The Great Recession: Rethinking Macroeconomics for Employment and Development

Anis Chowdhury
Western Sydney University, Sydney, Australia

Iyanatul Islam
Griffith University, Sydney, Australia

Series: Economic Issues, Problems and Perspectives
BISAC: BUS039000

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Edited by I Leslie Rubin, Robert J Geller, Abby Mutic, Benjamin A Gitterman, Nathan Mutic, Wayne Garfinkel, Claire D Coles, Kurt Martinuzzi, and Joav Merrick

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The chapters in this volume were written as commentaries between mid-2008 and early-2016 in the wake of the Great Recession of 2008-2009. The primary topics around which the various essays are compiled are: (a) crisis and response, (b) fiscal policy, (c) monetary and capital account policy, (d) employment, and (e) development. The chapters not only provide a critique of mainstream macroeconomics, but also suggest a way forward.

This volume contains an extensive introduction to synthesise the debate on macroeconomic orthodoxy and to assess the attempts at its reconstruction in light of its dismal failure in predicting the crisis and responding to it. As a background, it briefly traces the retreat of post-Great Depression Keynesian macroeconomics (with it, full employment as the primary policy goal) and the rise of new orthodoxy (concerned with a single target, inflation) that came to dominate major international financial institutions, notably the International Monetary Fund and the World Bank. It also highlights contrasting analyses of the global macroeconomic issues by the Bretton Woods Institutions (BWIs) vis-à-vis the United Nations, and their contributions to macroeconomics-development discourse.

Two main conclusions about the various attempts at reconstructing macroeconomics are that they: (1) suffer from an advanced country bias, and (2) do not pay sufficient attention to employment even in developed countries. The benign neglect of developing countries in reconstructing macroeconomics is not at all surprising, as both post-Great Depression macroeconomics and its orthodox replacement evolved without paying due regard to the particular circumstances and problems of developing countries. The neglect of employment in rethinking macroeconomics shows how deeply orthodoxy still remains embedded in the major institutions, as well as among professional economists and policymakers.

There is no sign of any significant shift even when a good deal of research within the BWIs themselves report findings that are contrary to conventional wisdom. Thus, unfortunately, whatever is likely to emerge as post-Great Recession macroeconomics does not seem very encouraging for employment and development.

The essays compiled in this volume suggest how macroeconomics can serve the dual objectives of short-term stabilisation and long-term inclusive sustainable development goals with decent and productive employment featuring prominently for both developed and developing countries.

List of Figures

List of Tables

Preface

Introduction

Part I: Crisis and Response (pp. 1-2)

Chapter 1. From Optimism to Pessimism (pp. 3-6)

Chapter 2. The Confidence Game (pp. 7-10)

Chapter 3. The G20 Declaration at the London Summit: A Global New Deal? (pp. 11-22)

Chapter 4. The ‘Green Shoots’ of Recovery: Pitfalls and Perils of a Premature Exit Strategy (pp. 23-28)

Chapter 5. The Fallacy of Austerity Based Fiscal Consolidation (pp. 29-36)

Chapter 6. Revisiting the Evidence on Expansionary Fiscal Austerity: Alesina’s Hour? (pp. 37-46)

Chapter 7. Latvia: Going Beyond the Fiscal Austerity Debate (pp. 47-56)

Chapter 8. Europe Needs Course Correction (pp. 57-66)

Part II: Deficit and Debt (pp. 67-68)

Chapter 9. Why Worry too Much About Fiscal Deficits? (pp. 69-74)

Chapter 10. Fiscal Rules: Help or Hindrance? (pp. 75-82)

Chapter 11. Is There an Optimal Debt-to-GDP Ratio? (pp. 83-88)

Chapter 12. The Political Economy of Sovereign Debt Workout (pp. 89-100)

Part III: Inflation, Finance and Capital Flows (pp. 101-102)

Chapter 13. Inflation Targeting: Some Anomalies Reconsidered (pp. 103-108)

Chapter 14. Inflation Targeting in Developing Countries: Revisited (pp. 109-116)

Chapter 15. Financial Sector Reforms: Which Way Now? (pp. 117-126)

Chapter 16. Revisiting Capital Account Liberalisation (pp. 127-132)

Part IV: Employment (pp. 133-134)

Chapter 17. Full Employment and the Global Development Agenda: Going Beyond Lip Services (pp. 135-144)

Chapter 18. Growth and Jobs in Europe: Which Way Now? (pp. 145-158)

Chapter 19. Fiscal Austerity and the Youth Unemployment Crisis (pp. 159-164)

Chapter 20. Fiscal Consolidation, Growth and Employment: What do We Know? (pp. 165-172)

Chapter 21. Labour Market Flexibility: Which Way Now? (pp. 173-178)

Chapter 22. Labour Market Regulations and the Perceptions of the Business Community (pp. 179-184)

Part V: Development (pp. 185-186)

Chapter 23. Limits of Conventional Macroeconomics for Development (pp. 187-194)

Chapter 24. Rethinking Macroeconomics from the Perspective of the MDGs (pp. 195-204)

Chapter 25. Managing Macroeconomic Risks and Protecting the Vulnerable (pp. 205-212)

Chapter 26. How to Enhance Fiscal and Policy Space in Developing Countries (pp. 213-218)

Chapter 27. A Dual Mandate for Developing Country Macroeconomic Policy Managers (pp. 219-232)

Chapter 28. Global Economic Crisis and Indonesia (pp. 233-238)

Chapter 29. How Vulnerable is Bangladesh (pp. 239-242)

Chapter 30. Developmental Macroeconomics (pp. 243-252)

About the Authors (pp. 253-254)

Index (pp. 255)

“The short essays in this collection critically reflect on the state of macroeconomics in the wake of the 2008-2009 North-Atlantic financial crisis. Anis Chowdhury and Iyanatul Islam, who joined the United Nations system with a distinguished academic background, were uniquely placed to synthesize the debate on the relevance of macroeconomic orthodoxy for employment and development goals from both analytical and policy perspectives. They were among the first economists who raised concerns about pre-mature fiscal consolidation, and argued for designing macroeconomic policies that balanced in an appropriate way short-term stabilization with long-term development goals. Academics and policymakers alike will find this collection very useful.” - Jose Antonio Ocampo, Member, the Central Bank of Colombia Board and Professor (on leave for public service), Columbia University; former Under-Secretary-General of the United Nations Department of Economic and Social Affairs, NY, USA

"The Great Recession was a missed opportunity for reforming both macroeconomic policy and the mainstream discipline of macroeconomics. In this important volume, Chowdhury and Islam show that it’s still not too late to bring back employment and development as central macroeconomic concerns – but this crucially requires reforming theoretical perspectives and changes in the political economy of macroeconomic policy." - Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University (Centre for Economic Studies and Planning), New Delhi, and the Executive Secretary of International Development Economics Associates (Ideas)

Keywords: Global Financial Crisis, Employment, Development, Macroeconomic Policies, Fiscal Consolidation, Inflation Targeting

Audience:
• Academics specializing in Macroeconomics and Economic Development
• Higher degree students in Economics and Development Studies;
• Macroeconomic, employment and development policy makers
• Economic journalists

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