Persistent Balance of Payments Deficits associated with rapid inflation and overvalued exchange rates tend to characterize the countries requesting the use of Fund resources in the upper credit tranches. In most cases, these problems are due to government budget deficits, financed by borrowing from the banking system, that result in excess demand, raising prices at home and spilling over into imports. As domestic costs and prices rise relative to foreign prices, changes in relative profitability cause resources to flow to the sectors that are more exclusively domestic, causing export and import–competing sectors to contract, relative to aggregate output. As the balance of payments deteriorates and the stock of international reserves diminishes, the authorities often impose restrictions and controls on imports to arrest the decline: requirements for import licenses are tightened; foreign exchange becomes increasingly subject to administrative allocation; and the exchange system itself becomes burdened with special tax and export bonus schemes. These measures tend to divert demand from imports to domestic production, and a fall in international reserves is avoided at the cost of additional domestic inflation and often a slowing of economic growth.

The solution to these problems lies in reducing domestic demand to a level commensurate with the country’s real productive capacity and sustainable borrowing capacity. Hence, the restraining of expenditure figures largely in programs associated with the use of Fund resources. Moreover, because of wage and price rigidities, the sizable monetary and fiscal contraction that is often needed to restore equilibrium tends to have serious adverse short–term and medium–term consequences for real output and employment. In this setting, currency depreciation has often been a useful complement to the restraint of demand. Devaluation not only raises the domestic price of exports and import substitutes, thereby providing incentives for the expansion of output in these sectors, but also, by reducing the relative price of nontraded goods and domestic factors of production, induces a shift of domestic demand to these goods and factors. In this way, the unemployment problem that restraint creates in the nontraded goods industries is mitigated.

The measures taken as part of stabilization programs inevitably have repercussions on the distribution of income. For example, a reduction in a food subsidy favorably influences those paying for it, including future generations, at the expense of its beneficiaries. Other distributional effects are indirect and reflect the necessary changes in relative factor rewards that are associated with the movement toward external balance. If the economy in question produced only one good for which the demand by the rest of the world were perfectly elastic with respect to price, this would not be an issue. In terms of our example, the reduced consumption of food would simply translate into diminished imports or increased exports; no movement of factors of production across sectors and no further change in factor incomes would be required. Hence, the sole distributional effect would be the initial one. However, economies like this exist only as artificial constructs. In the real world, reducing aggregate demand sets in motion a train of economic consequences, all of which have distributional effects, such that the sustainable equilibrium ultimately attained will be characterized by a distribution of income different from that observed immediately following the implementation of the program.

Additional channels through which stabilization programs affect the distribution of income can also be identified. In particular, if a program is successful in reducing inflation, and if financial stability exerts a positive influence on growth and development, then it is surely relevant to ask how inflation, as well as growth and development, affect the pattern of income distribution and particularly the share of the poorest segments of the population. In general, lower–income groups tend to have the least access to assets whose values rise pari passu with inflationg¹ and are most likely to hold their savings in a monetary form. That these same groups are often the weakest in their ability to secure effective indexation of their wages strongly suggests that reducing inflation has egalitarian implications.

The distributional effects of growth and development are less clear. The available empirical evidence suggests that the income share of the poorest 40 per cent of the population increases with the growth rate, but that it first decreases and then increases with development. ² However, the absolute level of income of the poorest 40 per cent does tend to rise throughout the relevant range, and some countries have designed their policies to provide the poor with an equitable share in economic growth. ³

A detailed analysis of the ultimate distributional effects that derive from financial stability, although desirable, is beyond the scope of this paper. Aside from indicating general trends and tendencies, the approach is to present an analysis of the distributional effects both of the policy instruments most commonly used in connection with programs supported by the use of Fund resources and of the structural changes that balance of payments adjustment tends to induce. This analysis is supplemented with examples drawn from case studies of stabilization programs in Bolivia (1972–73), Ghana (1966–70), Indonesia (1966–74), and the Philippines (1970–76).⁴ In each of these cases, excessive fiscal deficits contributed substantially to the balance of payments problem, and in three of the four, a decline in export prices or adverse weather also played a role. The programs all relied on monetary and fiscal restraint to contain demand and on currency depreciation to moderate the unemployment and to correct the misallocation of resources arising from overvaluation of the exchange rate. Despite these and other broad similarities, however, the individual economic structures and problems differ widely, and their comparative study illustrates the range of problems confronting developing countries in their adjustment to payments imbalances.

The paper is organized as follows. Section I discusses some general principles that bear on the relationship between the balance of payments and the distribution of income. Section II focuses on the distributional effects of the specific measures included in the stabilization programs associated with the use of Fund resources. Section III presents the findings and conclusions, citing evidence from the stabilization programs studied.

I. The Balance of Payments and the Distribution of Income

Prior to considering the specific questions raised by stabilization programs, it is useful to establish whether there exists a general relationship between the balance of payments and the distribution of income. In studying this relationship, the focus can be fruitfully narrowed to concentrate on the connection between the balance of trade and the distribution of income. To be sure, variations in the capital account may signal a change in the level of autonomous capital inflows, which, by affecting investment, play an important role in shaping the future structure of the economy and the ultimate distribution of income. Nevertheless, over the time horizon of concern to this paper, it is largely through the market for goods and services that the external sector bears on the distribution of income.

The analysis begins with an economy in internal and external balance. In other words, there is full employment⁵ and the current account deficit is offset by autonomous capital inflows. The effects of an increase in government spending are then considered, with particular attention to any change in relative factor earnings. From this new position of external imbalance, the distributional effects of adjustment (i.e., the return to the initial equilibrium) are investigated. Throughout the analysis, it is assumed that the nature of any restrictions on the current and capital accounts remains unchanged. In addition, the treatment is limited to two factors of production—capital and labor. These assumptions greatly simplify the analysis without detracting from the general points to be made.

The full employment absorption model suggests that an increase in the government deficit reduces net exports. ⁶ Moreover, according to this model, the ultimate degree of deterioration in the trade balance is independent of whether the additional government purchases are of imports or of domestic goods, since any increment to demand for the latter will crowd other sources of demand into additional imports or lead to a reduction in exports. Nevertheless, the composition of the increase in government expenditure does affect the distribution of income. If, for example, the increase in demand is directed exclusively at exports and imports, factor prices are unaffected, and the immediate distributional effect ⁷ then depends on the actual distribution of the increased fiscal benefits and the burden of financing. Alternatively, if much of the increase in demand is for nontraded goods, resources are redirected away from the traded goods industries toward the nontraded goods industries, and prices and factor rewards will rise in the industries supplying this market, bringing associated distributional changes.

While the equilibrium—in terms of the composition of output and the structure of prices and factor payments—that ultimately emerges depends on many forces, of critical importance to the distributional consequences is the potential mobility of capital and labor over the time frame of interest. ⁸ The pure theory of international trade suggests that, with factor prices flexible and labor and capital perfectly mobile between industries and perfectly immobile internationally, relative returns to labor and capital will vary with a change in the composition of output according to the relative factor intensities in the affected industries. ⁹ For example, if the traded sector is more capital intensive, its contraction vis–à–vis the more labor–intensive nontraded goods sector will cause wages ¹⁰ to rise relative to returns on capital, inducing a rise in the capital/labor ratio throughout the economy.

Nevertheless, over the short run to medium run, neither capital nor labor is as mobile as assumed in the neoclassical analysis. Financial capital is mobile across industries and across countries when controls do not impede its flow; but physical capital, once in place, tends to be fairly specific and costly to move. While institutional factors and specialized skills also limit the degree of labor mobility across industries, labor tends to be much more mobile than capital over the short run to medium run. Accordingly, this discussion is restricted to the situation of fixed capital and labor of varying degrees of mobility.

Under this assumption, differential returns to capital across sectors are generated by changes in relative prices, while the more mobility that labor has across activities, the less can relative wages change. Thus, with perfect labor mobility, the movement of labor in response to higher wages in one sector ensures that wages will remain equal across all activities, even while the returns on capital are rising and falling, respectively, in the expanding and contracting sectors. On the other hand, if labor is less than perfectly mobile, then wage differentials across activities can persist. Under this assumption, an increase in demand for the relatively labor–intensive nontraded goods will still put upward pressure on wages throughout all sectors of the economy;¹¹ however, wages will tend to rise by more in those activities that produce primarily for the domestic market. If labor is perfectly immobile, wages in the traded sector will not change, while they will rise even more in the nontraded goods activities than in the case of perfect labor mobility. It is not central to the argument, but worth noting, that an implication of perfect factor immobility is that the size of the export sector does not change in response to variations in the composition of demand. The ultimate composition of the trade balance will then be wholly determined by demand conditions, that is, by how much of the spillover in demand for nontraded goods goes to imports as opposed to exports.

While nominal wages are thus likely to rise as a result of an increase in demand, the effect on real wages is uncertain. With some labor mobility, nominal wages rise relative to traded goods prices but fall relative to nontraded goods prices. ¹² Hence, the overall effect on the real wage depends on the relative magnitudes of the increases in wages and prices ¹³ as well as the proportions of traded and nontraded goods in the consumer’s market basket. Nevertheless, two more definite observations can be made here. First, because nominal wages tend to rise by a greater degree in the nontraded goods sector, ¹⁴ the real wage of workers in that sector is more likely to rise with expansion. Second, the more immobile is labor, the smaller is the rise in nominal wages that is consistent with full employment in the traded goods sector. In such a setting, an expansion in domestic demand is likely to imply either reduced real wages or unemployment to workers in the traded sector.

If the hypothetical increase in demand under discussion proves unsustainable, ¹⁵ adjustment, consisting of a reversal of the increased expenditure, is required. For our purposes, two aspects of this process are of interest. First, the requisite cuts in spending will have a direct effect on the distribution of income, appropriately measured, if, as is inevitably true, the distribution of the net benefits to be curtailed are not perfectly uniform. Second, in addition to these effects, which are discussed in Section II, there are also distributional repercussions of unwinding the structural changes outlined earlier. For example, if the real wage of labor has not risen with an expansion in domestic aggregate demand, the real wage need not decline with adjustment. Rather, the ratio of the nominal wage to the price of traded goods must fall, and whether or not this entails a decline in the real wage depends—as in an expansion—on the relative declines in wages and prices and the proportions of traded and nontraded goods in labor’s consumption basket. ¹⁶

II. Stabilization Programs and the Distribution of Income

The programs associated with the use of Fund resources in the upper credit tranches typically include limitations on aggregate demand as well as specific provisions for changing relative prices within the economy. As fiscal deficits are a principal source of external and internal balance, strong emphasis is placed on eliminating them. Although programs generally contain targets for budget deficits, performance criteria for meeting them are usually in the form of ceilings on net credit to government and on new external loans contracted by the government or the public sector. The private sector also contributes to the problem when the terms and availability of credit encourage the maintenance of unsustainable consumption levels and investment in projects that would not occur if the interest rate correctly reflected the true opportunity cost of borrowing in world markets. Accordingly, programs often specifically limit the extension of credit to the private sector in order to contain this source of excess demand. Programs also include measures that work directly on prices under the control of the authorities. Most prominent here are currency depreciation and the relaxation of foreign exchange restrictions, the lifting of price controls on the private sector, and the rationalization of prices of public enterprises.

It is worthwhile to consider a few methodological points before discussing the effect of specific policy instruments. To begin with, measuring the distributional consequences of a stabilization program is not straightforward. The ideal data set, which would provide the distribution of income both prior to and at some time after the implementation of a program, does not exist. Hence, one must rely on knowledge of the effects of the program on certain proxy variables that are correlated with the income of specific groups. In this context, it is useful to delineate four categories of income distribution: First, functional income distribution, that is, wage and salary earners, profit earners, landowners, and fixed–rent earners. Second, regional income distribution, particularly in terms of the distinction between rural and urban dwellers. Third, distributional effects across the various productive sectors that make up the gross national product. Finally, distributional effects from the viewpoint of the public sector versus the private sector.

The distributional effects of policy measures are relatively easy to trace when the measures are directed at particular groups or activities. Examples of such measures include changes in producer prices under public sector control, holding public sector wages constant in the face of general inflation, and selective credit policies in a climate of excess demand for loanable funds. The magnitude of the subsequent distributional effects will also be influenced by the extent to which nominal factor rewards are indexed or downwardly inflexible. At the same time, factor price rigidity also tends to cause unemployment and therefore may, on balance, either better or worsen the income share of the affected group.

Finally, the benchmark for considering the effects of a program is the distribution of income prevailing at the program’s inception. However, since the initial point is not a sustainable equilibrium, it does not present a viable option for the economy to replicate in the future. Indeed, its very unsustainability implies that adjustment must be made, suggesting that the distribution of income is likely to change as well. Thus, while our focus is on the change in the distribution attributable to the program, it should be kept in mind that with or without the program the distribution of income would have changed, albeit differently, whether a different program were adopted or whether the authorities tried to maintain the prevailing situation through controls and restrictions.

III. Findings and Conclusions

In most cases, the success of a stabilization program can be judged in terms of its effect on the ratio of the prices of non-traded goods to those of traded goods. Unlike the external terms of trade, which are largely beyond the control of the authorities, this ratio is a key variable that the authorities can influence in attempting to achieve internal and external balance. If the ratio is “too high,” external balance achieved through restraint of demand entails unemployment, and internal balance entails an unsustainable balance of payments.

Given the conditions of production and the external market situation, movements toward the equilibrium ratio are generated by currency depreciation, which directly raises the domestic price of traded goods, and by monetary and fiscal restraint, which relieves the upward pressure on the prices of nontraded goods. Without a depreciation, the requisite decline in the ratio in question entails an absolute decrease in the nominal price of nontraded goods that is often not practicable. Without demand restraint, the devaluation–induced change in relative prices will be eroded by subsequent increases in the prices of nontraded goods. With regard to distributional effects, the reduced fiscal benefits implicit in restraint and the once–and–for–all inflationary impact of devaluation will inevitably affect economic agents differently, while the change in the internal terms of trade, if sustained, will lead to further distributional effects.

In comparing the specific countries examined in this study, ²⁰ the distributional impact of a sustained reduction in the ratio of the prices of nontraded goods to those of traded goods and the associated change in relative factor returns would appear to differ according to the underlying structure of the economy. Where, as in Ghana, the export sector is agricultural and dominated by small–scale operators and at the same time provides employment for a large segment of the population, the distributional effects would tend to be fairly egalitarian. Moreover, many of the unskilled workers in the urban sector retain strong working and family ties with the rural sector. The degree of mobility imparted by these connections allows this group to share in the gains accruing to the agricultural sector.

In the other countries under study, however, the distributional implications of a change in the internal terms of trade are more ambiguous. In Indonesia, for example, petroleum products accounted for some 35 per cent of export earnings in the early 1960s, and agriculture dominated the non–oil export sector. The agricultural sector, which employed about two thirds of the labor force, was composed of publicly owned estates and small producers farming family plots, generally of five acres or less. Almost three fourths of the tilled area was cultivated by the owner, rice being the most important commodity. Food prices comprised more than one half of the consumer price index, and import substitution measures favored certain manufactured goods. In this setting, a decline in the ratio of the prices of non-traded goods to those of traded goods would tend to shift real income away from farmers who specialize in foodcrops for the domestic market toward the urban sector and farmers who specialize in export crops. During this period, however, relatively rapid economic growth in the urban sector was taking place, inducing additional migration there. This situation would tend to temper somewhat the effect of any program–induced change in the rural/urban distribution on the overall distribution of income.

In Bolivia, 85 per cent of exports are mineral products, of which about 65 per cent are produced by public enterprises. Nontraded goods are largely agricultural products and simple manufactures, both produced principally by the poorer segments of the population. Hence, the movement in the internal terms of trade required by adjustment would tend to be to the disadvantage of the lower–income groups in Bolivia. Nevertheless, this worsening in their relative position could be offset by a coincident improvement in public sector operations—either passively, if the poor’s share of fiscal benefits exceeds its share of national income, or actively, by an increase in the poor’s share of public goods.

In the Philippines, the effect is even more complicated. About 65 per cent of exports are agricultural, and imports are overwhelmingly producer goods.

A movement in the internal terms of trade to achieve external balance would favor producers of agricultural exports at the expense of producers of goods for domestic consumption—such as corn, rice, and manufactured goods—whose prices were shielded from international markets. With the smallest farm-holdings planted to corn, rice, and other staples, the internal terms–of–trade effect is likely to intensify inequality within the rural sector. At the same time, through a relative reduction in urban income, which tends to be twice as high per family as does rural income, an increase in the ratio of the prices of nontraded goods to those of traded goods would narrow the dispersion of income distribution.

Turning to the stabilization programs under study, one finds that in each of the countries a public sector deficit had been a major source of disequilibrium. Hence, the programs emphasized fiscal restraint. In Bolivia, the cornerstone of the program was to be restraint in government spending, augmented by various revenue–producing measures. The latter were associated mainly with the large currency depreciation that was included in the program, the most important of which was a 20 per cent ad valorem tax on exports. The devaluation was also expected to restore the profitability of operations in publicly owned tin and hydrocarbons, providing an additional source of revenue. As for distributional effects, to reduce the adverse effect of devaluation on real wages, a general increase of $b 135 a month for public and private workers, regardless of salary level, accompanied the program.

In Ghana, the budget deficit was reduced to a level that could be financed out of domestic nonbank receipts and external loans and grants. This restraint facilitated a reduction in the rate of domestic credit expansion. Current expenditure was reorganized to reduce low–priority items, and efforts were made to rationalize the tax system in a way that would improve the collection of revenue. The ratio of government revenue to GDP rose between 1966 and 1970, and an increasing share of the tax burden was borne by the cocoa farmers (whose incomes are relatively easy to tax because they are received mainly in cash from a marketing board) even while their aftertax income was rising relative to GDP.

In Indonesia, a major objective of the program was to limit the overall budget deficit to the level of foreign aid and capital inflows. There was strict control over expenditure, and collection methods were considerably improved. During the period 1967–74, government revenue rose relative to GDP, and the burden of the increase was borne mainly by the oil sector. The individual income tax, export duties, and import duties all declined relative to total revenue.

In the Philippines, the program likewise emphasized fiscal restraint. Revenues were enhanced by the increase in customs receipts that accompanied the currency depreciation, a new tax on exports, and better fiscal administration. On the expenditure side, general development outlays were reduced, and overall spending was more closely monitored than before. While it is difficult to pinpoint the specific distributional impact of these measures, there was an apparent tendency to favor agricultural development. With 90 per cent of the poorest 40 per cent of the population living in rural areas and engaged primarily in farming, such an orientation would tend to have an egalitarian influence on the overall distribution of income.

In each case, a large exchange rate change was part of the program. In Bolivia, the peso value of the dollar was increased by 65 per cent in October 1972. As domestic costs had been rising faster than world prices for tin and other exports, public and private export enterprises had been increasingly squeezed financially, with unfavorable consequences for both employment there and government finances. Moreover, given the emerging structure of prices, the level of domestic demand required to attain full employment was not consistent with external balance, that is, the exchange rate had become overvalued.

In Ghana, a devaluation of 30 per cent was undertaken in the initial stage of the stabilization program. During the period 1961–65, when rates of domestic credit expansion had been much higher than real growth rates, domestic costs and prices were running well ahead of import prices. For example, in 1965 the ratio of the GDP deflator to the domestic price of imports was 36 per cent above its 1960 value. Meanwhile, cocoa prices were falling in world markets. While the producer price for cocoa could have been raised to bolster the profitability of the export sector, this was not a viable option in budgetary terms. Furthermore, in 1965 international reserves were less than half of what they had been in 1960.

In Indonesia, the rate of inflation had increased from 24 per cent in 1961 to 986 per cent in 1966, and the external effect of this acceleration led the authorities to intensify exchange and trade restrictions and to institute a complicated system of multiple exchange rates. A flexible exchange rate policy was instituted at the inception of the program in October 1966. The exchange rates in the two major markets depreciated until the rates were unified at Rp 315 = US$1 in April 1970. In August 1971, following a further currency depreciation, the value of the rupiah was fixed at Rp 415 per US$1.

In the Philippines, the program allowed for a flexible exchange rate policy. Following the exchange reform of February 20, 1970, the peso depreciated by 56 per cent vis–a–vis the dollar. While the motive force for the program was very high debt service payments, the exchange rate had been overvalued for some time. The viability of this rate had been maintained through an elaborate system of exchange controls, tariffs, and quotas, all of which favored the production of import substitutes. This kind of approach to development, that is, where few provisions are made to encourage exports, in the context of a rapidly growing labor force had created increasingly onerous unemployment. Currency depreciation was an important ingredient in implementing a strategy that would permit sustained growth through the simultaneous achievement of internal and external balance.

To the extent that restraint was maintained, the decrease in the ratio of the prices of nontraded goods to those of traded goods obtained by the respective devaluations was likewise maintained. To the extent that the planned restraint was relaxed, excess demand tended to pull up the prices of nontraded goods, reversing the change in the internal terms of trade and the associated movement in factor prices. Thus, in Bolivia the failure to maintain the demand restraint provided for in the program led to domestic price increases that by early 1974 eroded the decrease in the price ratio obtained by the devaluation of October 1972.

In Ghana, in contrast, the ratio of the GDP deflator to the domestic price index for imports fell with the devaluation in 1966 and remained below its predevaluation level at least until 1970. Similarly, in the Philippines, import prices rose much faster than did those for nontraded goods during 1970, the first year of the program. In 1971, while the trend was reversed, it reflected mainly increases in domestic food prices that resulted from unfavorable supply factors rather than from unrestrained demand. In Indonesia, although the ratio of the domestic inflation rate to the world rate declined dramatically during the period of the program, the continued high level of this ratio meant that the price of purely domestic goods continued to rise relative to prices for traded goods. The improvement in the balance of payments that occurred was due largely to increased oil exports, capital inflows, and foreign aid.

It is also instructive to examine the effects of the program on wages. A decline in real wages is not a necessary precondition for a sustained movement toward external and internal balance in all cases, although it is in some. Nevertheless, where hired labor is an important factor of production in the export sector, a fall in the ratio of the nominal wage there to the price of exports is required for an improvement in the volume of exports. Moreover, movements in this ratio are apt to be good indicators of movements in the ratio of the prices of nontraded goods to those of traded goods, since the nominal wage in the export sector is likely to keep pace with prices there if the prices of nontraded goods rise as fast as export prices.

Again, the situation in Bolivia is illustrative of the effects of devaluation when restraint is not present. Nominal wages rose in the mining sector by more than 100 per cent between October 1972 and January 1974, when the average peso price for exports rose by just under 100 per cent. In contrast, in the Philippines, nominal wages for skilled and unskilled workers rose by 10 per cent and 15 per cent, respectively, from 1970 to 1972, when export prices rose by 20 per cent. The Indonesian program resulted in a substantial decline in the rate of inflation that was beneficial to wage earners, but there is insufficient data to deduce the movement of real wages relative to profits. In Ghana, real wages in medium–scale and large–scale establishments, for which data are available, rose in 1966 and 1967. Between 1967 and 1969, real wages rose marginally in the private sector but fell in the public sector. Only in construction in the private sector do real wages appear to have fallen significantly between 1967 and the end of 1969.

In contrast to the program–induced distributional effects that are transmitted through a change in the internal terms of trade and are largely structurally determined, the authorities possess considerable discretion over whose demand is reduced in the initial phase of the program. However, official decisions in this area are bound to be heavily influenced by political factors.

Often, for example, those with the most to lose from a program whose distributional objectives are egalitarian tend to be those with the most power. Moreover, if not provided for in the design of the program, these interests will tend to assert themselves and to interfere with the planned unfolding of the program.

Bolivia is a case in point. Exporters were able to secure a reduction in the tax to be levied on the inflated value of post-devaluation export receipts. This violated organized labor’s conception of relative equity, and strike threats netted a sizable bonus to labor. As a result of these and other concessions, the relative price effects of the devaluation had been largely eroded by the end of 1973. Similarly, in the Philippines, the inability to get legislative authorization for tax increases initially hampered the pursuit of economic development with financial stability. By way of contrast, changes in government had preceded the programs in Ghana and Indonesia, and support for these changes was predicated to a large extent on dissatisfaction with the economic instability that had characterized the previous periods. Hence, there existed in these countries a firmer basis of support for the restrictive measures to be undertaken.

As a counterbalance to these political factors, there are some fairly important economic reasons for being sanguine about the equalizing effects of successful programs on the distribution of income. One of these is connected with the dismantling of controls. These and other institutional distortions of the price mechanism prevent the economy from organizing production in the most efficient manner. More important, controls and restrictions create artificial scarcities and bring a bonanza to those who gain access to the artificially scarce rights, who may not be the most efficient producers and are typically not the poorest groups.

Indonesia and the Philippines are examples of countries that had relied heavily on exchange controls to maintain their external positions in the face of overvalued exchange rates. In Indonesia, the complicated system of multiple exchange rates that evolved during the period of hyperinflation fostered a black market for foreign exchange in which U. S. dollars sold for 4 times the highest official rate and for more than 40 times the lowest official rate. On the other side of the market, the availability and cost of foreign exchange to purchase imported inputs was also highly variable. This tended to result in excess profits for firms or individuals acquiring import licenses and in an arbitrary distribution of foreign exchange and profits. In the Philippines, major beneficiaries of the Government’s development strategy in the 1950s and the 1960s were those who owned businesses in the industrial sector. Differential access to rationed credit at low interest rates enhanced the profitable opportunities created by exchange controls and other policies favoring import substitution. The removal of some of these distortions tended to reduce the gains of those who had enjoyed special privileges.

Perhaps of greatest importance for distribution is the impact of successful stabilization efforts on employment. Where the export sector has greater potential for growth than do the nonexport sectors, and where the lack of foreign exchange for imports and the general uncertainty produced by inflation, severe exchange controls, and overvalued exchange rates have constraining effects on investment, the employment effects of successful stabilization efforts can be particularly favorable. This was, for example, an important consideration at the time of the Bolivian devaluation, when many small tin mines had closed because production costs had been too high relative to the selling price and investment in mineral production had been too low to permit a sustained increase in output and employment.

Employment effects also figured largely in the aftermath of the Philippine and Indonesian programs. As part of the general movement away from a strategy of import substitution, the Philippine program stressed improved competitiveness for exports, with currency depreciation playing a critical role. This allowed for growth in employment opportunities from demand generated abroad, and tended to relieve the strain on the balance of payments that otherwise would accompany attempts to provide jobs for a labor force growing at 3 per cent annually. In Indonesia, real output and employment rose throughout the period of the program. Increased employment opportunities, especially in the Indonesian context with its rapidly expanding population, are favorable to enhancing equality.

In Ghana, there was evidence that excess capacity had existed in the cocoa sector, prices being so low that farmers simply had stopped tending some existing trees. Employment could, therefore, be quickly increased in the agricultural sector by a currency depreciation that would allow producer prices to be raised without endangering the financial status of the Marketing Board. At the same time, however, the low rate of growth in the initial stages of the program caused employment in the modern sector to decline in 1966 and 1967; this employment picked up in 1968 and 1969.

In conclusion, this analysis supports the view that stabilization programs necessarily have distributional repercussions. That an economy is in a chronic state of external imbalance implies that the level and structure of domestic demand as well as the associated set of prices and factor rewards are unsustainable. Domestic political considerations will largely determine who bears the burden of reducing and restructuring aggregate demand in a manner consistent with the sustained achievement of external balance. Moreover, the associated reallocation of factors of production across sectors entails changes in the set of prices and factor payments that, from a short–run egalitarian perspective, may be undesirable and yet are necessary for the attainment of the economy’s balance of payments and growth objectives. Thus, real wage rates may have to fall and real profit rates increase so as to encourage increased foreign capital inflow and private domestic capital formation. Similarly, because the mobility of labor and capital is limited, factor rewards in export industries will tend to rise at the expense of their counterparts in more domestically oriented industries in the process of moving toward a sustainable situation. Depending on the structure of the economy, these changes may constitute a movement toward or away from equality. Finally, perhaps the most important effect of a successful program on both the structure of the economy and the distribution of income operates only over time through the increased inflow of capital and the correspondingly increased rate of investment. Future research might profitably be directed to this topic.