Macroeconomic Policy in Sub-Saharan Africa

A policy goal for sub-Saharan Africa is to create an economic environment that will lead to development – that is, better jobs, higher standards of living, longer lives, and a wider range of opportunities. Macroeconomic policies, such as government spending, taxation, monetary policies, and exchange rate management, have the potential to spur economic development. However, in many African countries, this potential cannot be realized, because the scope for conducting macroeconomic policy to support development objectives is overly narrow. What may be appropriate for the already industrialized countries in North America or Europe often does not work in sub-Saharan Africa. Institutions differ, and the structure of the economy places limits on the policy choices available. The approach to macroeconomic policy in Africa might be described as trying to “do no harm” — i.e. avoid gross mismanagement, such as unsustainable debts or rapid inflation. But this approach shortchanges African countries in terms of the policy options they have at their disposal. The challenge is to replenish the economic toolkit available to African countries and allowing macroeconomic policy to play a more developmental role.

James Heintz, PERI Associate Director, writes in a chapter in The Industrial Policy Revolution II: Africa in the 21^st Century (edited by Joseph E. Stiglitz, Justin Yifu Lin, and Ebrahim Patel) about examples from three areas of macroeconomic policy – real exchange rate, monetary policy, and fiscal policy – that have implications for industrial development in Africa. In each of the areas, the chapter asks specific questions, and suggests ways in which macroeconomic policy can be reclaimed and used as a tool for development.

Real Exchange Rate: Real exchange rates are often considered important for the allocation of resources between tradable and non-tradable activities in ways that support economic development. How do issues of real exchange rate management for industrial development apply to countries in sub-Saharan Africa?

Monetary Policy: The chapter examines two critical questions: What are the sources of inflationary pressures in sub-Saharan African countries, and do inflation targets (and inflation targeting) constitute an appropriate monetary policy? What are the institutional barriers that prevent monetary policy from playing a more developmental role?

Fiscal Policy: Fiscal tools often feature in the design of industrial policy — e.g. subsidies, tax incentives, and public investment. Rather than focusing on these details, we discuss the question of domestic resource mobilization. Specifically, what are the barriers to better mobilization of domestic resources for industrial policy in terms of tax revenues and domestic public borrowing?

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