the Trump administration succeeds or not to implement its oil threats is an issue that we should wait and see, but it is necessary that Iran take a departure from oil export how much painful it will be.

Sorena Sattari, a graduate of Sharif University of Technology who serves as vice president for scientific affairs, told a meeting in Hamedan on Tuesday that sanctions have provided an opportunity that knowledge-based companies to intensify their efforts. Sattari also said plans have been drawn up to manufacture equipment and machinery that are subject to sanctions. 

Also, whether we like it or not, fossil fuels, especially crude oil, are losing their importance as renewable energy resources are gradually taking the center stage.

Saying goodbye to easily-gained oil revenues is a bitter pill that Iran should swallow. To do so, though very difficult under tough sanctions, officials need to find other sources of income.

They can invest on tourism as Iran is among the top countries in hosting touristic sites, establish an environment for a transparent competitive economy, close loopholes of corruption, involve competent persons in managerial posts, introduce a sound and workable tax system, end unnecessary subsidies, and more importantly prioritize research and development (R&D).

First published in our partner Tehran Times

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