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2007 AEC -Macroeconomic policy space and African economies: An empirical sifting through reality and rhetoric
The challenge that Africa faces to reduce poverty by half by the year 2015 calls for high and sustained economic growth rates. Scaling up of aid to create fiscal space is seen as one way of achieving faster growth. However, fears have been expressed that this cannot be realised within tight macroeconomic frameworks. This paper uses an approach of measuring the output gaps in selected African economies to determine whether or not the calls for macroeconomic policy space are justified. Relying on a simple Hodrick-Prescott measure of output potential and output gap, and comparing this with the policy stances that are reflected by inflation rates and fiscal balances, the paper provides evidence on where the truth might lie on the issue of scaling-up. It concludes that in the first five years of post-Millennium Summit period, African countries found themselves stuck in a stabilisation trap, with low growth rates that could not promise the realisation of halving of poverty amidst a stable macroeconomic environment. Given that the African economies are characterised by marginal positive output gaps, with a few of them having excess capacity, there is merit in the debate that current macroeconomic policy stances are not consistent with the objective to achieve the first MDG.