Observations On Price Stabilization And Economic Development

In the last 10 to 15 years, macroeconomic policy throughout the developing world has placed strong emphasis on policies for price stabilization, often giving them precedence over growth policies in the short- and medium term. While the benefits of stabilization are undeniable, and almost everyone would prefer less inflation to more, care should be taken to ensure that the means of achieving stabilization do not prejudice growth prospects, as indicated in the discussion earlier in this chapter about exchange rate policies. When inflation is very high, clearly priority has to be given to bringing it down. When it is moderate, however, at times it may be more appropriate to have inflation control share priority with the creation of income and employment. This matter has been put into perspective by Joseph Stiglitz.110 Some of his work on this and related subjects was summarized by Simon Maxwell and Robin Heber Percy in the following terms:

• high inflation (over 40 percent per annum) is seriously damaging, but lower inflation is not, and controlling inflation should not be a priority for many developing countries;

• there is too much concern with controlling budget and current account deficits. Deficits are to be sustainable;

• macro-economic stability is less important than stabilizing output or unemployment

108. Dean F. Schreiner and Magdalena García U., Principales Resultados de los Programas de Ajuste Estructural en Honduras, Serie Estudios de Economía Agrícola No. 5, Proyecto APAH, Abt Associates, Inc., Tegucigalpa, Honduras, June, 1993, p. 19.

109. B. Senauer, 'Household behavior and nutrition in developing countries', Food Policy, 15(5), October 1990, p. 63; quoted in FAO, State of Food and Agriculture 1995, Food and Agriculture Organization of the United Nations, Rome, 1995, p. 65.

110. The relevant papers of Stiglitz are: (a) 'More instruments and broader goals: moving towards the postWashington consensus', Annual Research Lecture, World Institute for Development Economics, Helsinki, January 7, 1998; (b) 'Towards a new paradigm for development strategies, policies and processes', 1998 Pre-bisch Lecture at UNCTAD, Geneva, October 19, 1998.

which often requires microeconomic intervention. . . .

• rather than focusing simply on liberalizing trade, governments must intervene to create competitive export sectors;

• privatization needs to be supplemented by provision of institutional infrastructure, including regulatory bodies, and there are critical issues about both sequencing and scope. . . .U1

Many countries such as Mexico through the latter half of the 1990s have managed to grow at a satisfactory rate while inflation was at levels above 10%. In this recent experience in Mexico, policy worked on gradually reducing inflation while maintaining stimuli to growth. The key to a successful stabilization policy is sustainable reductions in fiscal deficits, instead of artifices such as overvalued exchange rates, abrupt tariff reductions and monetary sterilization of liquid balances in the economy. It takes time to engineer an enduring reduction in inflation in the proper way, but many countries have done it, and the benefit can be more rapid growth of output and employment in the meantime. This is especially true of growth in the agricultural sector.

It may be time to shift the balance in macro-economic policy back toward promoting economic growth, which in the end is the most effective way to alleviate poverty, both rural and urban.

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