Post-Crisis Macroeconomics and LDCs Iyanatul Islam, EMP/POLICY - - PowerPoint PPT Presentation

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Post-Crisis Macroeconomics and LDCs

Iyanatul Islam, EMP/POLICY 23-24, June, 2011 Prepared for presentation at UN- DESA/ILO expert group meeting, Geneva

Key messages

• Improvement in macroeconomic performance of LDCs in

2000s

• But concerns about decline in public investment and high

borrowing costs

• Exacerbates binding constraints on private sector growth
• Evidence that at country-level macropolicy advice still

reflects ‘business as usual’

• Need to recapture ‘revisionist moment’ of mid-2000s
• Align macropolicy with core development goals (MDGs

+SPF)

• Example with fiscal policy design

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Higher growth, lower inflation in LDCs in 2000s

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Lower macroeconomic volatility in LDCs in 2000s

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But..secular decline in public investment….

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Higher borrowing costs, despite reduced inflation

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Implications?

• Higher borrowing costs and reduced public

investment exacerbates binding constraints on private sector development in LDCs

• Enterprise-level surveys show lack of access to

finance, high cost of credit and low quality infrastructure among top ten constraints

• Conventional macroframework not effective in

dealing with these binding constraints

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Business as usual?

• Review of policy statements for 30 LICs

and 20 MICs from IMF Article IV consultations (2010 mostly) show:

• An emphasis on fiscal adjustment
• Some emphasis on inflation targeting
• Insufficient alignment with development

goals

Business as usual?

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IMF Policy Statements for 30 LICs and 20 MICs: Frequency Distribution

6 1 48 27 10 20 30 40 50 60 Explicit reference to MDGs Explicit reference to MDG 1b: Full employment and decent work Explicit reference to Social Protection Floor Fiscal adjustment Explicit inflation targetting

Revisionist moment of mid-2000s

• Who said that?
• …(T)he scope for monetary policy to

impede growth far exceeds its ability to create it: high inflation above, for example, 40 per cent – is certainly inimical to growth, but keeping inflation low will not by itself induce a growth boom

Revisionist moment of mid-2000s

• Who said that?
• Controlling the growth of government

liabilities… offer little indication of longer term effects on government assets or on economic growth. Conceptually, the long- term impact is better captured by examining the impact of fiscal policy on government net worth.

Post-crisis macroeconomics and LDCs

MDGs 2015 +SPF Binding constraints

• n private

sector LDCs Post-crisis Macroeconomics

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What post-crisis macroeconomics ought to be: an illustration using fiscal policy

• What is needed…
• Resources to meet nationally adapted MDGs

and social protection floor while maintaining fiscal sustainability

• Simultaneously can help relieve binding

constraints on private sector

• Hence….fiscal diamond to identify sources of

sustainable resources

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The Fiscal Diamond (adapted from 2006 Dev Cttee of IMF/WB)

• 1. External Assistance (% of

GDP)

• 3. Deficit Financing

(% of GDP)

• 2. Dom estic Revenue

Mobilization (% of GDP)

• 4. Reprioritization

& Efficiency of Expenditures (% of GDP)

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Determining the size and shape of fiscal diamond to meet employment creation goals: example

• Bangladesh (Islam et al, 2010)
• Employment Guarantee Scheme or EGS (to

Indian standard) will cost 1.9% of GDP (2009- 2010 prices)

• Bdesh has tax-GDP ratio around 9% of GDP
• EGS can be met entirely through a moderate

increase in tax-GDP ratio by 3% points and better utilization of existing resources

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Concluding remarks

• Pro-development fiscal policy needs to be

complemented by…

• Monetary and financial sector policies that

support financial inclusion

• Encouraging diversification through…
• Competitive and stable real exchange rate
• Prudent capital account management
• Strengthening labour market institutions