Trade and technology: Christine Lagarde, Managing Director, IMF, on strategic avenues to boost inclusive growth

Christine Lagarde, Managing Director, IMF

Trade and technology are at the heart of Djibouti’s development strategy, Vision 2035. Djibouti can lead the way by transforming itself into a regional hub for trade and logistics, and by drawing on the experiences of other port-based economies. The goal is to become a middle-income country, where the benefits of economic growth are shared by all citizens. That is why Djibouti has been investing heavily in public sector projects, including several new ports and the new railroad to Ethiopia. We know that trade can increase living standards as consumers and businesses benefit from lower prices and a greater variety of goods. This is particularly important for consumers who buy relatively low-priced imports. We also know that trade can boost productivity by encouraging companies to adopt new technologies and production processes. The good news is that in its July update, the IMF projected global trade would grow by 4.8% in 2018, largely due to stronger global economic growth, which offers a huge opportunity for Djibouti. However, that is not the whole story; the longer-term objective is to shift a large part of Djibouti’s resources into higher-productivity services that support increased trade. A number of professions – from trans-shipment services to logistics, and financial and legal services – will need to be expanded if Djibouti is to become a regional trading hub. This is about fostering a larger and more vibrant private sector to help reduce unemployment and inequality, as well as creating better opportunities for the next generation.

There is also the opportunity to increase economic prosperity by leveraging Djibouti’s unique position at the crossroads of global internet connections. Its data centre has direct access to all major international and regional internet cables, serving as a gateway to East Africa and beyond. Djibouti could leverage this by hosting third-party equipment, providing internet exchange and offering big data processing, among other services.

Some of the biggest productivity gains could come from providing reliable electricity to companies and communities. Here in Djibouti, the clean energy sector is expected to benefit from the liberalisation of energy production and new regulations on public-private partnerships. A geothermal project is under way, but there is still room for more private investment, especially in solar power. To create this supportive environment, one strategy that has worked in all countries is pursuing sound macroeconomic policies. Djibouti’s economic growth is expected to remain strong in the medium term – at about 7% – because of the investment boom. However, the financing of these projects has raised public debt from 50% to 85% of GDP. Bringing public debt back to a sustainable level is critical to preserving economic stability and protecting spending on health and education. This calls for a slowdown in government borrowing and a strengthening of debt management.

A second avenue is improving the business environment. The government has made significant progress in cutting red tape, which could help attract further private investment. In addition, the government has taken an important step by creating a new governance code for public enterprises. Implementation of this code is critical, as is strengthening the management and supervision of these companies. Better governance in public enterprises could lead to lower prices for water, electricity and telecoms services.

A third avenue is promoting more inclusive growth. According to the IMF, Djibouti’s economic growth since 2008 has mostly benefitted the upper-income earners. To improve this disparity, we could extend public health insurance to the poorer population areas. There is also room to scale up investment in training and education so that workers can upgrade their skills and find jobs in companies with higher levels of productivity. Of course, meeting the challenges in trade and technology is not an easy task; however, the experiences of similar port-based economies demonstrate that it can be achieved.

The above is adapted from a speech given in Djibouti on December 18, 2017.

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