Macroeconomic Policy And Poverty Reduction

Macroeconomic policies influence and contribute to the attainment of rapid, sustainable economic growth aimed at poverty reduction in a variety of ways. Macroeconomic stability by itself does not ensure high rates of economic growth. In most cases, sustained high rate of growth also depend key structural measures such as regulatory reform, privatization, civil service reforms, improved Governance, banking sector reform, trade liberalization etc. 

Growth associated with progressive distributional changes will have a greater impact on poverty than growth that leaves distribution unchanged. As such, policies that improve the distribution of income and assets in a society such as land tenure reform, pro-poor public expenditure and measures to increase the poor's access to financial markets will form strong element of country's poverty reduction strategy. 

Three main types of government macroeconomic policies are - Fiscal policy, Monetary policy and Supply side policy. The objectives of macroeconomic policy  are as follows -

1.  Full employment - Modern governments aim at reducing both unemployment and inflation rates. The goal for high employment should therefore be not to seek an unemployment level to Zero, but rather a level of above Zero consistent with full employment at which the demand for labour equals the supply of labour. Full employment, though theoretically conceivable, is difficult to attain in a market- driven economy.     

2. Price stability-  Price fluctuations of a larger degree are always unwelcome.Though it is difficult to define the reasonable rate of inflation but sustained increase in price level as well as a falling price level produce de -stabilising effects on the economy. Therefore, one of the objectives of macroeconomic policy is to ensure relatively price level stability.     

3. Balance of payment equilibrium and exchange rate stability- Due to growing inter connectedness and interdependence between different nations in the world, the task of fulfilling this policy objective has become more problematic.   

4. Economic growth- Economic growth in a market is never steady. One of the important tool to measure the performance of the economy is the rate of increase in output over a period of time. The three main sources of economic growth - Growth of labour force, Capital formation and Technological progress. Promotion of higher economic growth is often hampered by short run fluctuations in aggregate output. As such, the macroeconomic policy should promote economic growth with reasonable price stability.     

5. Social objectives - Economic policy should be designed to cushion the impact of the shocks on the poor particularly in the time of crisis and/or adjustment by providing social security nets. Safety nets include public work programs, limited food subsidies, transfers to compensate income loss, social funds, fees waivers and scholarships for essential services such as education and health. Equally important, resources allocated to safety nets should be protected during economic crisis and/or adjustment, when fiscal tightening may be necessary. 

These safety nets should already be operating before economies get hit by shocks so that they can be effective in times of distress. Policies that relax barriers to access to credit markets can help the poor reduce consumption volatility. Previous experience suggests that most of the needed stimulus can be provided by monetary policy, with only a supplementary role to be played by fiscal policy. The Asian  economies with large current account surpluses have sufficient fiscal space.  

Economic growth is most important factor influencing poverty and macroeconomic stability is high and sustainable rate of growth and poverty reduction strategy. 

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