Advocates of the SDGs have a monetarism problem

UN Secretariat Headquarters, New York. UN Photo.

More expansionary fiscal and monetary policies are needed to meet the Sustainable Development Goals

This month, the international community will gather at the United Nations in New York to review progress on the implementation of the 17 Sustainable Development Goals (SDGs) that are intended to reduce poverty, hunger and economic inequality and promote development, particularly in developing countries. But only one of the SDGs, #17, says anything about how to finance all the efforts. While SDG 17 calls for more international cooperation and foreign aid, it only suggests that developing countries strengthen domestic resource mobilization (DRM) by improving their tax collection and curtailing illicit financial flows, etc.

While important, this approach neglects much bigger problems with the prevailing set of macroeconomic policies that hamper the ability of developing countries to increase public investment, employment and scale-up the long-term investments in the underlying health and education infrastructure needed to achieve the SDGs. The policy framework used in many developing countries is characterized by an overly restrictive low-inflation target achieved by using high interest rates and backed up by strict inflation targeting regimes at independent central banks.


These prevailing policies place major constraints on the ability of countries to mobilize more domestic resources, thus present a major obstacle to achieving SDG 17. The problematic nature of the policies was underscored in a 2017 joint publication by the ILO, UNICEF and UN Women which called on countries to adopt “a more accommodating macroeconomic framework.” This would entail lowering interest rates and allowing governments to use “higher budget deficit paths and/or higher levels of inflation without jeopardizing macroeconomic stability” in ways that could enable increased public investment. But doing so would bump up against the prevailing conservative policy orthodoxy as practiced by most central banks and finance ministries around the world and enforced by the International Monetary Fund (IMF) through its loan conditions and policy advice to developing countries.

The IMF insists the policies are needed to first ensure “macroeconomic stability” before other goals like the SDGs can be pursued. But there is concern that the IMF’s definition of macroeconomic stability is too restrictive. While policies have been successful at reducing inflation in developing countries, they tend to suppress aggregate demand and make it difficult for governments to generate higher GDP growth and employment. Most importantly, they undermine the ability of countries to engage in deficit spending needed to significantly increase public investment for long-term development. To achieve and maintain low inflation, the IMF typically advises central banks of developing countries to raise the interest rate at which they lend to other banks to between 15 and 25 percent or higher, which can quickly make any deficit financing by governments unaffordable. The net effect is to constrain governments’ ability to increase long-term public investment as a percent of GDP in key SDGs target areas. The deficit reduction policies reduce resources available for long-term capital expenditure and instead often lead to layoffs, hiring freezes and public sector wage caps, which tend to weaken the basic functioning of government over time. In other words, today’s advocates of the SDGs have a “monetarism problem”.

The prevailing orthodoxy is monetarism, a school of thought in economics which came to political prominence with the Reagan/Thatcher revolution of the 1980s and that proposes that the size of the money supply in an economy is the key factor to control for reducing inflation and managing economic cycles. Although their central theory about a link between the money supply and nominal GDP rates was disproven over time, monetarists still influence contemporary policy: primarily, the prioritization of low inflation over other goals and use of high interest rates as the key policy tool to lower inflation.

The ILO, UNICEF and UN Women report called for a “more accommodating macroeconomic framework,” in which more expansionary policy options are considered by developing countries. These include allowing for higher budget deficit paths and/or permitting higher levels of inflation. While annual inflation rates above 20 percent are certainly a problem, the historical record on the growth-inflation relationship shows that countries were able to maintain moderate levels of inflation – between 10-20 percent – for long periods without jeopardizing macroeconomic stability. This stands in stark contrast today’s prevailing monetarist orthodoxy that prioritizes inflation at 5 percent or lower for developing countries.

Monetarist policies have been broadly criticized for slowing potentially higher GDP growth rates and undermining the ability of countries to scale-up long-term investment in public health, education, and infrastructure. Important warnings have been issued about how IMF policies “overly concerned with macroeconomic stability” may be too austere, lowering economic growth from its optimal level and “impeding progress on poverty reduction.”

While the academic literature on the impacts of IMF programs on economic growth is mixed, there is considerable evidence that IMF conditionality is correlated with worsening inequality, and negative impacts on health spending and social spending(the IMF opposes social spending floors). There are also concerns about the disproportionately negative economic impacts on women, and how the policies override governments’ obligations to fulfil economic and social rights.

But despite the criticisms, the IMF is still conditioning loans and advising developing countries to adopt overly restrictive fiscal and monetary policies. This situation presents a challenge for advocates of the SDGs who want countries to do more than just increase tax collections.

There is much more that developing country governments could do on DRM. In addition to a “more accommodating macroeconomic framework,” advocates of more progressive approaches to DRM are calling for revitalizing the critical role of public banks, and in particular, public development banks. Despite the projected trillions of dollars needed to meet the SDGs, there is little evidence that “traditional” public funding sources cannot fill the gap. Central banks, too, have historically played supportive roles in policies designed to achieve national development goals that should be reconsidered. Others suggest the IMF could change its policies to better support countries’ efforts to achieve the SDGs – but doing so is likely to require political pressure by civil society advocates.

But expanding the tool box will require challenging the dominant orthodoxy on macroeconomic policy and exploring heterodox approaches that offer options for increasing public investment. With more expansionary policies, developing countries could increase GDP growth, employment and long-term public investment while improving gender equality. Advocates for the SDGs can start by insisting that the entire range of macroeconomic policy options is fully explored and opened to a broader and more inclusive public debate.

Rick Rowden recently completed his PhD in Economic Studies and Planning from Jawaharlal Nehru University (JNU) in New Delhi.

This essay was first published on the SPERI blog

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