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Boom, Crisis, and Adjustment: The Macroeconomic Experience of Developing Countries.

This is an excellent book for both academics and policy-makers. It reviews the diversity of macroeconomic experiences and policies of eighteen developing countries (Argentina, Brazil, Cameroon, Chile, Colombia, Costa Rica, Cote d'Ivoire, India, Indonesia, Kenya, Mexico, Morocco, Nigeria, Pakistan, Sri Lanka, South Korea, Thailand and Turkey) over the period 1965-92. Also, it focusses on the interplay between politics and economics.

The book is divided into four parts. The first is intended to provide a historical discussion of the macroeconomic experiences and policies of the eighteen countries. Chapters 1 and 2 give a general introduction and a brief review of the world economy over the period 1965-90. Chapter 3 looks at the period 1973-79 which witnesses two important events: (i) the new supply of international credit at low interest rates and (ii) the dramatic rise in oil prices in 1974. Because of the change in credit conditions, many countries borrowed heavily. This eventually led to the later debt crisis. Chapters 4 and 5 cover the crisis of the early 1980s and the adjustment period from 1983 to 1989. The authors mention many problems confronting developing countries and their policy reactions which include trade and other liberalization measures. Due to higher interest payments and reduced current account deficits, drastic shifts of resources also took place among these countries.

The second part of the book is devoted to germane issues like inflation and inflation stabilization, exchange rate policy, trade policy, and fiscal and monetary policies. Chapters 6 and 7 look at inflation in the eighteen countries, paying special attention to the connection between exogenous shocks and inflation, the outcome of stabilization attempts and the experiences of high inflation in Argentina, Brazil, Chile, Indonesia, Mexico, and Turkey. In Chapter 8, the exchange rate policies and changes in exchange rate regimes of the sampled countries are examined. The authors also assess the influence of various exchange rate regimes on inflation. Their main finding seems to refute the argument that fixing an exchange rate to the currency of a low-inflation economy "anchors" the economy's inflation rate. Chapter 9 surveys the change in trade regimes, highlights many episodes of trade liberization, and explores the relationship between exchange rate policy and trade policy.

Part III of the book deals with the role of macroeconomic policy in developing countries. Chapter 10 takes up the effects of fiscal and monetary policy. Contrary to conventional belief, the authors suggest that fiscal policy has not been too successful in terms of stabilizing output and employment. As well, seigniorage is found to be an important source of revenue to government in developing countries. In Chapter 11, the relationship between macroeconomic management and long-run growth is addressed. The authors pay considerable attention to the effects of macroeconomic policy on the investment ratio (investment/GNP), the productivity of investment, and the domestic savings ratio. In addition, the link between inflation and growth is investigated.

The last part of the book covers the political economy of stabilization and specific policy advice. Chapter 12 looks at political factors (the form of government, the strength of government, the role of interest groups, and institutional arrangements) that inhibit or prevent the achievement of economic goals. In the final chapter, the conclusions of the previous chapters are reiterated. On the basis of this unique experience of boom, crisis, and adjustment in eighteen developing countries, the authors [p. 403] make nine policy recommendations:

(1) Assert firm overall budgetary control and budgetary accountability.

(2) Be aware of the "unpleasant arithmetic".

(3) Maintain credit worthiness.

(4) Pursue sound long-run fiscal policy.

(5) Resist euphoria when export prices rise exceptionally, new resources are discovered, or new borrowing opportunities open.

(6) Avoid jerky movements in the real exchange rate.

(7) Avoid using import controls.

(8) Avoid building rigidity into the economy.

(9) Maintain flexibility in policy.

Overall, the book is well-motivated, informative and entertaining to read. It also contains many data series which can be useful for further investigation on the subject. Thus, it can serve as a reference both for research and teaching purposes and, as such, I strongly recommend it not only to those who work in the areas of development economics and macroeconomics, but also to those who have only a peripheral interest in the areas.

Andy C. C. Kwan The Chinese University of Hong Kong
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Author:Kwan, Andy C.C.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Apr 1, 1996
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