Economic Policy Choices—Macroeconomic and Financial Stability

This chapter and the next examine the second of the four dimensions that were identified earlier in the book as relevant for understanding the different development paths of East Asia and Latin America, namely, the role of economic policy choices. As noted earlier, governments in East Asia and Latin America have dealt very differently with the two basic macroeconomic constraints that have a bearing on development outcomes. One is fiscal solvency and the management of a generally sound path for the public finances that avoids the excesses of both chronic inflation and public debt problems; the degree to which countries manage this first constraint will determine to a great extent whether they are able to maintain approximate macroeconomic stability, which is a necessary condition for sustained growth and development. The other constraint is external sustainability. This constraint involves the management of a viable balance of payments position over time through export promotion and the encouragement of non-debt-creating capital inflows consistent with a sound public and private debt position. Obviously, these twin macroeconomic constraints or objectives of fiscal solvency and external viability are interrelated, as it is difficult for a country to sustain one without the other. In dealing with these constraints, it is clear that East Asia has been far more successful than Latin America, which is an important reason why the former region has been able to sustain more rapid economic growth and structural change than the latter.