Moving up: The growth story of frontier economies
The growth story for frontier economies isn't the same as China's in
the past two decades, or the United States a hundred years ago. These
fast growing, low-income countries have their own story and it's not
what you might think.
In May, I wrote about it and how they are different and today, I want
to go into a little more details about how its economies have been on
the rise and how it has moved to the frontier.
Although the countries' economic paths vary like snowflakes - no two
are the same - their growth stories have two distinct features.
First, frontier economies such as Bangladesh, Tanzania and Mozambique
have a different growth story from that of the United States or China
because they are not growing by moving their economy from agriculture to
manufacturing and then to services. They are growing across all of them.
Second, despite the different growth paths, frontier economies have
made progress when you compare their economic size relative to an
advanced economy like the United States - a process known as
This is due in large part to more stable and predictable fiscal and
monetary policies, strong investment and exports, better debt
management, less red tape, stronger institutions, strong productivity
gains and access to capital markets.
A number of factors will help these economies continue to achieve
strong growth. They will reap the benefits of a large, young,
working-age population for years to come. They are well endowed with
natural resources. They are making inroads in global ties. They have a
growing middle class, which creates potential for new markets.
All's well and good, you may think, but weak global demand, tumbling
oil prices and the expected end to the unconventional monetary policies
in the United States could pose risks for frontier economies.
Indeed, many frontier economies are established or prospective
commodity exporters and have benefited from high commodity prices.
A sharp decline in commodity prices could adversely affect export
earnings, derail investment programs, and raise the risks associated
with foreign borrowing.
Also, the recent surge in sovereign bond issuances by frontier
economies could leave the latter vulnerable to roll over risks when the
bonds mature, particularly given their large size relative to the
countries' reserve and other foreign assets.
We see two additional vulnerable spots that we need to keep an eye
on. Frontier economies have historically depended on a narrow range of
primary products for export to make money, so they need to diversify to
make themselves less vulnerable to the whims of the rest of the world,
including commodity price movements.
They also need to increase the quality of what they produce and move
up that proverbial ladder because faster growth in quality is associated
with higher per capita income and higher economic stability.
Opportunities for countries to upgrade the quality of products are
strongest in manufacturing but also exist in agriculture.
This is particularly important because a large portion of the
population in these countries is often employed in the agricultural
The question is how will frontier economies prepare for what happens
next? First, they need to continue to implement appropriate monetary and
fiscal policies to maintain stability and weather what lies ahead.
Economic stability is particularly important to manage risks
associated with foreign borrowing. Second, they need to implement the
difficult next generation of reforms, such as improvements in public
finance management, while they move away from policies that can
exacerbate a downturn, such as cutting back on spending.
They should also deepen the links between their economic sectors,
such as agriculture and manufacturing.
- Courtesy IMF