The Macro Content of the PRSPs: Assessing the Need for a more Flexible Macroeconomic Policy Framework

This paper analyses the macroeconomic content of 15 PRSPs from a growth and poverty reduction perspective. It finds that, in the main and contrary to new trends in developed and middle income countries, their macroeconomic policy frameworks lack the necessary flexibility to deal with external shocks and to appropriately address macroeconomic volatility. To ilustrate the point, their fiscal and monetary policies are too narrowly focused on fiscal balance and price stability, and as a consequence pay too little attention to sharp economic fluctuations arising from external shocks. The paper argues that this is problematic, as sharp macro volatility have major effects on poverty and long-term growth. PRSP countries are particularly vulnerable to external shocks such as a fall in the terms of trade due to their narrow economic structures and heavy reliance on a few primary commodities as export earnings and as sources of fiscal revenues. To reduce macroeconomic volatility, the paper proposes a set of policy measures including: avoidance of excessively tight inflation and fiscal targets (with provisions for fluctuations in their commodity prices), more room for counter-cyclical policy and the adoption of safety nets.