Globalization and Economic Development
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Globalization and Economic Development

Essays in Honour of J. George Waardenburg

Edited by Servaas Storm and C. W.M. Naastepad

Globalization is widely regarded as a means not only of ensuring efficiency and growth, but also of achieving equity and development for those countries operating in the global economy. The book argues that this perception of globalization as the road to development has lost its lustre. The experience of the 1990s belied expectation of the gains, such as faster growth and reduced poverty, which could be achieved through closer integration in the world economy.
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Chapter 6: The many edges of the fiscal policy sword

C.W.M. Naastepad


6. The many edges of the fiscal policy sword C.W.M. Naastepad* 1. INTRODUCTION Macro- as well as microeconomic theory have pointed to positive relations between the government budget deficit and inflation, and between the budget deficit and the trade balance. With these positive relations in mind, governments have, under various programmes, committed themselves to reduce their budget deficits in order to keep inflation and trade deficits under control. This has happened most notably in programmes of stabilization and structural adjustment in developing countries. The experience with programmes of stabilization and structural adjustment in developing countries, however, shows that in many cases these policies have been accompanied by major declines in private investment and growth; nor have they everywhere succeeded in restoring price stability and in reducing current account deficits (Corbo and Fischer, 1995; Rodrik, 1995). This paper suggests that the reason for such failures may have to be sought in the negative impact of deficit reductions on the supply of credit as well as on ‘real’ supply. Monetized deficit reductions, which typically form the core of an adjustment programme, involve a monetary squeeze which may result in shortages of credit. If credit is used to finance working capital as well as investment, credit shortages may result in a reduced supply of goods and services in the short as well as medium run. In addition, when public investment is complementary to private investment, deficit reductions achieved through a curtailment of public...

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