Macroeconomic policy, labour markets and growth in developed and developing countries

Abstract

Keynesian macroeconomics was designed for the economic context of the typical developed country, i.e. where the economy is fully monetised and workers are wage earners enjoying free collective bargaining and social protection against stochastic risks. Its justification of fiscal intervention hardly applies in developing countries whose economic context is radically different - having heterogeneous forms of employment, and poor articulation between a capitalist and a subsistence sector. In developing countries, because of an agricultural supply constraint, additions to government investment induce inflation before generating much extra employment. Arguments for tolerating significant inflation fail to convince. Inflation higher than a few percentage points per year makes the task of planning public spending and public service delivery arbitrary and chaotic. Yet, effective public expenditure planning is essential if governments are to be able to manage the process of adjusting to external shocks and to pursue a strategy of pro-poor growth with macroeconomic stability.