In the past 25 years or so, the Bretton Woods institutions have encouraged developing countries to undertake economic and liberalisation reforms, and to follow prudent macroeconomic policies. The intended outcomes have been greater economic stability, growth and ultimately poverty alleviation. There is growing consensus today that, although some countries have made progress in attaining macroeconomic stability, growth and poverty reduction, in many cases the results have been disappointing. Many developing countries have experienced relatively poor growth performance, and, in some cases, the living conditions of the poor have worsened rather than improved.
Recent research at IDS conducted by Ricardo Gottschalk has addressed these issues by focusing on current macroeconomic policies and their interaction with poverty and inequality in a post-reform context of fairly liberalised developing economies. One of the main problems identified is that developing countries have been highly vulnerable to shocks. Whilst the larger economies have been vulnerable to financial shocks associated with volatile capital flows, the smaller economies have been vulnerable to shocks such as falling terms of trade. In both cases, the consequences have been high degree of volatility of key macroeconomic variables, such as output, employment, wages and real exchange rate. Both groups of countries have failed to deal adequately with these shocks, due mainly to lack of instruments to prevent them, and to mitigate their effects. In the particular case of Poverty Reduction Strategy Papers (PRSP) countries, research has shown that the macroeconomic frameworks proposed by their PRSPs lack any embedded mechanisms that can be activated to counteract the effects of macroeconomic volatility on the poor, and in particular to deal with major external shocks, which tend to affect most strongly the poorest. The inability to respond appropriately to these shocks has resulted in major setbacks in these countries’ fight against poverty and inequality.
IDS research has in turn highlighted, and contributed to, the emergence of a number of proposals on alternative macroeconomic policies for adoption in developing countries. These are mainly countercyclical policies, aimed at addressing macroeconomic volatility and their negative effects on growth, employment and the living conditions, particularly of the poor.