Firm Behaviour, Private Investment and Structural Adjustment

Abstract

After over two decades of strenuous and socially costly attempts to implement macroeconomic adjustment policies in middle-income countries¹ inspired by the World Bank and the IMF, a remarkable degree of consensus has been attained (or rather re-attained) on the virtues of budgetary balance, on the need for a strong real exchange rate to promote exports, and on the conduciveness of market signals to firms for microeconomic efficiency. However, the hard-won achievement of narrower current account deficits, reduced government expenditure and lower rates of inflation has yet to be matched to any extent by sustained renewal of per capita income growth, let alone by industrial recovery. During these decades, this same model, with surprisingly little modification, appears to have been employed by the Bretton Woods institutions as the basis for the design of macroeconomic policy appropriate to the transition from centrally-planned to market economies in Eastern Europe and to address a series of financial crises in the latter half of the 1990s.