© 1996 International Monetary Fund
Cataloging-in-Publication Data
Reinvigorating growth in developing countries: lessons from adjustment policies in eight economies / David Goldsbrough … [et al.]. —Washington, D.C.: International Monetary Fund, 1996.
p. cm. — (Occasional Paper, ISSN 0251-6365; no. 139)
ISBN 1-55775-559-0
1. Developing countries—Economic policy. 2. Saving and investment—Developing countries. 3. Labor market—Developing countries. 4. Loans, Foreign—Developing countries. I. Goldsbrough, David John. II. Series: Occasional paper (International Monetary Fund); no. 139. HC597.R35 1996
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Contents
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Preface
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I Introduction and Summary: Issues in Adjustment and Growth
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Methodology
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Summary of Findings
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Crisis, Adjustment, and Growth
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How Can Adjustment Policies Foster Growth?
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The Response of Investment and Saving
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Structural Reforms and Labor Markets
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Key Lessons for the Design of IMF-Supported Programs
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II Overview of Adjustment
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Long-Term Trends in Growth and Investment
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Initial Conditions
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The Response of Growth to Adjustment
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Responses in the Short Term
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Responses in the Medium Term
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III Cross-Country Evidence on Factors Influencing Growth
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Correlations Between Growth and Policy-Related Variables
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Evidence on Shifts in Growth Across Adjustment Periods
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IV Role of Macroeconomic Policies
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Costs of Delayed Adjustment
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Abrupt Reduction in Real Domestic Absorption
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Second-Best Crisis Measures
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Uncertainty and the Effectiveness of Policies
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Less Time for Resource-Switching Policies to Take Hold
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Sustainability and Consistency of Policies
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Sustainability of Fiscal Policies
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Consistency of Macroeconomic Policies
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V Private Investment
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Factors Affecting the Lagged Response of Private Investment
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Determinants of Investment and the Role of Public Policies
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How Can Policies Accelerate the Response of Private Investment?
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VI Saving
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Evidence of the Links Between Policies and Saving
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Evidence for Individual Countries
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VII Role of External Financing
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VIII Structural Reforms
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Reforms and Productivity
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Trade Reforms
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How Closely Were Best Practices Followed?
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Supply Responses
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Financial Sector Reforms
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How Closely Were Best Practices Followed?
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IX Role of Labor Markets
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Structure of Labor Markets
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The Impact of Adjustment Policies on Real Wages and Relative Prices
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The Impact of Adjustment Policies on Employment and Unemployment
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X Conclusions and Lessons for Program Design
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Appendices
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I. Lessons from Earlier Studies
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II. Results from Cross-Country Growth Regressions
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III. Medium-Term Fiscal Sustainability and Its Consistency with Low Inflation
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IV. Econometric Evidence on the Determinants of Private Investment
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V. Trade and Financial Sector Reform and Labor Market Characteristics
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References
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Boxes
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1. An Overview of Adjustment in the Eight Countries
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2. Investment: Program Targets and Outcomes
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3. What Does the Literature Say About Lags in Investment?
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4. Saving: Program Targets and Outcomes
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5. How Could Structural Reforms Have Been More Growth Enhancing?
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6. Ghana: Constraints to a Stronger Supply Response
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7. Lessons from the East Asian “Miracle”
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8. Principal Studies Referred to in Appendix I
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Tables Section
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II
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1. Adjustment Periods in the Eight Countries
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2. Factors Influencing Growth, 1970-93
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3. Economic Structure in 1980
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4. Initial Macroeconomic Imbalances and Structural Distortions
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5. Response of Private Investment During Adjustment Periods
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IV
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6. Changes in Domestic Absorption and Output Gaps During Particular Contractionary Episodes
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7. Key Macroeconomic Indicators and Summary of Exchange Rate Policy
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V
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8. Selected Factors Influencing Private Investment
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9. Summary of Main Factors Explaining Major Episodes of Private Investment Performance
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VII
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10. Periods of Sharpest Swings in Net External Financing
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VIII
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11. Severity of Structural Distortions in the 1970s
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12. Indicators of Trade Reform
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13. Key Characteristics of Trade Reforms and Export Response
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14. Indicators of Financial Sector Reforms
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Appendix
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II
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15. Correlation Between Growth and Economic Policies, 1970-92
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16. Determinants of Per Capita Income Growth, 1960-92
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17. Estimates of Per Capita Growth Differentials After Controlling for Long-Run Determinants of Growth and Some Policy Factors
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IV
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18. Summary of Investment Equations
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V
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19. Main Elements of Trade Reforms
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20. Main Elements of Financial Sector Reforms
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21. Labor Market Characteristics
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Charts Section
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II
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1. IMF Arrangements in the Eight Countries
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2. Real Per Capita GDP Growth, 1970-94
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3. Real Per Capita GDP Growth and Investment Ratios
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4. GDP Growth, Investment, and National Saving, 1970-93
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5. Indicators of Domestic and External Economic Performance During Preadjustment Period and During 1990-93
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6. Size of External Shocks
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7. Share of Private and Public Investment in GDP
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8. Structural Reforms and Trends in Total Factor Productivity
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III
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9. Estimated Per Capita Growth Differentials
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IV
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10. Fiscal Indicators
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11. Nominal and Real Effective Exchange Rates and Inflation in Various Indexation Regimes
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12. Changes in Domestic Absorption, Exports, and Imports During Periods of Demand Contraction
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13. Difference Between Actual and “Sustainable” Fiscal Primary Balances
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14. Real Interest Rates
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15. Stock of Private Sector Credit
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VI
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16. National Saving Rates
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VII
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17. Selected Developing Countries: Comparison of Changes in Investment and Net External Financing
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18. Total Net External Financing
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19. A Comparison of Foreign Direct Investment and Gross Fixed Capital Formation, 1982-93
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VIII
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20. Export Market Shares and Real Effective Exchange Rates
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IX
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21. Wages, Productivity, and Unit Labor Costs
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22. Employment, Unemployment, and Output
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Appendix
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III
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23. Actual and Sustainable Primary Fiscal Balances
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Box
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2 Change in Investment Rates: Program Targets and Outcomes
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4 Saving: Targets and Outcomes
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The following symbols have been used throughout this paper:
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… to indicate that data are not available;
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— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
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– between years or months (e.g., 1991-92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
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/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
This study examines the links between adjustment policies and growth in a small group of developing countries—Bangladesh, Chile, Ghana, India, Mexico, Morocco, Senegal, and Thailand—during 1970-93, reflecting information available through mid-1995. The study provides an overview of the adjustment and growth experience, examines in depth several policy issues of particular interest, and distills the principal policy lessons for the design of adjustment policies. The analysis builds on separate studies prepared for many of the countries in the context of the IMF’s regular consultations with member countries, as well as on many other publications, articles, and work inside and outside the IMF and World Bank. A companion study, Composition of Fiscal Adjustment and Growth (forthcoming) examines issues related to the quality of fiscal adjustment.
The authors are indebted to numerous colleagues throughout the IMF for their assistance in the country analyses, in particular Rifaat Basanti, Elie Canetti, Ajai Chopra, Charles Collyns, Erik De Vrijer, Klaus Enders, Fernando Fernandez, Manal Fouad, Vicente Galbis, John Hicklin, Jianhai Lin, Michael Nowak, Karen Parker, Roohi Prem, Hugo Juan-Ramon, Marjorie Rose, Miguel Savastano, Amor Tahari, Van Can Thai, John Thornton, and Ewart Williams. They also thank Nadeem Haque, Peter Montiel, and Susan Schadler and many other colleagues in the Fund and World Bank for their valuable comments. They wish to thank Mehnaz Husain and Kadima Kalonji for research assistance and to Olivia Carolin and Fernanda Gusmao for secretarial support, and Esha Ray of the External Relations Department who edited the paper for publication and coordinated production. The opinions expressed in the paper are those of the authors and do not necessarily reflect the views of the IMF or of its Executive Directors.