MACRO POLICIES AND REFORM AGENDAS
(Ellis, Chapter 8)

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:
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:
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:
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:
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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