1. INTRODUCTION

In the second half of the 1990s, a series of developments led to a renewed interest in the intersection of macroeconomic policy and poverty issues. In 1996 the Heavily Indebted Poor Countries (HIPC) Initiative was launched, involving the International Monetary Fund (IMF), the , and other international financial institutions. The intent of the HIPC Initiative was to provide to low-income countries and thus open fiscal space to help finance their poverty reduction programs. In September 1999 the Bretton Woods institutions presented a new framework for poverty reduction strategies based on the preparation of national poverty reduction strategy papers (PRSPs). The strategies were supposed to be the basis for concessional lending by those institutions and for debt relief under the HIPC Initiative.1 Both the IMF and the World Bank renamed their concessional facilities and instruments to emphasize the new poverty focus. These developments were part of the broader concern within the international community related to poverty alleviation that eventually led to the adoption of the Millennium Declaration containing the Millennium Development Goals during the UN Millennium Summit in September 2000. The involvement of the IMF in the national PRSPs and the issue of debt sustainability after its reduction under various initiatives led immediately to the discussion of what type of domestic macroeconomic policies would help with poverty alleviation efforts. A flurry of analytical activity ensued in the international organizations, academia, and civil society, focusing on the intersection of macroeconomic and poverty issues (see, e.g., the May 2005 issue of Development Policy Review, which collected work done jointly by the International Food Policy Research Institute, the European Network on Debt and Development, the New Rules for Global Finance Coalition, and Oxfam International; Cornia [2006], which reflects a more critical view of the policy advice given by international organizations; and Mody and Pattillo [2006], based on work done mostly by IMF and World Bank staff). Notwithstanding the current renewal of interest, concerns about the proper domestic macroeconomic policies for development and poverty reduction are not new. Rather, they have been a recurrent topic, albeit in varying formats, in the development debates from the 1950s and 1960s to the present: from the divergent views of structuralists and monetarists on inflation and the impact of IMF stabilization programs on development (see, e.g., Sunkel 1958; Prebisch 1961; Seers 1962; Felix 1965; Johnson 1984), to the debates about stabilization and structural adjustment programs by the Bretton Woods Institutions during the 1980s (see, e.g., Easterly 2003; Truman 2003), to the current discussions about macroeconomic policies and poverty. The focus of most of the recent work has been domestic macroeconomic policies. At the same time, analysis of development and poverty issues has a long tradition of linking the evolution of domestic indicators to the level of integration with, and the conditions prevalent in, the international economy. The literature on colonialism and (see, e.g., Nkrumah 1965) emphasized the negative impact of direct colonial control that led to the extraction of the value of primary products in the periphery. The notion of the secular decline of the terms of trade of developing countries highlighted a more mediated economic mechanism that, through falling prices of primary exports, would lead to the impossibility of retaining the benefits of technical progress in developing countries (Prebisch 1950; Singer 1950).2 In turn, the theory of dependency criticized the economically imbalanced and socially unequal structures created by “dependent capitalism” in developing countries (Dos Santos 1970; Cardoso and Faletto 1979). Besides the issue of the impact of external conditions on trend growth (and its developmental “quality”), there were concerns about the impact of world volatility on variations or oscillations around that trend, mostly related to variable world commodity prices and trade flows but also linked to

1 In 2005 the HIPC Initiative was supplemented with the Multilateral Debt Relief Initiative (MDRI) to accelerate progress towards the Millennium Development Goals. The MDRI was supposed to provide full debt reduction by the IMF, the International Development Association of the World Bank, and the African Development Fund, which in 2007 was joined by the Inter-American Development Bank. 2 That outcome was considered the result of market structures in developed countries (characterized by industrial oligopolies and strong unions) that were clearly different from those of developing countries (characterized by smaller firms and surplus labor). The contrasting structures allowed developed countries to retain the benefits of technical progress, while developing countries had to surrender gains from productivity because of falling prices for their primary exports.

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