Over the past two decades, I have observed the performance of the Australian economy and the debates about fiscal policy and structural reform largely from afar. Now, there is a real question as to where our future prosperity will come from as the growth dividend of past reforms fades and growth in demand for our natural resources eases, especially against the headwinds of a weak global economy and an ageing population.
Introduction Poverty is a multidimensional problem that goes beyond economics to include, among other things, social, political, and cultural issues see Box 1. Therefore, solutions to poverty cannot be based exclusively on economic policies, but require a comprehensive set of well-coordinated measures.
Indeed, this is the foundation for the rationale underlying comprehensive poverty reduction strategies. Because economic growth is the single most important factor influencing poverty, and macroeconomic stability is essential for high and sustainable rates of growth.
Macroeconomic stability by itself, however, 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 which are discussed at length in the Poverty Reduction Strategy Sourcebook, published by the World Bank.
Growth associated with progressive distributional changes will have a greater impact on poverty than growth that leaves distribution unchanged. Physiological deprivation involves the non-fulfillment of basic material or biological needs, including inadequate nutrition, health, education, and shelter.
A person can be considered poor if he or she is unable to secure the goods and services to meet these basic material needs.
The concept of physiological deprivation is thus closely related to, but can extend beyond, low monetary income and consumption levels. Social deprivation widens the concept of deprivation to include risk, vulnerability, lack of autonomy, powerlessness, and lack of self-respect.
Poverty reduction strategies need first to be articulated i. The amount of finance, much of which will be on concessional terms, is, however, not necessarily fixed during this process: Nonetheless, in situations where financing gaps remain, a country would have to revisit the intermediate objectives of their strategy and reexamine their priorities.
Except in cases where macroeconomic imbalances are severe, there will usually be some scope for flexibility in setting short-term macroeconomic targets. However, the objective of macroeconomic stability should not be compromised.
Growth Matters Economic growth is the single most important factor influencing poverty. Numerous statistical studies have found a strong association between national per capita income and national poverty indicators, using both income and nonincome measures of poverty.
Moreover, the study found that the effect of growth on the income of the poor was on average no different in poor countries than in rich countries, that the poverty—growth relationship had not changed in recent years, and that policy-induced growth was as good for the poor as it was for the overall population.
These studies, however, establish association, but not causation. In fact, the causality could well go the other way. In such cases, poverty reduction could in fact be necessary to implement stable macroeconomic policies or to achieve higher growth. Studies show that capital accumulation by the private sector drives growth.
No magic bullet can guarantee increased rates of private sector investment. Cross-country regressions using a large sample of countries suggest that growth, investment, and productivity are positively correlated with macroeconomic stability Easterly and Kraay, Although it is difficult to prove the direction of causation, these results confirm that macroeconomic instability has generally been associated with poor growth performance.
Without macroeconomic stability, domestic and foreign investors will stay away and resources will be diverted elsewhere. In fact, econometric evidence of investment behavior indicates that in addition to conventional factors i.
Macroeconomic Stability Macroeconomic stability exists when key economic relationships are in balance—for example, between domestic demand and output, the balance of payments, fiscal revenues and expenditure, and savings and investment.
These relationships, however, need not necessarily be in exact balance. Imbalances such as fiscal and current account deficits or surpluses are perfectly compatible with economic stability provided that they can be financed in a sustainable manner.
There is no unique set of thresholds for each macroeconomic variable between stability and instability. Rather, there is a continuum of various combinations of levels of key macroeconomic variables e.
While it may be relatively easy to identify a country in a state of macroeconomic instability e. Finally, macroeconomic stability depends not only on the macroeconomic management of an economy, but also on the structure of key markets and sectors.
To enhance macroeconomic stability, countries need to support macroeconomic policy with structural reforms that strengthen and improve the functioning of these markets and sectors.
Macroeconomic Instability Hurts the Poor In addition to low and sometimes even negative growth rates, other aspects of macroeconomic instability can place a heavy burden on the poor.
Inflation, for example, is a regressive and arbitrary tax, the burden of which is typically borne disproportionately by those in lower income brackets.
The reason is twofold. First, the poor tend to hold most of their financial assets in the form of cash rather than in interest-bearing assets. Second, they are generally less able than are the better off to protect the real value of their incomes and assets from inflation.
In consequence, price jumps generally erode the real wages and assets of the poor more than those of the non-poor. Moreover, beyond certain thresholds, inflation also curbs output growth, an effect that will impact even those among the poor who infrequently use money for economic transactions.
This phenomenon typically operates through shocks to the human capital of the poor. In Africa, for instance, there is evidence that children from poor families drop out of school during crises.The formulation and integration of a country’s macroeconomic policy and poverty reduction strategy are iterative processes.
Poverty reduction strategies need first to be articulated (i.e., objectives and policies specified), then costed, and finally financed within the overall budget in a noninflationary manner.
This Overview is extracted from the Economic Survey of Australia. The Survey is published on the responsibility of the Economic and Development Review Committee (EDRC) of the OECD.
This is the first to pass How Australia broke the record for economic growth. The process of microeconomic reform in Australia has encompassed a wide variety of changes to government policy (see Productivity Commission, , and Industry Commission, ). In the last decade macroeconomics policy in Australia has been directed at controlling inflation as it would be associated with macroeconomic stability and growth.
Following on from the GFC’s the government’s main emphasis of macroeconomic policy has been trying to avoid a .