Summary of WP/92/53
“Multicountry Evidence on the Effects of Macroeconomic, Financial, and Trade Policies on Efficiency of Resource Utilization in the Developing Countries” by Matthew Odedokun
This study examines the effects of various macroeconomic policy variables on economic efficiency, using the annual panel data for 81 developing countries from 1961 to 1990. Using the incremental output-capital ratio as a measure of efficiency, the study draws the following conclusions:
(a) The export-GDP ratio and, particularly, the growth of this ratio enhance economic efficiency, suggesting that export-oriented policies promote efficiency.
(b) The government expenditure-GDP ratio and the growth of this ratio reduce economic efficiency, suggesting that the size of the public sector is inversely related to efficiency.
(c) The size of development banking in relation to GDP and its growth decrease efficiency, suggesting that directed credit policies hinder economic efficiency.
(d) A measure of financial deepening has a positive effect on economic efficiency.
(e) A high inflation rate reduces economic efficiency, even apart from the negative effect it may have through such financial variables as the real exchange rate and the real interest rate.
(f) The real interest rate improves economic efficiency.
(g) Economic efficiency is hampered by “inappropriate” exchange rate policies, namely, policies that fail to depreciate the real value of domestic currency in response to a current account deficit or to appreciate it following a current account surplus.