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1.2 Macroeconomic policies in developed countries: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: Despite the recent oil price hikes, global inflation has remained low and stable (figure 1.3), partly due to restrictions to wage increases, a tight macroeconomic policy stance in both advanced and developing countries, and the supply of cheap manufactures from China. In general, there is little concern about overheating in most economies.

1.2 Macroeconomic policies in developed countries: Economic Report on Africa 2007

Despite the recent oil price hikes, global inflation has remained low and stable
(figure 1.3), partly due to restrictions to wage increases, a tight macroeconomic
policy stance in both advanced and developing countries, and the supply of cheap
manufactures from China. In general, there is little concern about overheating in
most economies.

Since 2003, long-term interest rates in the advanced countries have increased from
an average of 3.6 per cent to 4.3 per cent in mid-2006; the newly industrialized
economies (NIEs) experienced the same trend (figure 1.4). Concerns about expected
higher inflation rates led monetary authorities in the USA and in the European
Union (EU) to raise short-term rates as a pre-emptive measure, resulting in higher
long-term interest rates. Most developing countries have also been tightening monetary
policy through higher interest rates and reserve requirements (UN-DESA 2006;
IMF 2006). Rising interest rates might contribute to retarding economic recovery
by depressing domestic demand, especially private investment.

Fiscal balance improving in most regions

The fiscal balance has improved in most regions since 2003 (figure 1.5). In the
advanced economies, the fiscal deficit declined from 3.1 per cent of GDP in 2003
to 2.1 per cent in 2006. Fiscal deficits have also declined in Asia and Latin America.
The reduction in the budget deficit was particularly strong in China: from 3 per
cent in 2002 to just over 1 per cent in 2006. This development was mainly driven
by relatively high growth rates, which contributed to increased government revenues.

It was also the result of continued adherence to a tight fiscal policy stance in
both developed and developing countries. Oil and commodity exporters in developing
countries have witnessed a significant improvement in their fiscal balance
position due to high oil prices. In some Asian countries, fiscal policy continues to
be expansionary due to increased social and development spending. To ensure fiscal
sustainability, governments need to broaden the tax base so as to increase revenue
(UN-DESA 2006; IMF 2006).

Generally, the currencies of many developing countries have appreciated against the
dollar. Energy and commodity exporters experienced a 10-20 per cent exchange rate
depreciation during the second quarter of 2006, but the trend towards appreciation
has resumed since then. It is expected that the depreciation of the dollar will continue
and the risk of a sudden depreciation due to worsening global macroeconomic
imbalances persists (UN-DESA 2006).

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Article Tags: developing countries, fiscal balance, fiscal policy, inflation rates, interest rates, macroeconomic policy, monetary policy, UN DESA



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