Macro policies provide the "
environment
for rural livelihoods" (p. 160), and may prove either
encouraging or
inimical to the sustainability and development of livelihoods. They
influence such factors as: inflation rates, exchange rates, interest
rates and credit conditions, rates of return on labour, land and other
assets, employment opportunities and human capital (education, health,
and nutrition).
In order to appreciate the major interactions and linkages of Macro
Policy, it is necessary to have some understanding of how the
macroeconomy works: see here for an outline of
Macroeconomic Principles.
Macro Policy Evolution
The basic strands of Macro Policy are illustrated in the following
diagram:
Much of the macro policy reform, adjustment and
stabilisation has been
driven by the international financial organisations, especially
the
World Bank and the International Monetary Fund. (See
here for a brief
synopsis of these organisations)
There has been a general progression from policies emphasising:
- Stabilisation (reducing
balance of payment deficits, reducing budget deficits, reducing
inflation) - the IMF provision of BoP support was conditional on
improved macroeconomic management and policy change, often cutting
government spending and/or raising taxes; devaluing the exchange rate,
making imports more expensive and exports more competitive on the world
market; and raising interest rates - through
- Adjustment - often
called structural adjustment
(referring to the structure of the economy): removing exchange
controls;
removing or reducing trade interventions (tariffs, subsidies etc.);
privatisation of parastatal agencies (marketing boards etc.); financial
market liberalisation (removal of credit subsidies, interest rate
ceilings, and opening up to foreign investment); and also improving
economic infrastructure (transport, communications etc.) and social
infrastructure (education, health); to
- Reform - improving
general administration, organisation and institutions - civil service
and tax collection reforms, public accountability, transparency of
decision making, fair application of common law - i.e. political reform
(which, by definition, cannot be imposed from outside).
However, the progression has been more from the benefit of
hindsight - the actual policies (and motives behind the policies) show
considerable overlap - reform includes major elements of the previous
adjustment and stabilisation foci. In addition, there has also been a
general shift from
Project Aid
(tied to specific, often large scale, projects) to
Programme Aid (tied to and
conditional on reform and
adjustment programmes).
"The conditionality aspect of reforms raises problems concerning their
ownership and compliance with conditionality clauses, and these remain
ongoing sources of conflict between donor and recipient
governments." (Ellis, p 163), see, for example, Stiglitz, Joseph,
Globalisation
and its discontents, Penguin: Politics, 2002 (Robinson
Shelf No. 337.STI, also in the Law Library, Student texts, 347.78 STI).
[The
Economist review suggests that
the title should have been
The IMF
and my discontent. The Penguin edition
contains an afterword which says that the
initial IMF
response was issued
instead of the IMF participating in an organised open discussion of the
issues raised in the book. Here is a
more
measured IMF response - a search for Stiglitz on the IMF site
produces 132 hits, mostly rebuttals, with some admissions of guilt.]
Reforms are supposed to generate stability and efficiency, and to
improve infrastructure, and some social services. However, Ellis says
that there are two overarching considerations:
- Flexibility and adaptability of
local economies: do the reforms actually make the economy more
resilient and less prone to shocks? The frequent policy condition for
greater liberalisation, more (and better) markets, and (implicitly, and
often explicitly) a smaller government and state involvement in
economic activity, has been supposed to generate a more robust economy.
- Role and nature of the state
as an agent for the well being of its citizens: questioned by
evidence of corruption, patronage, rent-seeking, waste and inefficiency.
Both Stiglitz and Ellis argue strongly that
sequencing has been a major problem -
liberalising trade by removing import controls and tariffs may be
sensible, but it cuts off government income (from tariffs) and exposes
weak economies to the winds of international competition which they may
not immediately be able to withstand - leading to more devaluations of
the currency, and greater inflationary pressures.
There are also complex problems of
ownership - who is in
control of the reform process: the international agencies (imposing
perhaps alien values and ideas); the (often weak, corrupt, inefficient)
domestic government: the people? Unrealistic to expect foreign aid and
support without the donors making some demands on how it is to be
used. But it is also unrealistic to expect reforms to work well
if the people on the ground cannot see the sense and value of them, or
if the effects are compromised by inadequate markets, or inefficient or
corrupt governments.
Outcomes:
Ellis notes that it is difficult to estimate the effects of these
reforms: what would economic development have looked like without the
reforms in any one country (the
counter-factual
problem)? What can be learned from cross-country comparisons, when
local circumstances and extraneous events are so different? Stiglitz
is, however, pretty sure that many of these reforms have not performed
nearly as well as they should. He blames the "Washington consensus"
about "market fundamentalism" - markets work and governments don't, so
get rid of government and use markets - for many of the poor results
(though this is rejected by the IMF). John Kay (
The Truth about Markets, Robinson
level 3, 330.122 KAY) also berates the American Business Model - that
markets should rule - and strongly argues that markets and institutions
are intimately inter-connected, so that well-functioning markets can
only be expected if the supporting social organisations and
institutions are in place. If they are not, as is the
case in many developing countries, and also in countries in transition
from communist or centrally-planned regimes, then markets cannot be
expected to work properly.
See, for example, the World Bank pages on
Macro policies and
Growth. and their new site devoted to
Macroeconomic
issues and research.
The conventional economic textbook story about stabilisation and
adjustment is outlined by Ellis as follows:
- devaluation (removal of foreign exchange controls and re-valuing
foreign exchange at its market or purchasing power parity rate - see
Macro Principles) should decrease the price of exports (typically
agricultural, raw materials, and labour intensive products) making them
more competitive on world markets, and increase the price of imports
(machinery, specialised inputs etc.) making it more attractive for
domestic producers to compete with imports.
- Market and trade liberalisation (removal of export taxes - which
are frequent in LDC conditions as being an easy way of raising domestic
finance for government - removal of state trading agencies etc.) should
also encourage the expansion of the competitive sectors (such as
agriculture)
- So, the virtuous role of agriculture in promoting growth in the
general economy should be encouraged.
However, this virtuous circle can be broken if the domestic markets
don't exist or are subject to imperfect competition (local monopolies
because of insufficient transport infrastructure etc.) In
particular, if local labour markets do not exist, then people will find
it difficult to change their activities in response to price and market
signals. Similarly, under-developed capital markets will also limit the
responses. Liberalisation of input markets and of product marketing
agencies may also result in an effective collapse of the input
supply and product marketing chains while the replacement private
enterprises develop (which may well be slow and imperfect).
Women, in particular, may bear many of the initial costs of reform -
their labour typically directed towards the subsistence crops, and if
employed in the production of the new marketable crops, may not see any
of the revenues (collected by the men), while also being excluded
from the embryonic capital markets. On the other hand, liberalisation
should result in more opportunities for women.
The effects of livelihood
diversification on the consequences of structural adjustment.
Because many rural families and communities are already heavily
diversified, getting part of their
incomes from subsistence farming, part from cash crop farming, and part
from off-farm work (even from urban area employment), the effects of
changes in prices between sectors (cash crops versus subsistence crops,
agriculture versus urban employment etc.) which result from structural
adjustment programmes may have limited effects, especially in the
short-term, on rural or urban livelihoods. Gains from one source
of income tend to be offset by losses from other sources.
Conclusions
The World Bank and the IMF have been insistent
on Structural Adjustment Programmes - designed to liberalise markets in
developing countries - and on responsible macroeconomic management - to
eliminate inflation by controlling the money supply (typically raising
interest rates) and by balancing the government budget, as critical
aspects of generating a stable and reliable macroeconomy. In
principle, these insistences have been correct - there is little chance
of generating a favourable economic environment for development without
these reforms. Ellis remarks (p 177): "It is just possible that
irrespective of the uneven results in terms of macroeconomic
performance (because, often, of unreliable data) the reform process in countries
like Ghana and Tanzania has had a beneficial impact on rural
livelihoods. It has done so by reducing high rates of inflation,
diminishing exposure of individuals and households to the
capriciousness of local officialdom, dismantling controls over crop
sales through official channels, lessening previous prohibitions on the
free movement of goods and people, and permitting economic diversity to
spring up where previous monolithic agencies of the state predominated.
This last point is important and should not be underestimated. In
many countries, market liberalisation has reduced the profile in the
economy of state and parastatal agencies that formerly curtailed
diversity and constrained opportunities and outcomes."
However, there are two important 'buts' to these
reforms:
- Adjustment costs and processes:
the deregulation of markets, typically involving the elimination of
parastatal agencies and marketing boards (which administered the buying
of inputs and the sale of outputs) frequently involves substantial
disruption and stagnation while the market institutions and
infrastructure develops, which is likely to damage the poor at the
expense of the better-placed. Disruptions and
damage can also easily be caused by macro reforms which typically
substantially reduce limited government spending on health, education,
and infrastructure, and often cause very substantial, if not penal,
increases in interest rates and declines in exchange rates (damaging
both export-based and import competing industries and sectors).
- Absence of 'good governance' -
Social capital shortfalls: continued corruption and fraud,
and lack of trust in and establishment of market mechanisms can easily
defeat otherwise well intentioned macro and market reforms. Ellis notes
(p 178): "In its more recent
manifestations, reform accepts the complimentarity of government and
markets, and is increasingly concerned with issues of good governance
involving attributes of accountability, transparency, fairness and the
rule of law. Aspects of reform that have been identified as detrimental
include declining social provision, poor sequencing, lack of
ownership, evasion of conditionality, weak privatisation, and
inflexible imposition of a blue-print approach on widely varying
individual country circumstances. ... The governance dimension of the reform
agenda is likely to remain at the forefront of progress in rural
poverty reduction for some time to come."
Conceptual Endnote (DRH)
There is a general presumption in favour or market mechanisms in the
current reform agenda, which has been challenged, especially by
Stiglitz (op. cit.). DeLong (2004) also notes that capital
market liberalisation, especially, does not appear to generate the
benefits expected - capital flows towards the rich, and not towards the
poor. Yet our economic models seem to suggest that capital will earn a
higher rate of return where it is scarce - where people don't have much
of it and are therefore poor. In addition, privatisation of previously
state owned companies and resources frequently results in a
redistribution of resources which is little better than legalised
theft, especially in economies in transition. These instances generate
huge wealth to people simply because they were lucky enough, or devious
enough, to be in the right place at the right time, rather than on the
basis of their particular contribution to social (even market) good.
The messages sent by these instances seriously undermine notions about
the innate meritocracy of the market mechanism, and are likely to
threaten emerging trust in the market to reward those who contribute
most.
There does seem to be a conceptual misunderstanding in these
observations. The notions of general equilibrium and the gains
from trade, and of the perfect market system being capable of
achieving a Pareto optimum,
in which no one can be made better off without making someone else
worse off, are based on the principles of production, consumption and
trade of goods and services, and of flows of factors of
production. (For those of you who still want to quarrel with this
proposition, see, e.g.
some myths about trade.)
However, these principles do not necessarily translate directly into
trade and exchange of stocks
of capital, especially when the inevitable problems of future
uncertainty and risk, asymmetric information and incomplete or thin
markets are considered. Capitalism
is qualitatively different from the market mechanism. Once
ownership of capital is divorced from the generation and use of the
stock, it is the rich, inevitably,
who will be the owners rather than the poor. As incomes come to be
generated simply on the basis of ownership of stocks, and on the basis
of shaving margins from the transfers of stock ownership amongst
different people, the simple logic of the market in rewarding those who
contribute most seems to be undermined. But I have not yet found a
decent literature exploring this apparently simple idea, and have not
yet had the time to develop it myself. If you come across any relevant
writing or thinking, let me know.
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