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Macroeconomic Stability, Growth and Employment

Issues and Considerations Beyond the Washington Consensus

December 1, 2003

AUTHOR: Muhammed Muqtada
TOPIC: Decent Work
CREDIT INFO: ILO Employment Paper 2003/48 (ISBN 92-2-113644-2)

PREFACE: During the past two decades, the design of macroeconomic policy frameworks, across countries, was focussed predominantly on the attainment of price and balance of payments stability. The so-called "Washington Consensus," which came to be adopted as the blueprint of stabilization and structural adjustment programme (SAPs), was largely concerned with restraining inflation and reducing fiscal and current account deficits.

The paper attempts to provide a critical assessment of the varied experiences of stabilization. It is largely observed that while stabilization has indeed yielded substantial price discipline, inflation in particular, growth has remained inadequate, volatile and far from reaching the sustained levels required to make any perceptible gains in reducing employment and poverty. In fact, the paper, using cross-section and panel data from 20 selected countries, shows that growth and investment are rather "insignificantly" affected by the "stability" factors.

The paper also provides a brief commentary on the PRSPs (Poverty Reduction Strategy Papers) that are currently emerging as the new blueprint of lending by the Bretton Woods institutions. The paper contends that the poverty agenda of the PRSPs and the stabilization targets sought by World Bank and IMF would create innate tensions if the macroeconomic framework fails to articulate both. In this context, it is important to understand that policies may overly conflict among those that reduce prices and deficits, and those needed to create a "fiscal space" for critical public expenditures for social goals.

In the above context, the paper forwards three considerations that are significant for future macropolicy planning. First, one needs to go beyond stabilization of prices, to seek factors that would increase and stabilize growth. Second, given the high levels of un/underemployment and poverty, there is a need to centralize the goal of "full productive employment" in macroeconomic planning. Third, a macroeoconomic environment by itself would not automatically produce growth or employment; various microeconomic, labor and institutional policies are needed to support macropolicies.

In conclusion, the paper identifies a few ingredients towards alternative designs of macroeconomic policies at the country-level, with the emphasis that these must be embedded in the economic and social objectives pursued. A return to the goal of full employment and decent work provides an alternative long-term objective, which needs to be cast in a macroeconomic framework of sustained investment, and employment-friendly growth. The developing countries, especially those facing a "stabilization trap" and high un/underemployment, would need not only a prudent use of the monetary and fiscal levers, but also a degree of focussed government intervention to boost investment and productive employment.

© 2004 International Labour Organization. For permission to use or distribute this paper, please contact the ILO. The ILO shall accept no responsibility for any inaccuracy, errors or omissions or for the consequences arising from the use of the Text.

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