Macroeconomic Policy and Employment: A Development Perspective

The present paper questions the conventional framework of macroeconomic policies where their primary role is to ensure macroeconomic stability which, in turn, is expected to ensure economic growth and employment. Using empirical evidence on countries of South Asia, it shows that the relationships between economic growth, inflation and budget deficit do not always support the conventional framework. The paper points out that some developed countries, e.g., the USA, have legislated the dual mandate of maintaining price stability and full employment for their monetary policy, and take the labour market situation into account in formulating such policies. In contrast, countries of South Asia seem to be guided more by inflation than by considerations of growth and employment. The paper argues that in developing countries, the notion of full employment cannot be conceptualized in the same way as in developed countries. In such cases, monetary policy would have to be informed by in-depth analysis of the employment and labour market situation. In fiscal policy, the effectiveness of different instruments (e.g., tax rates, and government expenditures) in boosting employment varies. Hence, the choice should be guided by the size of the fiscal multiplier. Experience indicates that public expenditure, especially on infrastructure, should have a greater impact on employment compared to tax reduction.