Developing countries need new reforms to boost growth and curb emissions, IMF says

Fresh policies on management, business regulation and trade can raise economic output by up to 8% in four years while supporting decarbonisation efforts

Economy-wide reforms give policymakers the tools to foster growth and prepare for the green transition, according to the IMF. Bloomberg

Developing countries stand to benefit from implementing economic reforms that will boost their output, while reducing carbon emissions without sacrificing growth and jobs, the International Monetary Fund has said.

New policies on management, business regulation and trade can boost output by 4 per cent in two years and up to 8 per cent in four years, and support decarbonisation efforts, the fund said in a report on Monday.

"Economy-wide reforms give policymakers the tools to foster growth and prepare for the green transition," the Washington-based lender said.

"The gains from overhauling institutions and regulations for businesses and people ... can quickly materialise even under severe economic strains, provided reforms are properly prioritised and sequenced. And these reforms are key to facilitate the decarbonisation of economies."

Developing countries require an investment of about $1.7 trillion per year in the clean energy sector but only managed $544 billion in 2022, the UN Conference on Trade and Development said in its World Investment Report in July.

The IMF recommendations come as emerging markets and developing economies face threats to economic growth because of high inflation, rising debt and balance of payments pressures. While these challenges piled up during the pandemic, they were further intensified by Russia’s war in Ukraine.

Emerging markets and developing economies are forecast to grow 4 per cent in 2023 and 4.1 per cent in 2024, little changed from 4 per cent in 2022, as stated by the IMF's latest World Economic Outlook in July.

That compares to global economic growth of 3 per cent in both 2023 and 2024, which is down from 3.5 per cent in 2022.

Structural problems hindering emerging and developing economies' growth include weak management, political instability, corruption, limits on trade and excessive regulations to starting a business, IMF said in its latest report.

Addressing these critical constraints through reforms to improve management, ease business regulation, lower trade barriers and increase access to foreign capital can help these countries quickly boost their economic output, it said.

The reforms will also result in promoting domestic and foreign investment and enhancing labour productivity.

"Given the extensive development needs of emerging market and developing economies, it is crucial that decarbonisation efforts be accompanied by sustained economic growth," the fund said.

The recommended reforms will help to generate growth, thereby supporting the green transition as well as facilitate the shift to low-carbon activities, it said.

Management reforms can incentivise the private sector to invest more capital in green projects if these changes make government policy more predictable.

They can also reduce implementation risks for climate projects, potentially attracting more financing from abroad, the IMF said.

Reducing barriers to opening businesses will enable the private sector to invest more easily in new, green emerging sectors, it said.

Lowering trade barriers can increase access to low-carbon technology and facilitate technology transfers that are critical for the green transition in less technologically advanced countries.

However, faster economic growth resulting from these reforms can increase emissions. Green reforms are needed in tandem to ensure a smooth energy transition, the report said.

"Stringent green reforms, such as energy taxation, regulations and green investments, are necessary to significantly reduce the emission intensity of economic activity," it said.

Combining economic and green reforms will allow these economies to reduce their overall emissions while supporting growth, it added.

The IMF recommendations come amid urgent global calls to tackle climate change problems as countries around the world grapple with wildfires, earthquakes and floods.