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Macro Stability can be Detrimental to Poverty

Author

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  • Iwan J. Azis

    (Professor, Cornell University)

Abstract

Consider the following propositions frequently voiced by policy makers and economists alike: Proposition 1: Macroeconomic stability is essential for growth, and economic growth is the single most important factor influencing poverty. By implication, macroeconomic stability should be upheld. Furthermore, low inflation is good for the poor, thus macro stability is even more essential for poverty reduction. Proposition 2: Slower growth and higher inflation can worsen poverty; by implication, maintaining macroeconomic stability is necessary for reducing poverty. Despite the seemingly logical narrative in the above propositions, no generalization can be made as to their validity. Only after we identify the detailed transmission mechanisms from macro policy to poverty can we be more certain about the propositions. In this paper I identify and use such transmission mechanisms, and show by using the Indonesian case that the above two propositions are void, at the very least inadequate. The mechanisms involve some complex relations in whom growth, stability, income inequality and poverty are all endogenous and interrelated.

Suggested Citation

  • Iwan J. Azis, 2009. "Macro Stability can be Detrimental to Poverty," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 57, pages 1-23, April.
    • Handle: RePEc:lpe:efijnl:200901
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    More about this item

    Keywords

    Macroeconomic Stability; Economic Growth; Poverty;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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