1. Institutional setting
It is widely recognized that developing economies are significantly different from industrialized economies. Yet, the macroeconomic models used, in terms of analytical constructs, typically follow a similar classification: classical, Keynesian and monetarist. The consensus among economists, much like fashion, has changed over time. The Keynesian consensus vanished, largely because the focus shifted from unemployment to inflation,1 but the shift was attributable, in small part, to the difficulties in reconciling the Keynesian worldview with behavioural hypotheses about households and firms in standard microeconomic analysis. The increasing focus on inflation and growth also shifted focus from aggregate demand to aggregate supply. This led to the emergence of supply-side economics, which argued for reducing public investment in the hope of stimulating private investment through incentives such as tax-cuts. Thereafter, for some time, the monetarist tradition became the ruling orthodoxy in macroeconomics. It stressed the importance of monetary aggregates and justified a natural rate of unemployment. But in most quarters there is now a consensus that monetarism too failed.