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Adjustment, investment, and the real exchange rate in developing countries

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  • Faini, Riccardo
  • de Melo, Jaime

Abstract

At the center of the controversy about effectiveness of"adjustment with growth"loan packages from the IMF and the World Bank has been the heavy emphasis on real exchange rate depreciation as a way to restore external balance and elicit a positive supply response. The authors find that adjustment has been far more successful for countries exporting manufactured goods than for countries exporting primary goods. Devaluation of the exchange rate in countries exporting primary goods appears to be ineffective. Most of their adjustment has taken the form of reduced spending rather than increased supply. As a result, they have not resumed sustainable growth. The longer term prospects for exporters of manufactured goods are much brighter. They show more signs of improving efficiency and less decline in investment than do exporters of primary goods.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 473.

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Date of creation: 31 Aug 1990
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Handle: RePEc:wbk:wbrwps:473

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Achieving Shared Growth;

References

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  1. Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," UCLA Economics Working Papers, UCLA Department of Economics 538, UCLA Department of Economics.
  2. Edwards, Sebastian, 1989. "The international monetary fund and the developing countries: A critical evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 31(1), pages 7-68, January.
  3. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 18(1), pages 47-82, January.
  4. Easterly, William R. & Wetzel, Deborah L., 1989. "Policy determinants of growth : survey of theory and evidence," Policy Research Working Paper Series, The World Bank 343, The World Bank.
  5. Dornbusch, Rudiger, 1990. "Credibility and Stabilization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 454, C.E.P.R. Discussion Papers.
  6. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 36(2), pages 229-242, October.
  7. Buffie, Edward F., 1984. "The macroeconomics of trade liberalization," Journal of International Economics, Elsevier, Elsevier, vol. 17(1-2), pages 121-137, August.
  8. Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, National Bureau of Economic Research, Inc, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42 National Bureau of Economic Research, Inc.
  9. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  10. Chenery, Hollis B, 1975. "The Structuralist Approach to Development Policy," American Economic Review, American Economic Association, American Economic Association, vol. 65(2), pages 310-16, May.
  11. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  12. Dailami, Mansoor, 1990. "Financial policy and corporate investment in imperfect capital markets : the case of Korea," Policy Research Working Paper Series, The World Bank 409, The World Bank.
  13. Dell, Sidney, 1982. "Stabilization: The political economy of overkill," World Development, Elsevier, Elsevier, vol. 10(8), pages 597-612, August.
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