Poor nations now better prepared for takeoff – IMF

MANILA, Philippines - There is a higher probability of “take-off” for low-income countries (LICs) such as the Philippines now compared to more than a decade ago, but a mixture of macroeconomic stability, structural reforms and investments is still needed, the International Monetary Fund (IMF) said.

In a chapter of the World Economic Outlook, LICs are defined as those whose average income per capita for the past five years have fallen below the threshold $2,600 income for emerging markets.

Per capita income measures the distribution of economic output over a country’s population. It is a gauge of how much economic growth has translated to higher income.  

The IMF, in the report, said the chances of a “take-off,” for those LICs whose per capita income expanded 3.5 percent for the past five years “more than tripled” since year 2000 versus before 1990.

“Improved structural conditions (particularly, more years of schooling) contributed most to the increase. Better macroeconomic conditions (higher investment growth, falling debt) are the next most important,” the agency explained.

At the same time, a stronger global economy and export competitiveness would help sustain growth and in the process allow for equal distribution of wealth.

The IMF cited experiences in Indonesia, South Korea, Mozambique, Cambodia and Brazil, where the “low interest environment” had also been instrumental for economic growth and development.

For all the five economies though, the reduction of “external and internal imbalances” characterized mainly by budget deficits and over-reliance on foreign borrowing to finance them would also contribute, the IMF report said.

Capital inflows should also be managed well, foreign direct investments (FDI) should be channeled to the right sectors such as infrastructure, while reforms should also be concentrated on moving the value added chain.

“Structural reforms can be instrumental in raising productivity and ensuring broad-based growth,” the IMF said.

These include lower regulatory burdens, stronger infrastructure, higher education levels, and greater political stability. Coupled with low inflation and “more competitive” exchange rates, LICs are on track to development, the IMF report further states.

“The important lesson for today’s LICs is to avoid procyclical policies despite the prevalence of ultralow global interest rates,” IMF said.

The Philippines, which was among the LICs cited in the study, has enjoyed strong growth on the back of slow inflation. It grew by an above-target 6.6 percent last year with inflation stable at 3.2 percent.

It has also begun implementing structural reforms, especially in fiscal discipline, and the passage of the excise tax reform bill is expected to raise billions in additional revenues. The Philippines end 2012 with the deficit capped at 2.3 percent of economic output.

Furthermore, the Aquino administration has made it public-private partnership (PPP) its centerpiece economic program. So far though, only two projects have been bid out since July 2010.