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

  • Faini, Riccardo
  • de Melo, Jaime

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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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
Date of revision:
Handle: RePEc:wbk:wbrwps:473
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  1. Dornbusch, Rudiger, 1991. "Credibility and Stabilization," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 837-50, August.
  2. Tabellini, Guido & Alesina, Alberto, 1989. "External Debt, Capital Flight and Political Risk," Scholarly Articles 4553019, Harvard University Department of Economics.
  3. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
  4. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  5. Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42 National Bureau of Economic Research, Inc.
  6. Dell, Sidney, 1982. "Stabilization: The political economy of overkill," World Development, Elsevier, vol. 10(8), pages 597-612, August.
  7. Chenery, Hollis B, 1975. "The Structuralist Approach to Development Policy," American Economic Review, American Economic Association, vol. 65(2), pages 310-16, May.
  8. Buffie, Edward F., 1984. "The macroeconomics of trade liberalization," Journal of International Economics, Elsevier, vol. 17(1-2), pages 121-137, August.
  9. repec:oup:restud:v:58:y:1991:i:2:p:277-97 is not listed on IDEAS
  10. Easterly, William R. & Wetzel, Deborah L., 1989. "Policy determinants of growth : survey of theory and evidence," Policy Research Working Paper Series 343, The World Bank.
  11. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  12. Edwards, Sebastian, 1989. "The international monetary fund and the developing countries: A critical evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 31(1), pages 7-68, January.
  13. Dailami, Mansoor, 1990. "Financial policy and corporate investment in imperfect capital markets : the case of Korea," Policy Research Working Paper Series 409, The World Bank.
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