Reclaiming Development – Ha-Joon Chang & Ilene Grabel – 2005.
Notes and quotes
Delegating policy to independent authorities is also economically undesirable. To date, there is no evidence that insulating policy from the political process improves economic performance in any significant respect. But there is overwhelming evidence that this strategy imposes severe costs on the economy and, especially, on the most vulnerable segments of society. This finding contradicts the neoliberal view that independent policymaking institutions are neutral guardians of the national interest. These institutions typically meet the needs of investors, lenders and business interests rather than serve the public good. P.50
The neoliberal view of central bank governance: Central banks must be independent of the government so that they are insulated from the vicissitudes and pressures of electoral politics. Price stability should be the principal goal of monetary policy. P 180
Rejection of the neoliberal view of central bank governance: Independent central banks do not pursue ‘neutral’, non-partisan monetary policies that are in the broad national interest. Contrary to the claims of neoliberals, independent central banks operate in accordance with the interests of some groups only. Independent central banks are structurally biased towards the interests of the financial community, an interest group for whom low inflation is of paramount importance. Empirical evidence demonstrates that greater central bank independence fails to reduce inflation and improve macroeconomic performance in developing countries. Embedded, politically accountable central banks can and do play important developmental roles in numerous countries.
Rejection of the neoliberal view of monetary policy: The inflation obsession is misguided and leads to monetary policy that undermines economic growth. Numerous empirical studies suggest that moderate levels of inflation (which, depending on the study, range from 10 to 40 per cent) have little or no cost in terms of economic growth. These studies find the economic costs of inflation are introduced only at very high levels of inflation. Finally, Bruno and Easterly (1996) find that moderate inflation (which they define as annual inflation of 15-30 per cent) can be sustained for a long time without serious economic cost (Colombia).
The Policy alternatives: Politically embedded and accountable central banks should be participants in national economic goals as they have been in many countries. Central banks should be neither less nor more accountable to the government than are other institutions that play important roles in influencing the country’s economic and social welfare. Clear, politically embedded and accountable central banks should be charged with the pursuit of monetary policy that promotes economic growth, employment and social-welfare objectives. In this connection, monetary policy targets can seek to promote economic growth, employment and equality.
The neoliberal view of expenditure policy: Governments in developing countries cannot afford to maintain high levels of expenditure. Excessive expenditure is the problem; fiscal restraint is the solution.P. 188
Rejection of the neoliberal view of expenditure policy: The pattern of expenditure reductions promoted by neoliberals damages living standards and compromises immediate and longterm economic activity. The obsession with budget deficits obscures some of the real causes of imbalance – namely, the pursuit of certain aspects of the neoliberal agenda (for example, trade liberalization diminishes tariff revenue, which is more important the poorer is the country (see above), repayment of international debt…). To date, studies of privatisation demonstrate that its potential to raise revenue and reduce budget deficits in the long run is limited. Interest rates on foreign loans, currency depreciations also increase the cost of servicing foreign debts. The IMF often requires that developing countries not only balance their budgets, but that they do so each year over the course of a structural adjustment programme. It would far more reasonable to recommend that countries balance their budgets over a business cycle, so that government spending can be increased (reduced) in order to offset the reduction (increase) in private-sector spending during the recession (boom).
Fiscal policy should not be constrained by an obsession with budget balance. The obsession with budget balance in developing countries is misguided. Budget deficits alone do not undermine investor confidence, cause inflation or discourage private investment. Empirical evidence shows that foreign and domestic investors do not shun countries with high deficits, provided that growth prospects are sound and/or attractive investment opportunities are available.
The neoliberal claim that budget deficits must always be avoided because they cause inflation is not supported by evidence. The increase in economic activity that is associated with government spending does not necessarily cause inflation in countries with significant excess capacity. Even as neoliberals preach the virtues of fiscal restraint and balanced budgets, industrialized economies maintain high levels of public expenditure.
Sustained economic growth and social improvement depend on strategic, well-designed and well-managed increases in government expenditure. The obsession with fiscal restraint is clearly inappropriate in the context of economies that have vast social ills and low or even negative rates of economic growth. Increases in public expenditure must be tied to the generation of additional tax revenue and a reduction in tax evasion. Increasing tax revenues involves redesigning the VAT so that income taxes are replaced with a progressive VAT. Evidence shows that VAT systems are more ‘revenue productive’ than are income-based tax systems because they are more difficult to evade.