Incomplete crisis responses: Socio-economic costs and policy implications

Since the 1970s, the policy-making discourse has been dominated by neo- S classical theories whereby unemployment is held to be mainly a reflection of structural rigidities (Howell, 2010). Within this framework, the main purpose of macroeconomic policies is to ensure financial stability, while market-oriented reforms are regarded as the principal means of promoting growth and reducing unemployment in a sustainable manner. Indeed, the theory assumes that market forces, left to their own devices, will optimize the allocation of resources. The financial crisis which erupted in the wake of the collapse of Lehman Brothers Holdings Inc. in September 2008 prompted partial reconsideration of this policy approach. In particular, the role of counter-cyclical macroeconomic policies in sustaining the economy and jobs was widely acknowledged (IMF, 2009). Unlike in earlier crises, social protection was also reinforced; and in a departure from the view that higher benefits exacerbate market distortions, the level and duration of unemployment benefits were improved. The initial results of this new approach were positive. Thanks to the counter-cyclical monetary policies and socially inclusive fiscal stimulus packages adopted in 2008-09, another Great Depression has probably been avoided.

However, this change of policy was effected without regard to the market- driven factors that had provoked the crisis in the first place. Indeed, the economic imbalances resulting from inefficient and unequal income distribution have not been properly addressed (IILS, 2008; Rajan, 2010). And little progress has been made in regulating the financial system. As a result, the scope for stimulative macroeconomic policies to revive the world economy has progressively grown very narrow. Against this background, this article begins by highlighting the real and financial causes of the crisis and their inter-linkages. It then examines the extent to which fiscal and monetary policies - i. e. remedies which, crucial as they are, do not address the real causes of the crisis - can support a return to balanced growth. Policy lessons from the analysis are drawn in the concluding section.download