Adjustment policies and investment performance in developing countries : theory, country experiences, and policy implications

Abstract

The authors analyze the response of private and public investment to external shocks, macroeconomic adjustment, and structural reform in three sets of countries: (a) countries that pursued structural reform and liberalization in Latin American in the 1970s (Chile) or the 1980s (Mexico and Bolivia); (b) countries that experienced severe macroeconomic instability and did not pursue macroeconomic reform (Argentina and Brazil); and (c) East Asian countries with high-growth, outward-oriented, state-active economies that adjusted to the shocks of the 1980s and maintained high growth, low inflation, and remarkable macroeconomic stability (Korea, Singapore and Thailand). Drawing on the literature and their economic analysis of the determinants of private investment in developing countries using cross-country data for 1972-87, the authors concluded that: (a) macroeconomic stability and policy credibility are essential for achieving a strong investment reponse; (b) the sequence of adjustment measures is important; (c) even well-designed, consistent adjustment programs might have to overcome a lack of credibility, especially in their early stages; and (d) even if policy changes are perceived as permanent, inadequate infrastructure may pose a significant obstacle to the recovery of private investment.Environmental Economics&Policies,Economic Theory&Research,Trade and Regional Integration,Macroeconomic Management,Financial Intermediation