Is there a paradox between growth and macro-economic stability? In normal circumstances they are considered complementary-one reinforcing the other; but asking which comes as the foremost priority may lead to answers that would tend to vary from place to place reflecting the various dimensions characterising economies. Is it appropriate to say that while macro-economic stability of a country is the precondition for economic growth, the latter may not necessarily be indicative of the former? The trade-off between the two is not simple enough.
Macroeconomic stability can be defined and measured in different dimensions including real, nominal and external stability. To speak of the most important one, real stability is related to sustained and stable growth in economic activity and employment, and is measured by business cycle indicators, such as the unemployment rate or the output gap. Macroeconomic stability is often considered a buffer against currency and interest fluctuations in the global market. Exposure to currency fluctuations, large debt burdens, and unmanaged inflation can cause economic crises and a collapse of GDP. It is here that macro-economic stability features as the foundation of an economy. Economists consider five variables to measure macro-economic stability. These include low and stable inflation, low long-term interest rates, low national debt relative to GDP, low deficits, and currency stability.
At a press meet in the capital recently, the issue came up as the main focus of discussion as the Centre for Policy Dialogue (CPD) stressed upon the importance of long-term macroeconomic stability instead of annual GDP growth in the forthcoming national budget in order to ride out the many challenges facing the country. The event was organised as part of the CPD's interim review of the national economy. The think tank also observed that the ongoing macroeconomic instability and consequent policy adjustments, largely influenced by the IMF lending conditionalities, have adversely affected the country's economic growth prospects. CPD's review also suggests that taming inflation and bringing stability of interest and foreign-exchange rates should be the key focus of policymakers in the upcoming budget for fiscal year 2024-25. "The priority should be given to overall macroeconomic stability, rather than focusing on high growth target, in the coming budget," said Golam Moazzem, research director of the CPD, while presenting the findings of the interim review at the media briefing.
Referring to the major issues CPD's review states that the country's economy is currently under significant strains stemming from several challenges such as policy weaknesses, poor governance, and inadequate reforms resulting in low revenue collection, reduced fiscal space, increased government borrowing from banks, and a fast declining forex reserve. The think tank also recommends that policymakers implement concrete measures to provide relief to inflation-affected individuals with limited incomes by meaningfully expanding and utilising the existing social safety-net programmes. It observed that the performance of the economy in the first 10 months of FY24 suggests that the remaining months will continue to face ongoing challenges, despite some positive policy measures initiated by the Bangladesh Bank. "This is because policy outcomes take time to materialise. Moreover, the effectiveness of any policy also relies on complementary measures in other areas," the CPD review adds. It also states that in Bangladesh, it is a matter of regret that it has become customary to set targets concerning the macroeconomic framework that are not consistent with ongoing realities. Enhancing fiscal space, prioritising expenditure, and foreign financing ought to guide the public finance management in FY2025, said the review, adding that complementarity between the fiscal and monetary policies must be ensured for positive outcomes of policy measures and improving macroeconomic performance. There is thus a crucial need to address the structural problems such as establishing good governance and strengthening institutions through reforms. In this connection, the CPD review says that a proper revision of Competition Act 2012 should be made to address monopolies by incorporating specific anti-trust clauses and concrete penalties for violators.
The reason underlying CPD's emphasis on macro-economic stability over growth can be traced to the global trend of populist campaigns, where GDP growth is unfortunately seen as a misnomer. As a casualty of cheap political maneuvering, GDP growth alone no longer serves as a decisive indicator of an economy's health. Esteemed economists, including Nobel laureate Amartya Sen, have extensively explored the paradoxical relationship between GDP growth and the actual well-being of the masses. Therefore, what truly matters for public well-being is the elimination of uncertainty and instability within the overall economic structure-perhaps sometimes at a cost to growth! This approach underscores the importance of a stable economic environment in fostering sustainable development and ensuring that the benefits of economic progress are widely shared. By prioritising stability, policymakers can aim to create a more resilient economy that can better withstand global and domestic shocks and provide a stronger foundation for long-term prosperity.
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