Macroeconomic Policy

Context

Macroeconomics is the branch of economics that deals with the overall functioning of the economy.  Macroeconomic policies are critical in shaping the landscape within which factor markets (such as labor and capital) and product markets (such as shoes, cars, or bread) operate. They have a critical influence on decisions by companies to produce, hire or fire workers, or export and import goods, for example. They also determine household decisions to consume, save, and borrow, and government decisions to invest in infrastructure, education and many other aspects of development.

Macroeconomic policies include taxes, government spending and borrowing, exchange rate determinants, and monetary and credit rules. The primary goal of effective macroeconomic policies is to reduce uncertainty and risk in economic decision-making.  A stable macroeconomic environment enhances prospects for growth and improved living standards.  But stability is not the only concern: these policies also have an important impact on how income is distributed across economic classes and across generations. The World Bank Group’s primary goals are to reduce poverty and ensure shared prosperity, and its macroeconomists are no exception. They work to help policymakers better understand and manage macroeconomic policy so that it works to reduce the number of people living in poverty and to increase the number of people who can share in the benefits of rising incomes.

While governments’ choices on macroeconomic and fiscal policies are already complicated, they gain a significant layer of complexity in countries facing fragility and conflict. Over the past decade the world has witnessed a resurgence of conflict across a variety of countries, including both low-income and middle-income countries. In some contexts, macroeconomics can be considered a driver or enabler of conflict. This is the case in societies where the distribution of natural resource rents is contested and at the root of conflict. In some cases, macroeconomic policymakers are working to achieve the goals of growth, poverty reduction and shared prosperity in an environment constrained by fragility and conflict. The efficacy of certain approaches will depend on the challenges facing a country at the different stages of conflict:  in contexts of fragility, during conflict, and in a post-conflict environment (stabilization, reconstruction, kick-starting growth, building resilience).These macroeconomic policy choices will also vary based on countries’ income levels, endowments of human and physical capital as well as natural resources, not to mention the state’s institutional capabilities.

Strategy

The Macroeconomics and Fiscal Policy Global Practice (MFM) plays the role of a primary diagnostician and integrator of macroeconomic analysis for the World Bank Group. The practice’s macroeconomists engage with clients around their development processes and economic management efforts at the broadest levels, while also taking into consideration local context. 

Some of the chronic and emergent challenges in general economic management include the accurate collection of statistics and data, the promotion of economic growth and structural transformation in a rapidly-changing world, developing appropriate fiscal management strategies, and the special cases of countries rich in natural resources and those affected by conflict.

The World Bank’s MFM experts who are working in fragile, conflict, and post-conflict states are supporting governments in designing policies to address the macroeconomic drivers of conflict, to design fiscal and macroeconomic policies in contexts constrained by fragility and conflict, and to build a path to reconstruction and growth after the end of conflict. The MFM team brings its knowledge and experience working in fragile and conflict environments around the globe to help governments learn what approaches have succeeded and failed elsewhere, and to support them as they design new solutions for growth and stability in their own countries.

Results

Below are some examples of projects that illustrate the macroeconomic policy work underway by MFM. In particular, the team’s experts in fragile and conflict-affected countries have been developing new tools and approaches to address critical challenges associated with macroeconomic policy in fragile and conflict states. 

• Economic impact assessment of Ebola crisis on Africa: Since the start of the Ebola crisis in 2014, the Bank has been at the forefront of efforts to support governments in West Africa in combatting the virus. It has also drawn on the diverse expertise within the Bank including the expertise of its country economists and macroeconomists more generally to assess the economic effects (short-term and fiscal effects, in addition to medium-term effects) of Ebola on the most affected countries (Liberia, Guinea, and Sierra Leone) as well as on Africa as a whole.

• Economic and Social Impact Assessment (ESIA) of conflict in Lebanon, Kurdistan Region of Iraq, and Ukraine: The Syrian crisis began in 2011 as a movement of popular protest and quickly escalated into a violent conflict leading to what has been considered the worst humanitarian crisis the world has seen in nearly two decades. It has wrought human, social, and economic losses of great magnitude in Syria and has significantly affected its neighbors, in particular Lebanon and Jordan. The MFM team, in collaboration with the United Nations, European Union and other partners, conducted a rapid and extensive Economic and Social Impact Assessment (ESIA) of the Syrian conflict on Lebanon in 2013. This ESIA was used to inform donor and government actions to mitigate the spillover of the conflict on Lebanon and effectively prioritize, finance, and target their support on the ground. This innovative approach was later applied by the Bank in its rapid development of an ESIA for the Kurdistan Regional Government of Iraq following the escalation of conflict in that area in 2014. The ESIA approach has also been shared to inform the Bank’s work in evaluating the impact of the recent crisis in Ukraine on the country’s economy. In addition, the MFM team's country economists are continuously monitoring economic developments in their respective countries and providing ongoing analysis of the impact of fragility and conflict on economic and social outcomes.

• Post-conflict needs-assessment in Gaza: The 50 days of hostilities and conflict in Gaza during the summer of 2014 proved to be more serious than any previous conflict in terms of lives lost, physical destruction, and productive losses. Following the cease-fire announced at the end of August 2014, the World Bank Group has begun supporting the recovery effort led by the Palestinian Authority (PA) in close coordination with other donors. In particular, the MFM team is estimating the macro-fiscal impact of the armed conflict on Gaza as well as developing projections for different scenarios of post-conflict economic recovery over the medium term.

• Data collection and economic analysis in data-poor contexts: Informed policy analysis and decision-making on macroeconomic issues requires access to data that is frequently absent and difficult to collect in developing countries, and even more so in fragile and conflict environments. The Bank’s MFM team invests in rapid and innovative data collection methods that can support high-quality economic analysis. From developing simple macroeconomic models and analytical approaches that circumvent data limitations in Afghanistan, to supporting government development and collection of national accounts data in Somalia, to experimenting with technology-based data-collection, the Bank is continuing to push the boundaries of data collection and analysis in fragile and conflict states.