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This blog seeks its inspiration from an excellent example of an institution-specific study of fiscal policy as viewed through the prism of finance ministries. This is represented by a thorough and independent review of the UK’s Treasury. It was commissioned by the Shadow Chancellor of the UK, John McDonnell MP and led by a high-powered panel of academics and practitioners.

The study begins by noting that the Treasury is a ‘small department’ by UK standards but wields ‘immense power’. This is largely because of its role in managing government finances, but also because of the power and status associated with the UK Chancellor (equivalent to finance ministers in other parts of the world) in the government hierarchy. The study makes the cutting observation that the Treasury is often seen as ‘arrogant, overbearing and insensitive to other departments’. It is also criticized by the study for becoming an avid advocate of fiscal austerity and for seeking to take control of the policy agenda under the guise of exercising its financial and prudential obligations. The Treasury is criticized for failing to take the leadership in responding to UK’s multiple economic challenges as reflected in low productivity and underinvestment that has held back fair and sustainable growth.

The study recommends that the Treasury be reformed to become a truly independent and impartial source of macroeconomic policy advice, especially given that the Bank of England, in common with other central banks in advanced countries, have assumed the primary role of short-run macroeconomic stabilization. This would mean encouraging diversity of economic views, playing the role of an ‘honest broker’ in initiating debates on UK’s long-term economic challenges and how to respond to them, devolution of fiscal authority, and encouraging a culture of inclusion towards other departments.

Is this characterization of the UK Treasury a reasonable depiction of finance ministries across the world, especially in developing countries? There are some general principles that seem to emerge from the study. First, it is probably the case that finance ministries in developing countries wield significant influence, if not actual power, largely because of their role in managing government finances and the status enjoyed by finance ministers in the government hierarchy. This influential role is enhanced by the fact that they are the traditional interlocutors to the international financial institutions, most notably the IMF. Second, in cases where central bank independence is constrained and inflation targeting regimes are not fully embedded, the finance ministry ends up becoming the preeminent voice in managing the macro-economy. Third, the relationship between the finance ministry and the other spending departments can indeed turn out to be unequal, creating scope for a corporate culture of arrogance and overbearing proclivity. Fourth, and perhaps the most important, finance ministries can become bastions of fiscal conservatism to the neglect of broader developmental concerns.

My long-time co-author Anis Chowdhury – a former Economics Professor and a former senior UN official – has made a number of thoughtful contributions in the Huffington Post on multiple themes that pertain to Australia. The issues he covers transcend the specific Australian context and are germane to many countries in both the developed and developing world.

1. “Achieving A Surplus Is Not As Important As Investing In Australia’s Future”, 20 March 2017, http://www.huffingtonpost.com.au/anis-chowdhury/achieving-a-surplus-is-not-as-important-as-investing-in-australi_a_21902868/

2. “Young People Can Only Get A ‘Highly Paid Job’ If The Government Fixes The Economy”, 14 March 2017, http://www.huffingtonpost.com.au/anis-chowdhury/young-people-can-only-get-a-highly-paid-job-if-the-government/?utm_hp_ref=au-homepage

3. “Cutting Penalty Rates Will Defeat The PM’s Vision For Australia” 27 February, 2017, http://www.huffingtonpost.com.au/anis-chowdhury/cutting-penalty-rates-will-defeat-the-pms-vision-for-australia/

4. “Public Policy Must Not Be Held Hostage By Ratings Agencies”, 22 February, 2017, http://www.huffingtonpost.com.au/anis-chowdhury/public-policy-must-not-be-held-hostage-by-ratings-agencies/?utm_hp_ref=au-homepage

5. “Tax Cuts Aren’t Going To Grow Our Economy”, 4 January 2017, http://www.huffingtonpost.com.au/anis-chowdhury/tax-cuts-arent-going-to-grow-our-economy/?utm_hp_ref=au-homepage

The World Development Report (WDR) 2017 believes that ‘…The global development community needs to move beyond asking ‘what is the right policy’? and instead ask: ‘What makes policies work to produce life-improving outcomes’? It confidently proclaims that the ‘answer is better governance – that is, ‘…the ways in which governments, citizens, and communities engage to design and apply policies’.

WDR 2017 makes an admirable attempt to decipher what good governance means and how it can be acquired. There is a judicious combination of theory and evidence – with the latter diligently marshalled from country-specific, regional and global experiences. Yet, one ends up, perhaps inevitably, with abstract and grand proclamations. Thus, in order to ‘…to improve policy effectiveness and ultimately expand the set of implementable policies, it is necessary to reshape the policy arena where actors bargain. This can be accomplished by enhancing contestability…by changing the incentives of the actors involved, or by reshaping their preferences and beliefs’.

Perhaps the most problematic part of WDR 2017 is the presumption that a consensus exists on ‘right policies’. Really? To take a few  examples, what about the debate on central bank independence and inflation targeting regimes for developing countries? Has the debate  been resolved? And what about fiscal rules as the basis of appropriate fiscal policies? How do we establish robust evidence about ‘right policies’? Cross-country and country-specific econometric investigations? The persistent use of RCTs (randomized control trials)? One cannot ignore the fact that a lively discourse on these and many other development policy issues – inevitably coloured by ideological predilections – continues unabated.

In an influential piece co-authored by Maurice Obstfeld, the IMF’s current chief economist, the Fund offers its latest reflections on ‘macroeconomic management’. It notes that globally ‘policy space is constrained’, that is, both monetary and fiscal policy tools lack ‘the power to raise growth or deal with the next negative shock’. Why? Monetary policy is subject to the ‘lower bound’ on policy interest rates. This means that the ‘room to loosen monetary conditions further is limited’. At the same time, ‘many countries have withdrawn fiscal stimulus out of concern for high and rising public debt’? What should one do in such circumstances?

The authors suggest a ‘comprehensive, consistent and coordinated approach to economic policy’. This is an attempt on their part to impart analytical substance to the proclamation by the IMF’s Christine Lagarde in April 2016 that one need a three-prong policy approach. Hence, the three ‘Cs’.

Comprehensive policy actions mean encompassing monetary, fiscal and structural policies. Short-term demand-management policies should be used to support growth-promoting long-term structural reforms and vice versa. Consistency means a continuing commitment to providing nominal anchors for long-term expectations that will guide the private sector in its spending and saving decisions. The two ‘Cs’ should then be complemented by international policy coordination.

Much of what is being said here is not new. The notion of three elements of a holistic policy framework – monetary, fiscal and structural – has been part of global policy discourse and numerous G-20 pronouncements at least since the Toronto Summit of 2010. Most importantly, the latest rendition of the IMF’s prescriptions on macroeconomic policy appear to suffer from an advanced country bias. The paper offers case studies from two advanced countries (Canada and Japan). Only a paragraph is devoted to the case of ‘emerging economies’. The authors simply claim that the insights they offer are ‘relevant for emerging economies as well’.

Well, one needs more than a paragraph to argue how, and in what circumstances, the current treatise on macroeconomic policy is applicable to the developing world. It is doubtful, for example, that the typical developing country suffers from a lower bound on policy interest rates or that, unlike the 1980s or even 1990s, sovereign debt crisis is a widespread phenomenon in the developing world. More importantly, key challenges pertaining to poverty reduction, climate change and structural transformation need to be addressed. Will the three ‘Cs’ be both necessary and sufficient in addressing these challenges?