Transcript How Macroeconomic Policy Can Support Economic Development in

James Heintz, University of Massachusetts, Amherst
IEA/World Bank Roundtable, July 3-4th, 2012
Industrial Policy in sub-Saharan Africa
Macroeconomic policy and
industrial policy
 Conventional wisdom: macroeconomic policy creates
the enabling environment for industrial policy.
 Industrial policy manages the details of economic
development within the boundaries determined by
macroeconomic management.
 Argument of this paper: in sub-Saharan Africa,
institutional and structural constraints limit the scope
for conducting macroeconomic policy.
 Challenge: to relax structural constraints which would
replenish the macroeconomic toolkit
Example: Liberia
 Context: ILO study of the impact of the crisis on
Liberia
 Balanced budget constraint imposed.
 Market for government bonds did not exist.
 Economy was largely dollarized.
 Trade taxes accounted for a large share of revenues
 Almost no scope for any kind of macroeconomic policy
 But the institutional constraints could be relaxed to
support productive sector development.
Three policy areas
 Real exchange rate
 Monetary and financial sector policy
 Fiscal policy: domestic resource mobilization
Real exchange rate
 Maintain real exchange rate at a level which
encourages allocation of productive resources to
tradable sector
 Economies of scale, scope for productivity
improvements, access to export markets.
 But can interventions to manage the nominal
exchange rate work in SSA?
 High levels of pass-through. Little scope for lowering
the real exchange rate
Domestic price levels
 Average price levels are higher in sub-Saharan African
countries compared to countries with similar
productivity levels.
 Reduces competitiveness of tradable sector.
 Indicator of relative prices: PPP conversion factor to
nominal exchange rate ratio.
Pi = α + βlnGDPi + δdi + ei
-0.51
0.14
0.11
(-6.1)
(14.6)
(3.4)
Macro conditions for
competitiveness
 Problem: high domestic prices can lead to an
uncompetitive real exchange rate.
 Possible reason: lower productivity of the non-tradable
sector (e.g. infrastructure, distribution services, etc).
 Solution: raise productivity of the non-tradable sector,
rather than manipulating the nominal exchange rate.
Monetary policy I
 Inflation targets and inflation targeting
 May introduce a pro-cyclical bias into monetary policy
formulation when inflation due to supplyside/external price shocks is common.
 Hard to isolate a measure of “core inflation” in many
sub-Saharan African countries.
 Need for a broader approach to monetary policy,
including developing indicators for real economic
activity.
Monetary Policy II
 Even in the absence of strict inflation targets, can
monetary policy support industrial development
through credit extension?
 Institutional problems in SSA: excess reserves in the
commercial banking sectors constrains credit
extension.
 Other issues: limited long-run credit due to structure
of deposits, imperfect information.
 Possible solution: financial sector reforms which
improve credit allocated to industrial development
which goes beyond liberalization.
Mobilizing domestic resources
 Tax revenues: tax revenues in sub-Saharan Africa, as a share
of GDP, have increased since the 1980s, but much of this
improvement has been driven by revenues from natural
resource exploitation.
 Institutional weaknesses/poor tax administration
constitute barriers to mobilizing resources in the region .
 Two interventions:
 re-organizing the administration of tax collection on a
functional basis
 establishment of statutory bodies which specialize in tax
collection, but not tax policies
Mobilizing domestic resources
 The ability to mobilize domestic credit to the public
sector to support industrial development is
constrained.
 Very high costs of domestic debt v. external debt.
 Short-term structure of debt & concentrated
ownership raise costs of debt service.
 Institutional reforms could help change this situation:
introducing longer term bonds, efforts to deepen the
bond market (i.e. a wider range of ownership).
Conclusions
 Need to go beyond seeing macro policy as simply
creating an enabling environment.
 In order for macroeconomic policies to support
industrial development, institutional reforms are
needed to address existing problems which limit their
effectiveness.
 Structural transformation is required to enhance and
deepen the scope of macroeconomic management.
 The exact nature of the institutional and structural
reforms would necessarily vary from one context to the
next.