Circumventing macroeconomic conservatism: A policy framework for growth, employment and poverty reduction1

Macroeconomic policy, as currently understood and practised in many developing countries, is mired in a "stabilization trap". It seems to be preoccupied with stability at the expense of growth and with fiscal and inflation targets at the expense of employment. The influence of global investors on policy-makers reinforces the bias in favour of fiscal and financial variables, at least in the context of developing economies (ADB, 1999). Orthodox macroeconomics also highlights the virtue of labour market flexibility rather than the importance of labour market institutions in dealing with the issue of the welfare of workers (Standing, 1999; van der Hoeven, 2000). This article argues that the empirical foundation of macroeconomic conservatism is fragile and that the intellectual momentum exists to develop a viable alternative to current orthodoxy. This would entail a renewed commitment to employment creation as a core goal of macroeconomic policy and creating "fiscal space" to sustain investments in infrastructure and human development.