Prioritizing Economic Growth: Enhancing Macroeconomic Policy Choice

This paper spells out a logic for increasing macroeconomic policy space in order to prioritize the goals of growth, employment creation and poverty reduction. First, there is the need to create additional policy instruments so that a greater number of policy goals can be addressed. Frequently, real economy goals get partly crowded out by financial objectives because there are too few instruments for too many goals. Second, the calibrated use of policy tools by degrees of commitment, deployment and assignment can create space for different policy-mixes. Selective capital controls, intermediate exchange rate regimes, and some monetary policy autonomy create the policy space within which a variety of policy combinations and mixes are possible and a greater number of instruments are available. Prioritization of real economy goals becomes both more feasible and more likely with a broader range of policy alternatives. Third, along with selective use of capital controls, fiscal policy-based stabilization instead of exchange rate-based stabilization delinks the exchange rate from the goal of internal financial stability to which it is yoked in a regime of fixed exchange rates. This delinkage enables the use of intermediate exchange rate regimes (soft pegs and managed floating). The use of these regimes in “the missing middle” between fixed and flexible exchange rates creates policy space where different mixes are possible generating a greater range of policy alternatives. Fourth, prioritizing real economy goals is also facilitated by the design of a larger strategic framework for accelerated development including institutions, norms, behaviours and governance. The larger strategic framework mobilizes more assets and power toward a dynamic growth trajectory that creates a more favourable context for macroeconomic policy. The impact of macroeconomic policies on growth, employment creation and poverty reduction is likely to be stronger when they are part of a wider effort to marshal resources for accelerated development. The examples of the East Asian success stories provide the evidence for this conclusion. These four steps in the logic for increased macroeconomic policy choice – new policy tools, selective and pragmatic use of capital controls and exchange rate intervention, fiscal policy-based stabilization, and strategic frameworks – reinforce each other in their capacity to create more policy space.