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Macroeconomic Adjustment in Developing Countries

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  • Corden, W Max

Abstract

The short-run adjustment problem in developing countries involves both the improvements of the current account and the reduction of inflation. In both cases, the usual reason for adjustment is shown to be the fiscal deficit. The article distinguishes primary adjustment costs, which are inevitable, from secondary costs, which result, for example, from failure to devalue or from real wage rigidity. The article then analyzes the effects of expenditure reduction and currency devaluation on various sectors of the economy. Reducing inflation involves both an inflation tax replacement and a price adjustment problem, and "heterodox" policies designed to deal with the latter are discussed. If the fiscal deficit cannot be reduced, the article argues, improving the current account may be at the cost of increasing inflation and likewise reducing inflation may be at the cost of worsening the current account. Copyright 1989 by Oxford University Press.

Suggested Citation

  • Corden, W Max, 1989. "Macroeconomic Adjustment in Developing Countries," The World Bank Research Observer, World Bank, vol. 4(1), pages 51-64, January.
    • Handle: RePEc:oup:wbrobs:v:4:y:1989:i:1:p:51-64
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    Cited by:

    1. Sergio G. Villarroel-Böhrt, 2007. "Reallocation of Resources within the National Productive System in Bolivia: A View from the Perspective of Tradable and Non-Tradable Goods," Economía Mexicana NUEVA ÉPOCA, , vol. 0(1), pages 105-149, January-J.
    2. William Lyakurwa, 1993. "The Fiscal Impact of Trade Reforms in Tanzania in the 1980s," The World Economy, Wiley Blackwell, vol. 16(5), pages 621-638, September.
    3. Bourguignon, Francois & de Melo, Jaime & Morrisson, Christian, 1991. "Poverty and income distribution during adjustment: Issues and evidence from the OECD project," World Development, Elsevier, vol. 19(11), pages 1485-1508, November.
    4. Egwaikhide Festus O, 1997. "Effects of budget deficits on the current account balance in Nigeria : A simulation exercise," Working Papers 70, African Economic Research Consortium, Research Department.
    5. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.
    6. Rodriguez, Francisco, 2020. "The political economy of Maduro’s economic policies," MPRA Paper 105121, University Library of Munich, Germany.

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