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Govt should rethink macroeconomic policy

26th February 2010

By: Seeraj Mohamed


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On February 12, the International Monetary Fund (IMF) released a Staff Position Note titled ‘Rethinking macroeconomic policy’.

The authors of the note, Olivier Blanchard, Giovanni Dell’Ariccia and Paulo Mauro, say that they thought they knew how to conduct monetary policy until the financial crisis forced them to rethink their views. The types of policies advocated for, and often imposed on, developing countries, such as South Africa, as the only correct approach to macroeconomic policy, are finally being reconsidered within the IMF.


This paper should be big news for the South African government because it follows the neo- liberal, orthodox macroeconomic framework now being reconsidered by the IMF. Even with the crisis and the great introspection by orthodox economists, the February 2010 Budget speech shows that South Africa’s new Minister of Finance and his team still seem wedded to central tenets of neoliberal macro- economic policy, such as inflation targeting and an independent central bank. After witnessing financial devastation, the South African government continues to maintain inadequately regulated financial markets and cross-border financial flows into South Africa. And it still seems to hope that building up foreign exchange reserves will protect South Africa from global financial instability and contagion.

Unfortunately, the IMF, while admitting mistakes, such as placing too much emphasis on inflation and that some of its models were too “simplistic”, still tries to approach macro- economic policy from its traditional mainstream economics perspective. The IMF is willing to say that more flexibility should be considered when deciding on inflation targets and that a bigger role for fiscal policy may be necessary.


However, it is not willing to question its basic theoretical perspectives. In fact, all it seems to be doing is to say that the crisis has shown it that, in addition to its traditional macroeconomic policies, it should accept the types of actions taken in the US to deal with the financial crisis. Further, it seems to put a lot of blame on inadequate regulation. The IMF was a major supporter of financial regulation and forced many developing countries to liberalise their financial markets. Somehow, it seemed to keep missing the point that financial deregulation would cause bubbles, instability and crises in economies.

The IMF’s advocacy of financial deregulation set the cat among the pigeons in many economies. The IMF economists’ rethink of macroeconomic policy seems like stocktaking after the cats have killed off the pigeons. Why do we need a global financial crisis and a global jobs bloodbath before some mainstream eco- nomists admit that they were wrong? We have had crises since the 1980s owing to financial liberalisation and uncontrolled flows of funds across borders.

Nonmainstream economists have argued for decades that asset price inflation is a huge economic problem, but mainstream economists remained stubbornly fixated on consumer price inflation only. They pursued inflation targeting and advocated financial liberalisation. They wanted to believe that financial markets are efficient. Mainstream economists’ ideologies trumped their common sense.

The IMF economists rethinking macro-economic policy admit that they did not recognise the threat inadequately regulated financial markets posed to the global economy. We have reason to fear that South African macroeconomic policymakers still do not recognise the danger of inadequately regulated financial markets. They seemed largely uninfluenced by the post-1990s financial crises discussions. They proceeded with liberalising exchange controls and remained fixated on fighting consumer price inflation.

The hopeful aspect of the 2010 Budget speech is the seriousness given to the unemployment crisis in South Africa. The speech also recognises the need for industrial policy. One hopes that pursuing common-sense policies that support employment creation and active industrial policy will drive government towards common-sense macroeconomic policies. The financial crisis has shown that ideological views on the infallibility of financial markets were grossly incorrect. Our economic policies have to shift from policies that benefit finance and speculation towards policies that support productive industries and employment.



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