On 15 November, DOC Research Institute held a conference focused on analysing what kind of macroeconomic policies are most conducive to growth in developing countries, and whether particular fiscal, monetary, and exchange rate policies have similar effects in developed and developing countries or whether these effects are country specific. The conference was part of an ongoing research project of the DOC Research Institute, Macroeconomic policies for inclusive growth in Southern countries.

Jean-Christophe Bas, the newly appointed CEO of DOC Research Institute, opened the conference by pointing out the importance of economic growth in southern countries.

After the opening remarks, Director of Research, Vladimir Popov, presented an overview of the conference. He highlighted two reasons why policies in the West and in the South should not be the same: 1. There is a conflict of interests between the ‘West and the Rest’; the interests of developing countries are different from the interests of developed countries. 2. Even when the interests of developed and developing countries are the same, optimal policies for development should be different. To address these two points, five hypotheses were developed in Popov’s project, which cover various aspects of macroeconomic policies in Southern countries: (i) Insufficient government spending on public goods (education, health care, infrastructure, law and order, administrative costs) can lead to a collapse of output. This happened in post-communist countries during the transformational recession of the 1990s; (ii) In countries with high price rigidity, a low inflation policy tends to suppress output growth. (iii) In developing countries, central bank independence contributes to lower inflation, but at the expense of growth. (iv) Countries with flexible monetary policy manage adverse supply shocks better, especially if there is wage and price rigidity. (v) Exchange rate undervaluation through the accumulation of foreign exchange reserves promotes export-oriented growth in developing countries because export-to-GDP ratios in these countries are generally below the optimal level.

Xinqiao Ping, Professor at Peking University, addressed the issue of infrastructure development in China by using the Total Factor Productivity (TFP) Index. On average, during the 1996-2017 period, the TFP index was about 101, implying that in each year of this two-decade period the allocation efficiency was 1% annually. This improvement in efficiency has brought about GDP growth at the rate beyond what the factor increases (capital and labour) would support. The government’s spending for R&D increased more than 40 times in the last two decades. And infrastructure investment increased about 12 times in the same period. For China, the government’s expenditure for R&D and the infrastructure investments kept growing at a rate around 20% a year for more than 20 years.

Anis Chowdhury, former research director at UN ESCAP, discussed the monetary policy frameworks and institutional settings for inclusive and sustainable development for southern countries. He argued that monetary policy should have the twin objectives of reasonable price stability and orderly economic growth. That is, the goal is to avoid both overly conservative and overly expansionary monetary policies. If needed, inflation in the range of 10-15% can be tolerated from the point of view of avoiding a stabilisation trap, especially when inflation is caused by supply shocks. Monetary policy should support the fiscal authority in stabilising the prices of food and essential items. Monetary authorities should also monitor asset price movements while expanding credit in order to prevent asset price bubbles, which can destabilise the financial sector and distort investment. Monetary authorities should also carefully analyse sources of inflation, and must avoid ‘knee-jerk’ responses to any sign of inflation. Safe expansionary monetary policy within the above guidelines will allow governments to borrow from the central bank to finance growth enhancing, employment-intensive public infrastructure investment programmes.

Chowdhury then presented another part of his research on fiscal policy in developing countries. He argued that growth-promoting and access-enhancing public investment – physical and social – has to play a central role in this regard. Such public investments do not threaten macroeconomic stability; instead, they expand fiscal space through their growth effects, and a larger fiscal space means greater ability to consistently pursue counter-cyclical fiscal policy. While a progressive tax structure, along with a well-designed transfer system, is an essential element of distributive fiscal policy, it also supports counter-cyclical fiscal policy through stronger automatic stabilisers. Middle-income and emerging economies, which were able to pursue counter-cyclical fiscal policy in response to the 2008-2009 global financial crisis, face challenging circumstances as inequality has risen in a number of these countries and their growth remains far below pre-crisis levels. According to a World Bank study, fiscal space has shrunk in many emerging markets and developing economies since the crisis. Therefore, they may have to consider deficit financing to promote growth and distribution.

Pascal Petit argued that the benefits of any further internationalisation seem to have vanished for most countries, developed or developing. The drawbacks of the present phase are numerous, from the deterritorialisation of value added, to the new uncertainties brought about the worsening of environmental issues. Trade deficits and surpluses seem more and more difficult to reduce. Tariffs have returned and a phase of detrimental trade war may become more and more worrying for the emerging economies.

In Vladimir Popov’s presentation, he evaluated the impact of the accumulation of foreign exchange rate reserves on long-term economic growth. He suggest that the accumulation of foreign exchange reserves (FER) contributes to economic growth of a developing economy by increasing both the investment/GDP ratio and capital productivity through the following mechanism; (i) FER accumulation causes real exchange rate (RER) undervaluation that is expansionary in the short run and may have longer term effects, if such devaluations are carried out periodically and unexpectedly; (ii) RER undervaluation allows for the full benefits of export externality to be taken advantage of and triggers export-led growth; (iii) FER build up attracts foreign direct investment because it increases the credibility of the government of a recipient country and lowers the dollar price of real assets. He further argued that slight undervaluation of the exchange rate may increase growth and welfare.

Donghyun Park talked about inequality, inclusive growth, and fiscal policy in Asia. He stated that rapid growth has sharply reduced poverty in Asia. International experience shows that public spending can reduce income inequality, for example, spending on education and health. But in Asia, policymakers traditionally used fiscal policy primarily to support growth rather than to redistribute income. Evidence from advanced and developing economies alike suggests that government expenditure has somewhat stronger impact on income distribution than revenues. This general pattern is also true in developing Asia. Innovative measures can amplify the contribution of fiscal policy to inclusive growth. For example, forging public–private partnerships in social infrastructure can extend the reach of education and healthcare services. Such measures can provide additional financing for public services and improve their delivery, thus promoting equity.

Brazilian economist Luiz Carlos Bresser Pereira argued for a ‘new developmentalist’ macroeconomic approach for middle income countries. Between the 1940s and 1960s classical developmentalism made a major contribution to economics as it defined economic development as structural change, or industrialisation, and advocated a moderate intervention of the state. Since the 1970s, classical developmentalism has been in crisis, while, from the 1980s, neoclassical economics became the mainstream model. At the end of the 1980s, Latin American countries engaged in neoliberal reforms; in the 2000s, some tried to go back to classical developmentalism, but the success of either school of thought ended in 1980. In the early 2000s, as this failure became clear, a new theory emerged: ‘new developmentalism’, which was built based on post-Keynesian macroeconomics and classical developmentalism.

New developmentalism is strongly against the state engaging either in fiscal or exchange rate populism – the former meaning the state irresponsibly spends more than it gets. With the latter, the nation-state (the country) irresponsibly spends more than it gets. Free-spending is fiscal populism – it is not a responsible macroeconomic policy that progressive or conservative governments in developing countries often practice. Engaging in current account deficits with the argument that growth is promoted via foreign savings is exchange rate populism, is something that ‘austere’ liberals always practice as they defend current-account deficits. The additional capital inflows that such policy requires appreciate the national currency and encourage consumption, not investment in the long run.

Leong Liew, Professor at Griffith University in Australia, discussed China’s macroeconomic policy. It is ambitious but also pragmatic, this policy that takes into account China’s unique circumstances. China’s officials see macroeconomic policy as a means of maintaining high employment and price stability, but they also regard it as an important tool to support developmental state policies that contribute to high economic growth and the global strategic objectives of the state. Chinese policymakers implement gradual economic liberalisation, including the development of stock markets and a shadow banking system that offers some flexibility in an otherwise tightly controlled financial system. But they have never hesitated to reassert greater centralised control when external and internal developments, such as the global financial crisis, and later, massive capital outflows threatened macroeconomic and political stability, and/or undermined the country’s ability to pursue its core strategic objectives.

David Celetti, Researcher at the University of Padua, discussed Kazakhstan’s monetary policy. Monetary policy was one of the main instruments for managing the economic transition in the first years of independence. In the mostly uncontrolled macroeconomic conditions of 1992-96, monetary policy emerged as the ‘main force’ with clear, simple, and effective objectives. It filled an institutional vacuum and addressed economic instability with one single aim: curbing inflation. This, however, resulted in greater imbalances, monetary policy being the only instrument of economic governance. ‘Monetary imbalance’ heavily contributed to long term stagnation within a (mitigated) inflationary environment. But the monetary policy could not curb inflation, as the latter was driven by non-monetary causes (privatisation, imports within degrading exchange rates, speculation, falling production in most sectors, etc.).

Reza Moosavi Mohseni Assistant Professor at Aucland University of Technology, New Zealand, explained why some regimes in the global south use inflation targeting. This monetary approach primarily aims to achieve price stability with single-digit inflation. Mohseni argued that there is a positive impact on growth from adopting an inflation targeting regime. In addition, inflation targeting is superior compared to exchange rate and money aggregates targeting in certain southern countries. He continued by explaining that southern countries have relatively dependent central banks. High budget deficits make them heavily reliant on the seigniorage (fiscal dominance), and they do not have well-developed financial markets. With some strong institutional arrangements to improve the credibility of central banks, full-fledge’ inflation targeting can be the best choice of inflation targeting for certain southern countries rather than light inflation targeting.

DOC Senior Researcher Behrooz Gharleghi discussed the relationship between central bank independence, inflation, and economic growth in a sample of 31 developed and developing countries, taking into account major control variables. He argued that central bank independence has a significantly negative impact on growth in rich countries, and a positive impact in poorer countries. Furthermore, there is a threshold level for inflation. The study showed that the impact of inflation on growth is positive below a certain threshold and negative above the threshold.

Roshelle Ramfol, Assistant Professor at University of South Africa, proposed that a South African Natural Resource Fund (NRF) could be used as a policy tool to ameliorate the effects of the ‘Dutch disease’ and the resource curse. The NRF, with a dual role as a stabilisation and savings fund, would act both as an income smoothing policy tool, reducing the impact of commodity price volatility and currency appreciation and as a savings tool, promoting intergenerational equity and avoiding excessive and non-sustainable government spending of natural resource tax revenue. In addition, the NRF could be a beneficial fiscal policy mechanism, provided that disciplined fiscal management can be exercised and it is free of unnecessary political interference. However, the present economic environment in South Africa is not conducive to establishing an NRF. Exploitation of the oil and gas sector will not yield significant tax revenue. It is therefore recommended that resource rent from this sector be invested to create intergenerational equity.

Gaurav Agrawal, Associate Professor at IIITM, India, discussed the driving factors of FDI in India, which are: market imperfections in the host country, global and host country competition, location-specific advantages that imply a close proximity to natural resources, and lack of technology & innovation development in host countries. He concluded that technological advancement is an important determinant of FDI inflows, especially in developing economies like India. In order to improve the technological capabilities of a nation, R&D becomes an utmost necessity. Agrawal said that R&D in India mostly comes from the private sector.


You can watch the full conference below:

Full Event: Macroeconomic policies in countries of the Global South