Macroeconomic Issues

Poverty is a multidimensional problem that goes beyond economics to include, among other things, social, political, and cultural issues (see chapter 1, Poverty Measurement and Analysisand box 12.1). The fact that solutions to poverty therefore cannot be based exclusively on economic policies, but require a comprehensive set of coordinated measures lies at the heart of the rationale underlying comprehensive poverty reduction strategies. Economic growth, however, remains the single most important factor influencing poverty, and macroeconomic stability is essential for high and sustainable rates of growth. Macroeconomic stability must therefore be a key component of any poverty reduction strategy.

Macroeconomic stability by itself does not ensure high rates of economic growth. In most cases, sustained high rates of growth also depend upon key structural measures, such as regulatory reform, privatization, civil service reform, improved governance, trade liberalization, and banking sector reform. Many of these are discussed at length in other chapters of this book. Growth alone is in its turn insufficient for poverty reduction. Growth associated with progressive distributional changes, for example, will have a greater impact on poverty than growth that leaves distribution unchanged. Policies that improve the distribution of income and assets within a society, such as land tenure reform, pro-poor public expenditure, and measures to increase the access of the poor to financial markets, are thus essential to a country’s poverty reduction strategy.

To safeguard macroeconomic stability, the government budget, including the country’s poverty reduction strategies, must be financed in a sustainable, noninflationary manner. The formulation and integration of a country’s macroeconomic policy and poverty reduction strategy is an iterative process. Poverty reduction strategies need first to be articulated (that is, objectives and policies specified), then costed, and finally financed within the overall budget in a noninflationary manner. The amount of finance, much of which will be on concessional terms, is, however, not necessarily fixed during this process: If credible poverty reduction strategies cannot be financed from available resources, World Bank and IMF staff should and will assist countries in their efforts to raise additional financial support from the donor community. Nonetheless, in situations where financing gaps remain, a country must revisit the intermediate objectives of its strategy and reexamine its priorities. Except in cases where macroeconomic imbalances are severe, there will usually be some scope for flexibility in setting short-term macroeconomic targets. The objective of macroeconomic stability should not be compromised, however.

This chapter is organized as follows: Section 12.2 draws upon recent literature to outline key empirical facts about growth and the implications of those facts for macroeconomic policy. Section 12.3 discusses how macroeconomic policies may vary depending on whether a country is in a state of instability, stabilization, or stability. Section 12.4 provides a description of the iterative process for the integration of a country’s poverty reduction strategy and its macroeconomic and budgetary framework. It also discusses fiscal, monetary, and exchange rate policies that would be supportive of the objectives of sustainable growth, low and stable inflation, and, in turn, poverty reduction. Finally, section 12.4 also discusses policies to insulate the poor against the impact of shocks to an economy.

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