Iyanatul Islam
Neoliberal macroeconomics emerged in the advanced economies in the 1970s. It grew out of a debate between Keynesian economists and their critics (‘new classical’ economists). These ideas were exported to the developing world through the conduit of major financial institutions (most notably IMF/WB). Developing economies hosted 958 structural adjustment programmes (SAPs) in the 1980s and 1990s. The SAPs played an important role in the restoration of macroeconomic stability but were less successful in fostering sustainable growth and structural transformation. The intellectual foundation of neoliberal macroeconomics rests on the view that the primary role of the government is to stabilize expectations about the future of forward-looking economic agents. This is best done by making a credible commitment to ‘nominal anchors’. These nominal anchors take the form of numerical targets pertaining to inflation, debts, deficits and external sustainability. The key proposition is that a credible commitment to these targets fosters macroeconomic stability which, in turn, is essential for growth and structural transformation. A key aspect of neoliberalism is that a fully flexible labour market ensures full employment and provides scope for macroeconomic policy instruments to play their due role. Hence, the implication is that one should aim to remove regulatory impediments to the labour market, such as minimum wages and employment protection legislation. Neoliberal macroeconomics favours independent central banks that make counter-cyclical adjustments to the interest rate in order to maintain the medium-term inflation target. This should be combined with either fully floating or fully fixed exchange rate regimes supplemented by an open capital account. Fiscal policy should be geared towards maintaining debts and deficits within numerical limits, with an independent fiscal council exercising an oversight role. However, confidence in neoliberal macroeconomic policy has been shaken by the global financial crisis of 2007 followed by the global recession of 2008-2009. The IMF has led the initiative to ‘rethink’ macroeconomic policy in the post-crisis era, but this literature reflects the concerns of advanced economies. The neoliberal policy framework should be modified to reflect developing country circumstances. While certain institutional innovations – such as independent, but democratically accountable, central banks and fiscal councils are useful – a rigid adherence to numerical targets pertaining to inflation, debts and deficits should be eschewed in light of evidence that such targets are not robust. One should aim for a range that can accommodate estimation errors and country-specific circumstances. Central bankers should look beyond inflation targets and find credible ways to support growth, employment creation and poverty reduction objectives. This is perhaps best achieved through the promotion of financial inclusion. The available evidence also suggests a case for prudent management of the exchange rate and the capital account in order to attenuate the incidence of macroeconomic volatility.
Fiscal policy should move beyond a focus on fiscal targets to harness resources from multiple sources to sustainably support investments in health, education, infrastructure and social protection and to respond proactively to smooth business cycles. Finally, the idea of a fully deregulated labour market should be modified to take account of evidence that what matters are well-designed and appropriately enforced regulations that strike the right balance between protecting the rights of workers and the interests of the business community.
Dr. Iyanatul Islam, Adjunct Professor, Griffith Asia Institute, Griffith University, Australia. Email: i.islam@griffith.edu.au
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