More than any time before, it is now understood that the general and one-size-fitsall growth policies embedded in macroeconomic stabilization and second-generation reform programmes are among the key reasons for Africa’s slow pace in achieving and sustaining high growth (Rodrik 2004; Gottschalk 2005). These reforms are founded on the premise that macroeconomic stability, if achieved, will stimulate growth. After decades of the stabilization experiment, it is clear that this premise is naive at best.
Moreover, this reform framework is too ambitious and cannot help developing countries to design growth policies that are specific and feasible given the scarcity of resources and the capacity constraints (McCord et al. 2005 and Zagha et al.
2006). According to these programmes, to achieve macroeconomic stability and sustainable growth, developing countries need, among other things, to promote faster human and institutional development, accelerate privatization, develop the private sector, promote exports to enhance economic diversification, lower transaction costs, increase competitiveness, manage natural resource revenues for growth and increase mobilization of domestic and external resources for development financing (UNECA 1999).
A successful growth policy needs to have specific objectives and has to be based on analyses that identify key country-specific constraints and priorities, and can therefore vary across countries (Hausmann et al. 2006). In addition to general objectives, as those embodied in the reform agenda, growth policies in high-growing developing countries and newly industrialized countries, for example China, India and Vietnam, are characterized by specificity and pragmatism.
Moreover, successful growth strategies require bold policy experimentation in both the fiscal and monetary areas within a dynamic policy framework that is sensitive to country-specific growth potentials, structural constraints, and development goals (Hausmann et al. 2006). Failure to identify the sources of growth potential and the binding constraints to growth result in ineffective growth strategies and inability to achieve high growth even in the presence of abundant resources, including oil revenues and aid flows.
While sustaining commitment to preserve macroeconomic stability, African countries need to tailor their fiscal and monetary policies to promote investment, employment generation, and growth (Pollin et al. 2006; Gottschalk 2005). For example, in their efforts to ensure macroeconomic stability, governments need to define a more flexible range for the budget deficit that can be adjusted to stimulate growth without creating unsustainable deficits (box 2.2). Although this range may vary across countries, evidence suggests that a deficit of 2-3 per cent of GDP is sustainable, and gives the government enough room to expand public investment as a means of boosting growth (Pollin et al. 2006). Moreover, while fostering price stability, monetary policy needs to be broadened (i.e. beyond inflation targeting) to contribute to the national agenda of achieving and sustaining higher growth. This agenda will be undermined by tight and rigid targets for monetary and fiscal policy, as observed in many countries and regions, and as is the case of countries in the West African Economic and Monetary Union (WAEMU) (Gottschalk 2005).
Accelerating growth through policy experimentation While committed to maintaining long-term fiscal deficit within a certain limit, a government can increase spending on public investment/infrastructure, income transfers and social support, and employment subsidies to businesses to promote accelerated employment growth without exceeding the deficit limit. For example, a recent study suggests that South Africa can increase spending in these areas by up to R30 billion per annum without exceeding the deficit limit of 3 per cent of GDP (Pollin et al. 2006). A one per cent increase in the deficit-GDP ratio (from 2 per cent to 3 per cent, will finance about 47 per cent (R14 billion) of the increase in government expenditure.
The rest can be financed through increases in personal, corporate, and the value-added taxes (R6 billion) and new revenue sources: (a) extending the Uncertified Securities Tax to cover bond trading, in addition to secondary trading of stocks; (b) enacting a mineral and petroleum royalty bill; and (c) the increase in incomes and decline in poverty that will result through the employmenttargeted growth programme itself.
Meanwhile, persistent high real interest rates despite falling inflation rates have constituted a constraint to private economic activity. It has been estimated that a one percentage point decline in the prime lending rate, other things remaining the same, would lead to a 0.15 per cent rise in real GDP growth, a modest increase in inflation of 0.2 per cent and also a modest exchange rate depreciation of 0.6 per cent. Thus, easing monetary policy would boost growth with minimal and easily manageable costs in terms of inflation and exchange rate changes.
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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