Human Motivation in Political Economy
Chapter 12: The Political Economy of Stabilization Programmes in Developing Countries with Reiner Eichenberger
PROBLEMS AND ISSUES Developing countries are faced with severe economic problems: high, galloping rates of inﬂation, large shares of the population without adequate employment, and low real growth or even declining standards of living. The balance of payments and budget are regularly in deﬁcit. The developing countries’ governments may turn to various sources of outside help. Some countries were fortunate enough to receive substantial help from industrial countries for strategic political reasons (Israel and Cuba are, or were, good examples of this). Most countries’ governments have to resort to the international credit market. However, due to the high country risk typically attributed to nations in trouble, either the interest rates demanded are very high, or credits are not available at all. Governments must then turn to international ﬁnancial institutions, most importantly the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank). The cost of the credit to the government of the recipient developing country is then not so much (or not at all) reﬂected in the interest rate, but rather in the conditionalities attached, that is in the adjustment programme the country is contractually obliged to undertake. In such programmes, three kinds of action are normally required of the developing country’s government: the currency must be devalued in order to balance external accounts, the budget must be balanced, and the distorted price structure must be reformed, involving, in particular, a heavy reduction or discontinuation in subsidies to speciﬁc households and ﬁrms. Experience...
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