Before preparing a financial program or analyzing developments in a country, sufficient data on the economy’s past and expected performance are necessary. If the basis for the program or analysis is deficient, the program will probably not be well prepared and the objectives will not be achieved. All those data that may have an impact on the preparation of a program are needed. IMF missions are sometimes described as “hungry” for both statistics and data in general, but this hunger is logical, because before giving any advice or taking any decision, the mission must know what is happening in a country. The term “data” is used broadly here, meaning not only statistical information, but also details of pertinent legislation and of rules and regulations connected with the implementation of such legislation.
Mohsin S. Khan, Peter J. Montiel, and Nadeem U. Haque
Most Developing countries at one time or another have faced the need for macroeconomic adjustment. Such a need typically arises when a country experiences a persisting imbalance between aggregate domestic demand and aggregate supply, reflected in a worsening of its external payments and an increase in inflation. While in certain cases external factors, such as an exogenous deterioration of the terms of trade or an increase in foreign interest rates, can be responsible for the emergence of the basic demand-supply imbalances, these imbalances can often be traced to inappropriate domestic policies that expand domestic demand too rapidly relative to the productive capacity of the economy. As long as adequate foreign financing is available, the relative expansion of domestic demand can be sustained for an extended period, albeit at the cost of a widening deficit in the current account of the balance of payments, a loss of international reserves, rising inflation, worsening international competitiveness, falling growth, and a heavier foreign debt burden. Eventually, however, the country would lose international creditworthiness, and as foreign credits ceased, adjustment would be necessary. This type of forced adjustment could prove to be very disruptive for the economy.
Shocks emanating from domestic policies or from changes in the external economic environment in developing countries invariably set off a dynamic process of adjustment that frequently takes some time to work itself out. Although analysis of the macroeconomic effects of such shocks typically focuses on impact effects or on the eventual steady state at which the economy settles, it is the intermediate run—that is, the “real-time” effect of such shocks—that is often of equal if not even greater concern to policymakers in developing countries. While explicit dynamic solutions to small analytical models can yield valuable insights into particular aspects of the economy’s response to such shocks, general-equilibrium interactions can only be studied in the context of larger models that, unfortunately, do not often prove to be analytically tractable. Thus, numerical simulation experiments with dynamic macroeconomic models become the tool of choice for understanding the real-time effects of policy measures and external shocks in developing countries.
Nadeem U. Haque, Peter J. Montiel, and Mr. Steven A. Symansky
Macroeconomic policy in developing countries has received considerable attention in recent years as continuing external and internal imbalances have contributed to a slowdown in growth, balance of payments difficulties, and high inflation. Many countries have undertaken adjustment programs whose announced objectives have been to reduce external imbalances and to lower inflation while avoiding recession and enhancing medium-term growth. The consequences of such programs for income distribution have also received increased attention. Diverse macroeconomic targets such as these respond to policy and other shocks via fairly complex general equilibrium interactions. Thus, the analysis of the effects of policies on such variables, as well as of the trade-offs among conflicting macroeconomic targets confronted by policymakers, must necessarily be conducted by using reasonably detailed quantitative macroeconomic models. Existing quantitative models for developing countries are not well suited for exploring these issues, however, because they typically incorporate ad hoc behavioral relationships and generally provide inadequate treatment of expectations.1 The formation of expectations is generally modeled in a static or adaptive fashion, even though forward-looking expectations have by now become an important feature of macroeconomic analysis for developing countries.2