Why macroeconomics is important to a country achievement




















This type of adjustment is also painful, in the sense that it leads to a decline in consumption as net imports decline after devaluation, but domestic prices do not fall. In fact, after a while they start to increase, eating up the pro-competitive effect of devaluation, so there is no depressive effect on output.

Which type of adjustment is associated with a greater reduction of — or slowdown of growth in — output, through the money supply and a slowdown of inflation or through devaluation, is open to question. This issue is also discussed in terms of plusses and minuses of exchange rate based stabilisation — pegging the national currency to a stable currency and using the peg as the nominal anchor — versus money-based stabilisation, the policy of setting targets for monetary aggregates — and gradually lowering these targets — while keeping the nominal rate flexible.

The advantage of the former is that it is usually believed to be credible, although there are many cases of spectacular failures, from Russia in to Argentina in Money-based stabilisation allows more flexibility for monetary policy, in line with a one-size-does-not-fit-all argument. The disadvantage of this policy is that there is no automatic mechanism to bring down inflation; everything depends on how strictly the central bank observes the targets.

With regards to the medium-term and short-term, there is another argument: asymmetric shocks. These occur, for example, when commodity prices increase. Consider the case of one country, an oil exporter, and another country, an oil importer. The increase in oil prices will create a positive trade shock for the exporter and a negative shock for the importer.

If both countries have fixed nominal exchange rates, in the former country FOREX will increase, in the latter it will decrease. At the end of the day, this latter country — the oil importer — will be unable to sterilise the decline in FOREX, if the trade shock is significant enough, so the money supply will decrease, prices fall, and the RER will fall as well.

Even if prices are perfectly flexible, there will be a need to move resources — labour and capital — from the oil sector to other sectors of the economy. And when oil prices rise again, there will be a need to move resources in the opposite direction, from other sectors to oil.

Because oil prices fluctuate a lot, it is unreasonable to move resources back and forth every time there is a trade shock. With fixed exchange rates, the room for manoeuvre to adjust to these temporary shocks is limited.

With fixed exchange rates, and with currency board arrangements even more so effectively forcing countries to abandon their independent monetary policy, countries are doomed to adjust to trade shocks and inflows and outflows of capital through real indicators: when the exchange rate is pegged and prices are not completely flexible, changes in the money supply caused by fluctuating reserves may affect output rather than prices.

And as the recent experience of East Asian and transition economies has shown, this kind of real sector adjustment is quite costly. To put it in the simplest terms, under fixed exchange rate regime, neither changes in foreign exchange reserves nor domestic price changes in response to money supply fluctuations provide enough room for manoeuvre for responding to terms of trade shocks and changing international capital flows.

Most developing and transition economies, with the exception of the smallest ones, like Hong Kong, Singapore, and perhaps the Baltic states, are large enough to remain preserved against exposure to global market competition and to hence retain some inflexibility of domestic prices with respect to global market prices.

Nevertheless, they are not large enough to create an appropriate cushion in the form of foreign exchange reserves, bringing down the vulnerability resulting from the international capital flows to reasonable levels.

In most emerging markets, with the possible exception of China, foreign exchange reserves are normally enough to withstand only several weeks, if not days of an attack on the currency.

More than that, because major international banks, investment funds, and hedge funds operate with pools of money comparable to or even exceeding the value of reserves in most countries, exchange-rate fluctuations remain the only reliable and efficient safety valve providing protection against external shocks.

The consensus today, if any, could probably be summarised as follows: whereas exchange rate based stabilisation may work to fight inflation at the initial stages of transition, there is growing evidence that at later stages it becomes an obstacle to economic growth and creates the potential for a currency crisis by allowing the real exchange rate to appreciate. Undervaluation of the exchange rate via long term accumulation of foreign exchange reserves is in fact a growth policy stimulating export-oriented development.

This used to be a policy of many fast growing economies in East Asia and elsewhere Polterovich and Popov ; Popov Undervaluation of the exchange rate via an accumulation of foreign exchange reserves is a macroeconomic policy, but also in fact an industrial policy aimed at promoting export-oriented growth, which benefits the producers of tradables and exporters at the expense of the producers of non-tradables and importers.

This policy is gaining support in the literature Dollar, ; Easterly, ; Polterovich and Popov, ; Rodrik, ; Bhalla, If there are externalities from exports and production of tradables, like industrialisation and the development of high-tech sectors, the undervaluation of the exchange rate resulting from an accumulation of reserves provides a subsidy to these activities and this subsidy is automatic, i.

In short, this is a non-selective industrial policy promoting exports and the production of tradables that seems to be efficient, especially in countries with high levels of corruption and poor quality institutions. An accumulation of reserves and the undervaluation of the exchange rate may therefore be good for long-term growth.

However, if all countries use these policies, they will all lose, and, on top of that, for developed countries this policy does not work.

But for developing countries it works, and there are good reasons why these countries should have sufficient policy space to use this tool to promote catch-up development. The policy of reserve accumulation is often considered to be self-defeating because in order to avoid inflation, which would eat up the impact of devaluation of the real exchange rate, it would be necessary for monetary authorities to carry out sterilisation policy, i.

But sales of government bonds lead to higher interest rates, which in turn attract capital from abroad, which contributes to an increase in foreign exchange reserves FOREX , which again needs to be sterilised, which creates a vicious circle. But many developing countries do exercise control over capital flows — China and India would be prime examples — and even without such controls, capital mobility cannot be considered perfect, especially for large economies.

In practice, as the statistics show, an accumulation of FOREX is financed through a government budget surplus and debt accumulation, but not through printing money Polterovich and Popov, That is to say, most countries that have accumulated reserves rapidly have exhibited low inflation, and low budget deficits or a budget surplus, but growing government debt.

In the post-Soviet space, Uzbekistan — at least since — is probably the only country that has carried out predictable and gradual nominal currency devaluation, which is a bit larger than needed to counter the differences in inflation rates between Uzbekistan and its major trading partners, so that the real effective exchange rate depreciates slowly. The real exchange rate of the Uzbek Som the Uzbek currency versus the US Dollar has appreciated a little, although not as much as currencies of other countries.

Acemoglu, D. Institutional causes, macroeconomic symptoms: Volatility, crises and growth. Journal of Monetary Economics , 50 1 , pp. Alesina, A. Journal of Money, Credit and Banking , 25 2 , pp. Balls, E. Central Bank Independence Revisited: After the financial crisis, what should a model central bank look like? Working Paper Series, Bhalla, S.

Devaluing to Prosperity. Misaligned Currencies and Their Growth Consequences. Peterson Institute for International Economics. Bruno, M. Inflation and growth: in search of a stable relationship. Proceedings, Federal Reserve Bank of St. Louis , May, pp. Chowdhury, A. Thematic Summary Report: Monetary Policy.

Macroeconomic Policies in Countries of the Global South. Nova Science Publishers. Cornia, G. Oxford: Clarendon Press. Crowe, C. Journal of Economic Perspectives , 21 4 , pp. Cukierman, A. Central bank independence and monetary policymaking institutions — Past, present and future. European Journal of Political Economy , 24 4 , pp.

Morten Balling Ed. The World Bank Economic Review , 6 3 , pp. Dollar, D. Three cross-cutting themes: digitalization, gender, and climate change will run across the four engagement areas and are mainstreamed across all activities under the CPF. Some of the important achievements supported through this financing include the rollout of a national free vaccination program for adults, the securing of multiple sources of vaccine supplies in December , and expanding the PCR network from 49 to testing labs between March to September On August 31, , Indonesia crossed a major milestone by administering the millionth COVID vaccine dose and is further accelerating the vaccination program to reach its remote parts.

Promoting human capital is an important priority for Indonesia. This achievement involved a range of ministries and government institutions working together to bring nutrition services to millions of pregnant women and children under two across the country.

The PKH provides cash benefits to encourage beneficiary families to use maternal and child-related health and nutrition services and to send their children to school. In addition, the program also provides family development sessions and learning materials to beneficiary mothers so that they can gain better understanding of health and nutrition, good parenting practices, child protection, and financial management.

A recent study shows that the cumulative impacts of PKH can reduce stunting by around 9 percentage points. On education outcomes, the PKH has helped to solve the last-mile enrollment problem for children aged 7 to 15, and eliminated more than half of nonenrolments. Since , the government has expanded the program significantly in both coverage and benefit levels. In , the program reached 10 million poor and vulnerable families. The World Bank supported the Ministry of Education and Culture in implementing and independently maintaining the pilot in over schools.

Given the dire impact of climate change, the World Bank supports integrated landscape management to reduce deforestation and improve livelihoods.

By , the project has registered more than one million land parcels in non-forest areas. Further, through Strengthening of Social Forestry and the Strengthening Rights and Economies of Indigenous and Local Communities projects, 63 indigenous communities partners have received support to gain stronger recognition of tenure rights.

Through Dedicated Grant Mechanism for Indigenous Peoples and local communities, an Adat community received recognition within Perhutani area, a jurisdiction under a state-owned forestry company for the first time.

The World Bank develops knowledge, builds capacity, and finances on-ground investments to support sustainable fisheries, develop coastal livelihoods, build healthy ecosystems, reduce marine pollution, and strengthen policy and institutions. Similarly, to support reduction of emissions from deforestation, the World Bank has committed to providing results-based payment related to this agenda in East Kalimantan Province.

It is often followed by a period of lower growth rates and recession 'bust'. Sustainable growth in this context relates to stable growth rates that even out the fluctuations in the business cycle, thus avoiding high peaks and the large troughs associated with recessions. Note that this is different from the issues that environmentalists typically focus upon when they discuss the sustainability of economic growth.

We shall say more on this later. Do high levels of GDP necessarily correspond with high levels of development? Not necessarily. Countries like China and India have much higher levels of GDP than, say, Singapore, New Zealand or Belgium, but few would suggest that the latter are economically less developed than the former. Assuming that it does, is it reasonable to say that development is taking place?

Certainly, statistics reveal that the most developed countries are those with the highest GDP per capita. Clearly, though, GDP per capita doesn't tell the whole story. It says nothing about how incomes are distributed or spent. Growth in GDP per capita could result from growth in the incomes of richer groups in society, with incomes of poorer groups remaining largely unchanged. It coincides with spending patterns that are skewed towards the rich and which exclude the needs of the poor.

It doesn't necessarily follow that growth in per capita GDP will lead to a reduction in poverty or to broader social and economic development. Indeed, there are those who argue, rightly or wrongly, that in many countries economic growth is associated with increasing levels of poverty, rather than the reverse. The relationship between economic growth and poverty is a hotly debated topic, about which people are very divided. Some people highlight the negative effect of growth on low income groups, stressing the need for new approaches to economic development that will allow the poor to benefit more from economic growth than they do at present.

Others are more sanguine, believing that the benefits of current models for growth will eventually ' trickle down ' to poorer groups in society, if they are not already doing so. Most development professionals now believe that growth, at least in poorer countries, is essential but not always sufficient for poverty reduction in the longer term. However, inequality is a potentially important factor in determining how quickly and effectively growth reduces poverty, with growth in countries that start out with high levels of inequality being less effective in reducing poverty than it would be were inequality less pronounced see Ravallion A renewed interest in the role of inequality and efforts to reduce it appears to have entered the development discourse since the global economic crisis of the late s.

Much of the debate in this area revolves around the values and ideals of those engaged in it, as well as the different theories on the subject. It also hinges upon interpretations of the empirical evidence. Poverty and income distribution are hard to measure, especially in developing countries where the capacity to gather and analyse data is often very weak. Consequently, the strength of the statistical relationship between growth, poverty and inequality remains the subject of heated debate.

There is also controversy about the mechanisms by which economic growth may reduce poverty, the timing of these and the policy implications. This has been heightened by the ' bottom billion ' debate see 1. The bottom billion debate which revolves around the question of whether the poorest people the bottom billion are to be found in the poorest countries see Collier or in fast growing middle income countries see Sumner



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