MACROECONOMIC ADJUSTMENT IN DEVELOPING COUNTRIES

1 January 1989

journal article
Published by Oxford University Press (OUP) in The World Bank Research Observer

Vol. 4 (1) , 51-64
https://doi.org/10.1093/wbro/4.1.51

Abstract

The short-run adjustment problem in developing countries involves both the improvement of the current account and the reduction of inflation. In both cases, the usual reason for adjustment is shown to be the fiscal deficit. The article distinguishes primary adjustment costs, which are inevitable, from secondary costs, which result, for example, from failure to devalue or from real wage rigidity. The article then analyzes the effects of expenditure reduction and currency devaluation on various sectors of the economy. Reducing inflation involves both an inflation tax replacement and a price adjustment problem, and “heterodox” policies designed to deal with the latter are discussed. If the fiscal deficit cannot be reduced, the article argues, improving the current account may be at the cost of increasing inflation and likewise reducing inflation may be at the cost of worsening the current account.

Keywords

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