For LDCs, Time to Rethink Economic Strategy

The last few weeks have seen the demise of several prominent Finance Ministers and Central Bank Governors as cabinet reshuffles become the norm across many middle income and less developed countries. Inflation, economic slowdowns, a surge in unemployment, collapsing FDI, currency devaluations, rising interest rates, are all a consistent reality in the development world today. 

In Kenya, a Masai cattle herder, adorned in a traditional shuka, talks on his cellphone (Creative Commons)

Many of the countries facing these exogenous shocks, mostly as a result of COVID economic recovery, supply chain issues, as well as the war in Ukraine, find themselves yet again in need of bailouts and are turning to the International Monetary Fund. 

While most of what the developing world is facing today is the result of exogenous shocks, it is also the result of the inability of many of these countries to find a pathway for economic development other than the course they charted in their visions for 2030. 

Most developing countries, and I’ve worked in over 70 of them, have an economic development playbook. Usually, they call this vision 2030. After detailed reading of almost all of these 2030 development strategies for a variety of LDCs, it’s hard to tell the difference between one country’s development vision and another. Speaking frankly, most of these 2030 development strategies  seem to have been developed by the same high priced consultancy firms. They have the same chapters, they include very similar visions for growing GDP, they have the same approaches to attract foreign direct investment, and have almost an identical approach to developing infrastructure, and for job creation. These 2030 visions read like there were a large number of students in an exam, and they all cheated from one another. 

For the incoming class of Central Bank Governors and Minister’s of Finance, I would like to offer some advice. Of course, with the proviso that any advice I give is always bad advice. But, the advice I would give to remedy the economic challenges of today has to begin with a considerable amount of resetting economic strategy more broadly, and I would recommend the following:

1. It is now time to rethink development approaches outside the rigid framework of documents like vision 2030. Economic objectives now should be more short term, and should be more focused on immediate structural adjustment requirements. Economic recovery and stabilization have to be a top priority. 

2. Every economic strategy as documented in the 2030 write ups, envisions growing GDP. But, it envisions growing GDP through a combination of two major interventions. One is growing foreign direct investment, and the other is channeling government expenditures. What is consistently missing in these development plans is how consumption and wealth creation can also lead to growth. The focus now has to be on growing consumption, which in turn requires growth in disposable income. It will also require adjusting Gini coefficients for what is clearly now in many countries an out of control disparity between the rich and the poor. Development strategies now have to focus on enhancing purchasing power to build a more vibrant middle class, while taxing the rich appropriately to ensure that the social fabric of various LDCs is not challenged. That is, we cannot continue to develop economies that lead to societies of the haves and the have nots, you’re either very rich or very poor, with a very small middle class buffer in between. This will not be sustainable either economically or politically over timre. 

3. Undoubtedly, as many developing countries prepare for the bailouts they need from the IMF, austerity measures will follow in some form. This will likely lead to an increase in energy prices, an increase in the cost of utilities, and elimination of subsidies of different types, tax hikes, a lower civil service wage bill, etc. What many of these countries cannot afford to do is to have these measures further deteriorate the middle class, lower consumption, lower disposable income, as this will only lead to economic slowdowns and recessionary trends. If anything, what has to happen is the exact opposite. Wealth has to be created, the middle class has to be more vibrant, consumption has to be the lead indicator in growing GDP, disposable income must rise. We cannot continue to see developing countries witnessing rising GDP, and hypothetical rises in GDP per capita, when in reality there is falling disposable income and no significant gains in the levels of consumption. 

4. What is required across a variety of LDCs is a radically different vision of development outside the frame of their 2030 visions. In my mind, and without doubt, there has to be a renewed focus on growing consumption, disposable income and wealth creation. New economic strategies have to be built that grow disposable income. A new mindset needs to take root that encourages governments to pass wealth down to its citizens rather than governments who are primarily focused on taking money away from the masses. These new economic strategies must have at there core finding ways to move resources to the general populace that will enhance their level of consumption and wealth. And, to achieve this a completely new development paradigm will be necessary.

In the final analysis, it is not going to be the individual contributions of a new Central Bank Governor, or a new Minister of Finance that will lead us to the Holy Grail of economic development in LDCs. But, what these new leaders need to do is to rethink the development paradigm of their predecessors, and forge a different path, while not throwing the baby away with the bath water. Yes, the definition of insanity is doing the same thing over and over again and expecting different results.

Roadside vendors sell sachets of table water and jewelry in Niger (Creative Commons)

FDI and government spending shouldn’t lead the new development paradigm by themselves. Any healthy economy is an economy that can weather a storm because of sustained levels of consumption, which in turn leads to sustained levels of demand for goods and services, and sustained levels of demand for labor, and low unemployment. 

China has shown us this can be done and consumption is the principal driver for success in most of the developed world. The developing world hasn’t yet learned the lesson of the importance of growing consumption, and how this promotes short and long term development. They haven’t learned the lesson that sustaining levels of consumption is the way to ward off high levels of unemployment. 

Had LDCs learned this lesson than they would have used stimulus the way Europe, the US and Canada did at the height of COVID. While most of the developed world was passing out stimulus checks to citizens, most of the developing world was finding ingenious ways to tax their most vulnerable citizens even further. If there’s something broken in the development paradigm of LDCs today it’s the lack of recognition that the wealth of its citizens is fundamentally more important than the wealth of the state.