The point of departure for a discussion of what macroeconomic policy can or cannot do depends on the economic context.
In the real world, assuredly, there are hundreds of different economic contexts. That is why one size of macroeconomic policy does not, and cannot, fit all. Purely for expository purposes, however, this article shall distinguish just two archetypes of economic context, ‘developed’ and ‘developing’ countries. ‘Developed country’ here means one in which (1) the economy is fully monetised; (2) wage employment is the dominant form of employment; (3) institutions of free collective wage bargaining are in place; and (4) social protection exists for workers’ stochastic risks – job loss, industrial accident, ill health and incapacity in old age, but not for the co-variant risk of mass unemployment. ‘Developing country’ here means one where (1) the economy is less than fully monetised, because subsistence and barter economy still prevails in part; (2) wage employment is a minority form of employment, the dominant form being self-employment with associated low levels of capital per head and low levels of labour productivity; (3) institutions of free collective wage bargaining, if they are in place, have a restricted impact on conditions of employment; and (4) social protection against stochastic risks is very limited, even for the minority who are wage workers. One can think of these two stylised contexts as the extremes of a spectrum. Most real world contexts can be found somewhere between these extremes. This article begins with the analysis of the ‘developed country’ archetype. Then, in the second half, the article turns to the ‘developing country’ archetype.
This article comes from the IDS Bulletin 39.2 (2008) Macroeconomic Policy, Labour Markets and Growth in Developed and Developing Countries