Political economy of macroeconomic management: The need for institutional change

Abstract

The article attempts to locate the lack of macroeconomic stability and hence the problem of low economic growth in developing economies in the absence of appropriate institutions. Paradoxically, government can fail in both authoritarian and democratic systems and accentuate market failures which government interventions are supposed to rectify in the first place if the state is weak. The challenge is to design institutions that are compatible with democracy. Institutional change should start from legal reform. There must also be an élite bureaucracy based on competitive selection criteria. In the presence of an inefficient political cycle, the central bank should be made independent from the executive branch of the government to be supplemented by fiscal reforms designed to increase transparency and to safeguard against political interference. The importance of financial deregulation and trade liberalisation lies in the fact that a well developed financial sector acts as an internal constraint while the openness of an economy acts as an external constraint on the macroeconomic misbehaviour of politicians.

Citation

Chowdhury, A. (1999), "Political economy of macroeconomic management: The need for institutional change", International Journal of Social Economics, Vol. 26 No. 1/2/3, pp. 389-401. https://doi.org/10.1108/03068299910229767