Author: Yan

In 1990, the central bank of New Zealand became the first country in the world to adopt an inflation targeting (IT) regime. Two years later, the founding members of the Eurozone adopted the Maastricht Treaty that included an inflation target along with fiscal rules. Other countries – such as Australia, Canada, UK and Sweden – became IT regimes between 1991 and 1993.  Low and middle-income countries followed with a significant lag, usually about 10 years.  By 2014, the IMF calculates that there were 34 IT regimes in the world in addition to all the countries that belong to the Eurozone and fall under the European Central Bank (ECB) which practices inflation targeting. The spread of IT regimes to the developing world has been rather limited . There are only 19 out of more than 90 middle-income economies and only one out of 31 low-income that can be classified as IT regimes – even on a de facto basis.

Monetary policy in the advanced economies has emerged as the preferred tool of short-run economic stabilization, while fiscal policy has primarily been assigned to deal with debts and deficits. This is a paradigm shift from the golden age of Keynesian economics when both monetary and fiscal policy shared the responsibility of short-run economic stabilization in the pursuit of the twin goals of price stability and full employment. It was also the period in which discretion rather than rules governed the conduct of macroeconomic policy. This has evolved into a distinct preference for rules and targets rather than discretion – or at least discretion constrained by the need to observe rules and targets.

In the case of low and middle-income countries, the spread and scope of IT has been rather limited despite the formidable intellectual and political influence of both academics and practitioners preaching the virtues of IT regimes. This is not necessarily an undesirable outcome. The institutional prerequisites for the successful conduct of an IT regime are not always in place in the developing world – such as the effective transmission of monetary policy, especially in low-income countries. More importantly, following the global recession of 2008-2009, IT regimes in developed countries have faltered significantly in terms of their effectiveness. Furthermore, an ideological allegiance to a particular framework in which monetary policy is given primacy over fiscal policy has constrained the capacity of macroeconomic policy managers in the advanced economies to use fiscal initiatives to kick-start growth in the wake of the global recession of 2008-2009. This in turn has prolonged the period of slow growth in the developed world. Such lacklustre growth in the rich nations has acted as a drag on global growth.

There are thus important lessons that low and middle-income economies can learn from the experience of IT regimes in the developed world. What one learns in particular is that the objective of low inflation needs to be combined with other development objectives. If IT regimes constrain, rather than empower, central banks in low and middle-income economies to pursue growth and employment objectives that are at the core of the development process, then there is a case for re-thinking the appropriate role of central banks without sacrificing their obligations with respect to price stability.

The notion of ‘market confidence’ is perhaps the intellectual bedrock on which the agenda of economic conservatism rests. It can be invoked to justify fiscal austerity, privatization, labour market deregulation and so forth. The late Michael Kalecki, an eminent Marxist economist, offers one of the most prescient pronouncements on ‘market confidence’ and the role that it plays in shaping economic policy …[1]

  Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence.  If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).  This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.  But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.  Hence budget deficits necessary to carry out government intervention must be regarded as perilous.  The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

[1]http://mrzine.monthlyreview.org/2010/kalecki220510.html

A previous blog post revisited the issue of global poverty and argued that a multidimensional approach to poverty yields much higher estimates relative to prevailing ones released by the World Bank. Even if one did not take account of a multidimensional poverty index, the current international poverty line of US$ 1.90 a day is simply too penurious to capture the incidence of poverty even in middle income countries. Indeed, global poverty – as Lant Pritchett has so eloquently  argued – is a misnomer if the World Bank criterion, embedded in the recently expired MDGs framework and likely to persist under the current SDGs, is used.[1] While it might yield reasonable estimates for Swaziland, poverty under this standard would be non-existent in Switzerland. Why should one discount the existence of poor people in rich countries while focusing only on extreme poverty in poor countries? Why set the bar so low and ‘define development down’ as Lant Pritchett and Charles Kenny have argued?[2] Global poverty should take account of all the poor in all countries, which suggests a poverty line that is a reasonable approximation of an OECD standard. Using this capacious approach, there are around 5 billion poor people in the world at large or approximately 68 per cent of the global population – and not the 700 million that recent estimates from the World Bank suggests. Tackling global poverty is indeed a monumental task.

[1] http://www.cgdev.org/blog/extreme-poverty-too-extreme

[2] http://www.cgdev.org/publication/promoting-millennium-development-ideals-risks-defining-development-down-working-paper

The ‘one dollar a day’ poverty line was popularized by the World Bank in estimating the incidence and evolution of extreme poverty across the world. Today, this international poverty line has become US$ 1.90 a day below which a person is considered to be poor.

How has the world fared in terms of the battle against extreme poverty? The recently released ‘Global Monitoring Report’ (GMR), jointly authored by the IMF and the World Bank, has offered an upbeat estimate.[1] Given that the GMR is primarily intended to be a report card on the Millennium Development Goals (MDGs) which formally expired at the end of 2015 and became the ‘Sustainable Development Goals’ (SDGs) from 2016 onwards, the World Bank assesses trends in extreme poverty between 1990 (the initial year of the MDGs) and 2015 (the terminal year of the MDGs).

GMR argues that

‘…the world has made rapid strides in poverty reduction since 1990…The proportion of global population living on less than $1.90 a day was about a third of what it was in 1990. This finding confirms that the first (MDG) – cutting extreme poverty to half of its 1990 level – was met well before its 2015 target date.’

Based on ‘tentative projections’, GMR notes that by 2015 global poverty ‘…may have reached 700 million’ or a poverty rate of 9.6 per cent. At this rate of progress, extreme poverty would be negligible by 2030 – the terminal year of the SDGs – thus enabling the World Bank to argue that we will reach a ‘world free of poverty’.

But … will we? What is true for the world at large is not necessarily true for parts of the world. One of the world’s poorest regions, Sub-Saharan Africa, has not really attained the first of the MDGs. According to statistics reported in GMR, extreme poverty in Sub Saharan Africa was 56.8 per cent and was projected to decline to 35.2 per cent by 2015. This is certainly a commendable achievement, but does not mirror the rate of poverty reduction at the global level. This reflects the well-known feature that global trends in extreme poverty have been influenced by rather rapid progress in Asia – home to some of the world’s most populous nations.

There is another aspect to global poverty that induces one to adopt a more circumspect perspective. The international poverty line measures income poverty but ignores its non-income dimensions – such as lack of access to health, nutrition, education, employment, housing and so forth. Of course, both income and non-dimensions are significantly correlated, but there can be marked divergences. One estimate of a generic ‘multidimensional poverty index’ or MPI (which is now available for 101 countries) suggests that in 2015 1.6 billion people or 30 per cent of the population in 101 countries were ‘multidimensionally’ poor.[2] This is more than twice the incidence of income poverty at the global level. Another example of the discrepancy between income poverty and MPI can be captured by country-specific cases. Thus, in Chad and Ethiopia, the incidence of MPI is about 87% whereas for income poverty based on the international poverty line it is only 37%.

It is perhaps not surprising that a principal goal of the SDGs is ‘ending poverty in all of its forms everywhere’. That is indeed a long way off and by 2030 we may not inhabit a ‘world free of poverty’.

[1] http://www.worldbank.org/en/publication/global-monitoring-report

[2] http://www.ophi.org.uk/multidimensional-poverty-index/mpi-2015/