Beyond Macroeconomic Stability

Structural Transformation and Inclusive Development

Iyanatul Islam, D. Kucera

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137379245
• eBook ISBN: 9781137379252
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This volume goes beyond a narrow conceptualization of macroeconomic stability and explores the link between socio-economic policies, structural transformation and inclusive development. It rests on three thematic pillars: the limits of conventional macroeconomics; the long run agenda of structural transformation and the development of capabilities.

Part I

Limits of the Conventional Macroeconomic Policy Framework

1

Dispensing Macroeconomic Policy Advice to Developing Countries: The IMF’s Article IV Consultations¹

Iyanatul Islam, Ishraq Ahmed, Rathin Roy and Raquel Ramos

Introduction

Under the IMF article of agreements, Article IV consultations play an important surveillance role. As the IMF observes:

Article IV consultations usually take place once a year. IMF economists visit the member country to gather information and hold discussions with government and central bank officials, and often private investors and labor representatives, members of parliament, and civil society organizations. Upon its return, the mission submits a report to the IMF’s Executive Board for discussion. The Board’s views are subsequently summarized and transmitted to the country’s authorities. Currently, nine out of ten member countries agree to publication of a Public Information Notice (PIN), which summarizes the staff’s and the Board’s views, and four out of five countries agree to publication of the staff report itself.²

Public access to Article IV consultations is of comparatively recent origin. It emanates from a pilot project that the IMF initiated in April 1999 to improve its transparency.³ These consultations are an excellent source of information on the nature of macroeconomic policy advice offered by the IMF to member states. Yet unlike the extensive – albeit contentious – literature on the nature and impact of conditionalities that are enunciated under the IMF’s lending arrangements, relatively little effort has been invested in undertaking a ‘content analysis’ of staff reports that support the Article IV consultations in order to decipher the nature of the macroeconomic policy advice that is offered to member states.⁴ This chapter intends to deal with such a lacuna by undertaking a content analysis of 2009–2010 Article IV consultations (and equivalent country reports if such consultations are not available) for a sample of 30 low income and 20 middle income countries on the following themes:

(1)	fiscal adjustments;
(2)	inflation targeting; and
(3)	employment generation, poverty reduction and expansion of social protection.

The list of low and middle income countries is compiled from World Bank sources. This is supplemented by drawing on another study that assesses the IMF Article IV consultations for 25 low and middle income countries.⁵

A discourse on the nature of macroeconomic policy advice as dispensed by the IMF to a selected sample of its member states is timely because of the proclamations by the Fund that it is now necessary to engage in a ‘wholesale re-examination of macroeconomic policy principles’ in the wake of the Great Recession of 2008–2009 that was triggered by the US-driven financial crisis of 2007–2008.⁶ Critics have argued that both the financial crisis and the Great Recession represent the inadequacies of the standard macroeconomic framework, with the IMF widely seen as the internationally recognized custodian of this framework. This is a critique that has been exacerbated by the current debate on the efficacy and relevance of fiscal austerity measures in the debt-distressed economies of the Eurozone and elsewhere.⁷

The standard macroeconomic framework assigns a central role to macroeconomic stability as a prerequisite for economic growth. Macroeconomic stability is assessed in terms of the ability of countries to attain and sustain preferred nominal targets (whether implicit or explicit) pertaining to debts, deficits inflation and the balance of payments. The rationale is that predictability in terms of key nominal targets engenders market confidence, boosts investment, propels growth and supports employment creation and poverty reduction. In principle, these nominal targets should be tailored to country-specific circumstances, but in practice they have often tended to become part of a ‘one-size-fits-all’ approach. Thus, in the case of inflation, the target suggested by the IMF for developing countries is usually less than 5 per cent, while for debt-to-GDP ratios the prudential thresholds are set at 40 per cent, despite the fact that they do not seem to be anchored in robust empirical evidence.⁸ There is also a growing body of evidence that the relationship between macroeconomic stability and growth is asymmetric. Extreme instability – such as hyperinflation and out-of-control budget deficits – kills growth, but it does not follow that restoration of stability will be both necessary and sufficient to promote self-sustaining growth and lead to durable and productive job creation. Hence, as noted, a re-thinking of the standard macroeconomic framework is underway, a process in which leading IMF economists themselves have played an important role.⁹

The content analysis undertaken in this chapter seeks to assess the extent to which the Article IV consultations reveal the persistence of a ‘one size fits all’ approach as they pertain to targets on debts, deficits and inflation; and the extent to which the consultations focus on employment creation, poverty reduction and extension of social protection that go beyond a mere re-affirmation of the view that the primary – if not the sole – role of macroeconomic policy managers is to act as guardians of stability. Such an assessment is important given that the IMF has claimed that, in response to its critics, it has become more flexible in the design of its lending arrangements and in offering policy advice to both borrowing and non-borrowing countries. In the context of low income countries, the IMF makes the point that ‘macroeconomic policies [are] intended to become more supportive of growth and poverty reduction objectives, including by safeguarding social and other critical spending in times of adjustment’ (IMF 2009: 29).¹⁰ Hence, it seems appropriate to assess the IMF Article IV consultations through the prism of employment creation, poverty reduction and extension of social protection.¹¹

The rest of the chapter is structured as follows. The second section describes the methodology that is used to undertake the content analysis of the Article IV consultations (and equivalent country reports where such consultations are not available). The chapter then reports the results based on this methodology on the themes of fiscal adjustment, inflation targeting, employment creation, poverty reduction and extension of social protection. A consistent attempt is made to locate the discussion in a broader development context. The concluding section offers a summary of key findings and their implications for the future evolution of the Article IV consultations.

Methodology

The content analysis drew on the 2010 Article IV consultations of each country, and if the 2010 reports were not available a country report under a lending arrangement was used instead. Some countries (four) did not have any Article IVs or equivalent reports for 2010, in which case the last available report (2009) was used (see Appendix A for the full country list). The policy recommendations that are analysed are usually for the medium term, that is, from 2010 onwards until 2015.

Variables representing fiscal adjustment

As noted in the Introduction, one of the themes explored in this study is the issue of fiscal adjustment. This topic is selected because it is very much part of the current global policy discourse on fiscal consolidation. This is taken to represent IMF advice of urging the government to adopt fiscal discipline through a combination of expenditure adjustments and revenue mobilization. Within the broad sphere of fiscal adjustments, the following areas are highlighted.

(1)	Explicit spending restraint: the variable is defined as the IMF recommendation for explicit control or cuts in public spending.
(2)	Manage public sector debt: for the purposes of the research, the variable is defined to include cases where the IMF proposes a country to rein in its public debt to more sustainable levels. The IMF also sets a threshold for public debt – if the present value of public debt to GDP ratio exceeds a certain threshold, then that country is at a risk of debt distress, which in turn is classified into ‘high’, ‘medium’ or ‘low’.
(3)	Mobilize revenue: the variable is defined to include aspects of tax and non tax revenues along with efforts to reform and simplify the administration and collection process.

Variables representing inflation targeting

This topic is selected because leading IMF economists believe that inflation targeting represents macroeconomic orthodoxy that is in need of revision in the wake of the Great Recession of 2008–2009. For some countries, the IMF explicitly addresses the issue of...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Tables and Figures
• Acknowledgements
• Notes on Contributors
• Introduction
• Part I Limits of the Conventional Macroeconomic Policy Framework
• Part II Structural Transformation and the Development of Capabilities
• Part III Inequality, Wages and their Macroeconomic Consequences
• Index