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External Finance and Adjustment: Failure and Success in the Developing World PDF

501 Pages·1997·3.5 MB·English
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EXTERNAL FINANCE AND ADJUSTMENT INTERNATIONAL FINANCE AND DEVELOPMENT SERIES Published in association with the Institute of Social Studies General Editor: E.V.K. FitzGerald, Professor of Economics, Institute of Social Studies, The Hague, and Director, Finance and Trade Policy Research Centre, University of Oxford The International Finance and Development Series reflects the research carried out at The Hague and associated centres in Europe, Asia, Africa and Latin America on the relationship between inter national capital flows and the process of structural adjustment in less developed economies. The studies in this series share a common analytical approach based on the use of advanced social accounting techniques and the explicit modelling of the economic behaviour of institutional sectors, which in turn permit a new approach to macroeconomic policy design. Karel Jansen EXTERNAL FINANCE IN THAILAND'S DEVELOPMENT Karel Jansen and Rob Vos (editors) EXTERNAL FINANCE AND ADJUSTMENT Rob Vos DEBT AND ADJUSTMENT IN THE WORLD ECONOMY Rob Vos and Josef T. Yap THE PHILIPPINE ECONOMY: EAST ASIA'S STRAY CAT? External Finance and Adjustment Failure and Success in the Developing World Edited by Karel Jansen Associate Professor Institute of Social Studies, The Hague and Rob Vos Senior Economist Inter-American Development Bank, Washington, DC and Senior Lecturer Institute of Social Studies, The Hague in association with ISS Palgrave Macmillan First published in Great Britain 1997 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-25907-6 ISBN 978-1-349-25905-2 (eBook) DOI 10.1007/978-1-349-25905-2 First published in the United States of America 1997 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 ISBN 978-0-312-17472-9 Library of Congress Cataloging-in-Publication Data External finance and adjustment: failure and success in the developing world 1 [edited by] Karel Jansen, Rob Vos. p. cm. - (International finance and development series) Includes bibliographical references and index. ISBN 978-0-312-17472-9 (cloth) I. Investments, Foreign-Developing countries. 2. Capital movements-Developing countries. 3. Structural adjustment (Economic policy)-Developing countries. I. Jansen, Karel. II. Vos, Rob, 1955- . III. Series. HG5993.E95 1997 332.67'3'091 724-dc21 97-1791 CIP Selection and editorial matter © Karel Jansen and Rob Vos 1997 Chapter I © Karel Jansen and E. V. K. FitzGerald 1997; Chapters 4, 9 and 12 © Karel Jansen 1997; Chapters 2 and 11 © Rob Vos 1997; Chapter 7 © Josef Yap and Rob Vos 1997; Chapters 3, 5, 6, 8 and 10 © Institute of Social Studies 1997 Softcover reprint of the hardcover 18t edition 1997 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10987654321 06 05 04 03 02 01 00 99 98 97 Contents List of Tables and Figures xiii Series Editor's Introduction xix Editors' Preface xxiv 1 International Finance, Growth and Adjustment: An Introduction 1 Karel Jansen and E. v.K. FitzGerald 1.1 Introduction 1 1.2 Background 8 1.3 The Role of External Capital in Economic Development 11 1.4 Approach of the Study and Summary of Findings 15 1.4.1 Methodology 17 1.4.2 Comparison to other studies 16 1.4.3 Main fmdings 22 1.5 Outline of the Book 29 Notes 32 2 External Finance and Structural Change 33 Rob Vos 2.1 Introduction 33 2.2 Structure, Markets and Institutions 35 2.2.1 The accounting framework 35 2.2.2 Structural change 37 2.2.3 Savings and income distribution 43 2.2.4 Financial development and investment 48 v vi External Finance and Adjustment in the Developing World 2.3 External Finance and Economic Structure: Simulation Results Using MSAF-based CGE Models 57 Notes 61 3 External Shocks and Domestic Adjustment in the 1970s and 1980s 63 E. V,K FitzGerald and Khwaja Sarmad 3.1 Exogenous Shocks and Structural Adjustment 63 3.2 A Methodology for Estimating External Shocks and Domestic Responses 65 3.3 The Nature of the External Shocks Experienced by LDCs 68 3.4 External Shocks and Individual Economies 74 3.5 Domestic Response to External Shock 75 3.6 Conclusions 86 Notes 88 4 External Finance, Investment and Growth 90 Karel Jansen 4.1 Introduction 90 4.2 The Public Sector Loan Boom 95 4.2.1 Public sector response to capital inflows: Theoretical considerations 96 4.2.2 Public sector response: A comprehensive view 100 4.2.3 Patterns of public sector adjustment: A mixed experience 102 4.3 Private Investment 110 4.3.1 Private investment under structural adjustment 112 4.3.2 Private investment in the case study countries 115 4.4 Conclusion 118 Notes 120 Contents vii 5 Incomplete Adjustment: Fiscal Policy, Private Savings and Current Account Deficits in Mexico since 1982 121 Angel Calderon-Madrid 5.1 Introduction 121 5.2 Crisis and Recovery 123 5.2.1 Background to the 1982 crisis 123 5.2.2 The orthodox stabilization attempts of 1982-87 125 5.2.3 Successful heterodox stabilization in 1987-92 129 5.3 Macroeconomic Adjustment Policy During the Stabilization Programmes 131 5.3.1 Fiscal adjustment and debt management 131 5.3.2 The problem of speculative attacks on the balance of payments 135 5.3.3 Exchange and interest rate management during the heterodox programme 138 5.4 Private Sector Behaviour Under the Heterodox Programme 141 5.4.1 Current account deficits and fiscal surpluses 141 5.4.2 Private savings and the consumption boom 143 5.4.3 Private sector portfolio adjustment 144 5.5 The Implications for Macroeconomic Policy 146 Postscript: Determinants of the Exchange Rate Crisis of 1994 148 Notes 153 6 External Shocks and Domestic Adjustment in Pakistan 157 Khwaja Sarmad 6.1 Introduction 157 6.2 A Historical Perspective 158 Period I (1970-77) 161 Period II (1978-86) 163 Period III (1987-90) 165 6.3 The Links with the Outside World 167 The burden of external debt 172 viii External Finance and Adjustment in the Developing World 6.4 Capital Accounts of Institutional Agents and the Flow of Funds 173 6.4.1 Savings and investment 173 Period I (1970-77) 173 Period IIa (1978-81) 175 Period lib (1982-86) 175 Period III (1987-90) 175 6.4.2 Capital flight or net acquisition of external private assets 176 6.4.3 Flow of funds 179 6.5 Conclusion 186 Notes 188 7 The Philippines: Finance Without Development 190 Josef Yap and Rob Vos 7.1 Introduction 190 7.2 External Finance and Growth 192 7.3 Political Economy and Adjustment Policies 198 The 1970-74 Regime 198 The 1975-79 Regime 202 The 1980-82 Regime 205 The 1983-85 Regime 208 The New Regime: 1986-93 210 The political economy of external debt management 214 7.4 Private Sector Adjustment and Emerging Policy Dilemmas 216 Private and public accumulation behaviour 216 Emerging policy dilemmas 222 The fiscal bind and a reassessment of the debt management strategy 224 7.5 Conclusions 226 On policy effectiveness 226 On the role of external finance 227 Policy implications 229 Notes 232 Contents ix 8 Imports, Investment and Aid in Tanzania 234 Joshua Doriye, Howard White and Marc Wuyts 8.1 Introduction 234 8.2 Capital Inflows to Tanzania 234 8.3 Accounting for Aid in the Tanzanian Economy 237 8.4 Impact of Aid on Economic Development 244 8.5 Policy Changes Under Two Aid Booms 251 8.5 Conclusions 257 Notes 258 9 External Finance and Adjustment in Thailand 260 Karel Jansen 9.1 Introduction 260 9.2 External Shocks 261 9.3 Policy Regimes 271 9.3.1 Development strategy 271 9.3.2 Adjustment policies 273 9.3.3 Policy regimes 285 9.4 Conclusion 293 Notes 298 10 External Dependence, Structural Adjustment and Development Aid in Sub-Saharan Africa 300 Rolph van der Hoeven 10.1 Introduction 300 10.2 The Continuous Need for External Resources 301 10.3 Trade in the Context of Structural Change 305 10.3.1 African trade during the crisis years 305 10.3.2 Trade policies for structural change 310 10.4 Debt in the Context of Structural Change 313 10.4.1 The growing mountain of debt 313

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This book studies the impact of different sources of external finance on growth and development in different country contexts. An important finding of the study is that 'success' or 'failure' in the productive use of external and domestic financial resources cannot be explained on the basis of singl
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