The rich expand, the poor contract. The paradox of macroeconomic policy in Ethiopia

While rich countries are currently spending trillions of dollars to address the effects of global economic turmoil, including demand stimulation measures, the International Monetary Fund (IMF) has recently developed&nbsp;a deflationary package for Ethiopia comprising of curbs in domestic borrowing and money supply. Why is it that high- and low-income countries are concurrently adopting such opposing policies? A new policy brief brought out by UNDP&rsquo;s International Policy Centre for Inclusive Growth (IPC) assesses the extent to which deflation&nbsp;is the correct policy response for Ethiopia from the perspective of poverty reduction.&nbsp; <br /><br />Owing to global commodity price fluctuations, particularly in petroleum and food, Ethiopia&rsquo;s import bill has increased by 50 percent. The consumer price index (CPI) rose from 17.5 percent in January 2008 to 45.6 percent in January 2009. Clearly, some extent of deflation appears justifiable. But commodity prices have now fallen and are likely to come down further as a result of the global slowdown. In this context, advising the Ethiopian government to adopt contractionary macroeconomic policies will only reduce the amount of public investment available to achieve the Millennium Development Goals (MDGs). <br /><br />The brief concludes that&nbsp;it is more important for Ethiopia to address the supply-side factors that continue to hamper economic growth and particularly,&nbsp;increase agricultural productivity. Amongst others, policies are now&nbsp;necessary to: increase farmers&rsquo; access to fertiliser, machinery and irrigation improve the supply of credit to both the public and private sector improve infrastructure and the functioning of market institutions <br />