Saturday, March 17, 2007

Economic growth is necessary but not sufficient

The International Monetary Fund (IMF) had a delegation visit El Salvador last week, and at the end of the visit, it issued a press release. Here are some excerpts:

The Salvadoran economy has strengthened during the last year, with output growth of 4¼ percent in 2006. Inflation rose to 5 percent, reflecting a sharp mid-year increase in the prices of petroleum products. Robust growth in nontraditional exports and remittances offset a decline in maquila exports, a higher oil import bill, and rising capital goods imports, thus maintaining the current account deficit at 4¾ percent of GDP.

The outlook for 2007 is favorable, with growth expected to be supported by investment and non-traditional exports. Lower oil prices should help bring along a reduction in inflation. The external current account deficit would be stable, with a reduction in the oil import bill compensating higher imports of investment goods.

The mission concurred with the authorities that a core challenge is sustaining a high rate of economic growth over the medium term and bringing about a marked reduction in poverty, while concurrently enhancing the economy's resilience to shocks. To achieve these objectives, the Salvadoran authorities are appropriately focusing on strengthening public finances and the financial system, boosting El Salvador's integration in the global economy, and promoting innovative social programs.

The mission commended the authorities for the steps taken in 2006 in line with this medium-term strategy, including the important efforts made to enhance tax administration and focus subsidies on the most vulnerable segments of the population. The mission pointed out that the current favorable economic conditions provided an ideal environment to make further progress in implementing this strategy.

The mission welcomed the authorities' intention to achieve a primary surplus of public finances in 2007, thanks to a further expansion of the tax base, focus of subsidies, and strengthened tax administration. It stressed the need to build on this progress in coming years, with a view to continue putting public debt on a firm downward path and increasing the scope for a fiscal policy response in the event of adverse external shocks.

The authorities' efforts to reduce poverty are highly welcome. In this context, the mission noted the important benefits that could accrue from the projects to be financed from the Millennium Challenge Account and pending loans from multilateral development banks. The mission discussed the potential for boosting private investment and the government's plans to boost infrastructure and human capital, reduce red tape, tackle crime, and create new trade opportunities. It also stressed the importance of pressing ahead with steps to enhance the regulation and supervision of the financial system.
The IMF can report on macro-economic figures, but there are micro-economic figures, the finances of individual Salvadoran families, about which we need to know more. For example:

  • How did the distribution of wealth in the country change in the past year? Did the disparity between rich and poor grow or diminish?
  • How did wages change in the economy? If inflation was 5%, how did real household income vary?
  • How much of the economic energy in the country is generated by the remittances from Salvadorans who have left the country?
  • How has the size of the middle class in El Salvador changed?
  • How did the percentage of Salvadorans living on less than $1 per day change? $2 per day?
  • What sectors of the economy generated this economic growth?
Growth in the Salvadoran economy is a good thing. The economy must grow in order to be able to provide jobs and to be able to support programs to reduce poverty. But just knowing that the economy grew is not enough, one needs to know who this growth benefited and whether it is providing a sound base for future economic security for the entire country.

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