The Economics of Adjustment and Growth / Edition 2

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Overview

This book provides a systematic and coherent framework for understanding the interactions between the micro and macro dimensions of economic adjustment policies; that is, it explores short-run macroeconomic management and structural adjustment policies aimed at promoting economic growth. It emphasizes the importance of structural microeconomic characteristics in the transmission of policy shocks and the response of the economy to adjustment policies. It has particular relevance to the economics of developing countries.

The book is directed to economists interested in an overview of the economics of reform; economists in international organizations, such as the UN, the IMF, and the World Bank, dealing with development; and economists in developing countries. It is also a text for advanced undergraduate students pursuing a degree in economic policy and management and students in political science and public policy.

Audience: Economists, government researchers, as well as advanced undergraduate and graduate students.

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Editorial Reviews

Joshua Aizenman
The Economics of Adjustment and Growth is an exciting book, focusing on the challenges facing researchers and policymakers in the design and implementation of macroeconomic policies in developing countries. The book is very well written, with a nice balance between a clear exposition of models and an overview of their empirical applications. It summarizes the current state of knowledge and recent experience with policies. I highly recommended it to advanced undergraduate and graduate students interested in applied policy issues, as well as practitioners interested in gaining insight into current models and applications.
Panicos Demetriades
Richard Agénor's book provides an excellent and comprehensive analysis of macroeconomic and structural policy issues that are highly relevant for developing countries. Its rigorous, yet intuitive, treatment makes it particularly suitable for postgraduate programmes in development macroeconomics or development finance. It is also well suited for advanced macroeconomic courses that have a development or growth focus, as well as being an excellent up-to-date reference source for policymakers in developing countries.
Klaus Schmidt-Hebbel
This book brings together recent theory and fresh empirical evidence on all relevant dimensions of economic adjustment and growth. Drawing from the research frontier and the results and insights of worldwide policy experience, it presents a unified treatment in a rigorous but accessible form. Richard Agénor's new book is a primer for academic economists, policymakers, economic analysts, and students in the fields of macroeconomics, development economics, and international finance, both at undergraduate and graduate levels.
Klaus Schmidt-Hebbel
This book provides a comprehensive and up-to-date review of issues, theory, and empirical evidence on the complex relations between stabilization, structural reform, and growth. Pierre-Richard Agénor skillfully blends theory, empirical evidence, and policy lessons on all relevant topics related to growth and development. Brilliantly written, this book is required reading for professional economists and advanced students concerned with adjustment and reform, as well as policymakers in developing countries." (--Klaus Schmidt-Hebbel, Research Department, Central Bank of Chile, and Catholic University of Chile)
Joshua Aizenman
The Economics of Adjustment and Growth provides an excellent review of the policy issues confronting developing economies. It covers both the short-run macroeconomic management and structural adjustment policies aimed at economic growth. It provides a unique and accessible overview of the recent applied research in development economics. The book is a perfect fit for college and M.A. courses in development economics, as well as a very useful guide to policymakers and practitioners interested in recent advances in the field." (--Joshua Aizenman, Champion International Professor of Economics at Dartmouth College, Hanover, New Hampshire)
Susan M. Collins
Agénor's new volume provides a timely marriage of theory and evidence that is both an excellent teaching tool and a valuable reference." (--Susan M. Collins, Professor of Economics, Georgetown University and Senior Fellow, The Brookings Institution)
David Vines
Adjustment and growth in developing countries have become core issues for macroeconomics, in light of the Asian "miracle" of the early 1990s, and the subsequent Mexican and Asian crises. This book shows just how much good macroeconomic theory and empirical work have been done on these topics. Readers will find the extensive discussion of growth and convergence, and the thorough exposition of crisis models, extremely helpful. The exposition in the book is careful and systematic, and the emphasis on the empirical evidence throughout is valuable. As a result, the book will be very useful to both graduate students and their teachers. In addition, it will be helpful to those who seek a well organized account of just how much we have learned in these areas over the past ten years." (--David Vines, Fellow in Economics, Balliol College, Oxford University; and Director, ESRC Research Programme on Global Economic Institutions)
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Product Details

  • ISBN-13: 9780674015784
  • Publisher: Harvard University Press
  • Publication date: 9/28/2004
  • Edition description: Second Edition
  • Edition number: 2
  • Pages: 784
  • Product dimensions: 6.58 (w) x 9.28 (h) x 1.72 (d)

Meet the Author

Pierre-Richard Agénor is Hallsworth Professor of International Macroeconomics and Development Economics in the School of Economic Studies of the University of Manchester, United Kingdom, and Co-Director of the School's Centre for Growth and Business Cycle Research. His research interests include international macroeconomics, development economics, and growth theory.
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Table of Contents

Acknowledgments

Introduction and Overview

1. BUDGET CONSTRAINTS AND AGGREGATE ACCOUNTS

1.1 Production, Income, and Expenditure

1.2 A Consistency Accounting Matrix

1.2.1 Current Account Transactions

1.2.2 Capital Account Transactions

1.3 Identities and Budget Constraints

1.3.1 Gross Domestic Product and Absorption

1.3.2 The Government Budget Constraint

1.3.3 The Private Sector Budget Constraint

1.3.4 The External Sector Budget Constraint

1.3.5 The Balance Sheet of the Financial System

1.3.6 The Savings-Investment Balance

1.4 Social Accounting Matrices

1.4.1 Activity, Commodity, and Factor Accounts

1.4.2 Institutions and the Capital Account

1.4.3 The Rest-of-the-World Account

1.4.4 SAMs and Economy-wide Models

1.5 Summary

2. CONSUMPTION, SAVING, AND INVESTMENT

2.1 Consumption and Saving

2.1.1 The Permanent Income Hypothesis

2.1.2 The Life-Cycle Model

The Basic Framework

Age and the Dependency Ratio

2.1.3 Other Determinants

Income Levels and Income Uncertainty

Intergenerational Links

Liquidity Constraints

Inflation and Macroeconomic Stability

Government Saving

Expectations, Taxation, and Debt

Social Security, Pensions, and Insurance

Changes in the Terms of Trade

Financial Deepening

Household and Corporate Saving

2.1.4 Empirical Evidence

2.2 Investment

2.2.1 The Flexible Accelerator

2.2.2 The User Cost of Capital

2.2.3 Uncertainty and Irreversibility

2.2.4 Other Determinants

Credit Rationing

Foreign Exchange Constraint

The Real Exchange Rate

Public Investment

Macroeconomic Instability

The Debt Burden Effect

2.2.5 Empirical Evidence

2.3 Summary

Appendix - Income Uncertainty and Precautionary Saving

3. FISCAL DEFICITS, PUBLIC DEBT, AND THE CURRENT ACCOUNT

3.1 Structure of Public Finances

3.1.1 Conventional Sources of Revenue and Expenditure

3.1.2 Seigniorage and Inflationary Finance

3.1.3 Quasi-Fiscal Activities and Contingent Liabilities

3.2 The Government Budget Constraint

3.3 Assessing the Stance of Fiscal Policy

3.4 Deficit Rules, Budget Ceilings, and Fiscal Transparency

3.5 Fiscal Imbalances and External Deficits

3.6 Consistency and Sustainability

3.6.1 A Consistency Framework

3.6.2 Fiscal and External Sustainability

3.7 Sustainability and Solvency Constraints

3.8 Commodity Price Shocks and Deficits

3.9 Can Fiscal Austerity Be Expansionary?

3.10 Summary

4. THE FINANCIAL SYSTEM AND MONETARY POLICY

4.1 The Financial System

4.1.1 Financial Repression

4.1.2 Banks and Financial Intermediation

4.2 Money Demand

4.3 Indirect Instruments of Monetary Policy

4.4 Credit Rationing

4.5 The Transmission of Monetary Policy

4.5.1 Interest Rate Effects

4.5.2 Exchange Rate Effects

4.5.3 Asset Prices and Balance Sheet Effects

Net Worth and the Finance Premium

The Financial Accelerator

4.5.4 Credit Availability Effects

4.5.5 The Role of Expectations

4.6 Monetary Policy: Inflation Targeting

4.6.1 Strict Inflation Targeting

4.6.2 Policy Trade-offs and Flexible Inflation Targeting

4.6.3 Comparison with Intermediate Target Strategies

Monetary vs. Inflation Targeting Exchange Rate vs. Inflation Targeting

4.6.4 Requirements for Inflation Targeting

4.7 Monetary Policy in a Dollarized Economy

4.7.1 Persistence of Dollarization

4.7.2 Implications of Dollarization

4.8 Summary

Appendix - Inflation Targeting with Forward-Looking Expectations

5. EXCHANGE RATE REGIMES

5.1 The Nature of Exchange Rate Regimes

5.1.1 Pegged Exchange Rate Regimes

5.1.2 Flexible Exchange Rate Regimes

5.1.3 Band Regimes

5.1.4 Multiple Exchange Rate Regimes

5.2 Evidence on Exchange Rate Regimes

5.2.1 General Trends

5.2.2 Exchange Rate Bands

5.3 Choosing an Exchange Rate Regime

5.3.1 Some Conceptual Issues

5.3.2 The Evidence

5.3.3 A Practical Guide

5.4 Trade-offs and Exchange Rate Credibility

5.5 Exchange Rates and the Trade Balance

5.5.1 Measuring Competitiveness

5.5.2 Devaluation and the Trade Balance

5.6 Devaluation with Imported Inputs

5.7 Summary

6 INFLATION AND DISINFLATION PROGRAMS

6.1 Sources of Inflation

6.1.1 Hyperinflation and Chronic Inflation

6.1.2 Fiscal Deficits, Seigniorage, and Inflation

6.1.3 Other Sources of Chronic Inflation

Wage Inertia

Exchange Rates and the Terms of Trade

The Frequency of Price Adjustment

Food Prices

Time Inconsistency and the Inflation Bias

6.2 Nominal Anchors in Disinflation

6.2.1 Controllability and Effectiveness

6.2.2 Adjustment Paths and Relative Costs

6.2.3 Credibility, Fiscal Commitment, and Flexibility

6.2.4 The Flexibilization Stage

6.3 Disinflation: The Role of Credibility

6.3.1 Sources of Credibility Problems

6.3.2 Enhancing Credibility

Big Bang and Gradualism

Central Bank Independence

Price Controls

Aid as a Commitment Mechanism

6.4 Two Stabilization Experiments

6.4.1 Egypt, 1992-97

6.4.2 Uganda, 1987-95

6.5 Summary

Appendix - Inflation Persistence and Policy Credibility

7. CAPITAL INFLOWS: CAUSES AND POLICY RESPONSES

7.1 Capital Flows: Recent Evidence

7.2 How Volatile Are Capital Flows?

7.3 Domestic and External Factors

7.4 Macroeconomic Effects of Capital Inflows

7.5 External Shocks and Capital Flows

7.5.1 Households

7.5.2 Firms and the Labor Market

7.5.3 Commercial Banks

7.5.4 Government and the Central Bank

7.5.5 Equilibrium Conditions

The Money Market

The Credit Market

The Market for Home Goods

7.5.6 Graphical Solution

7.5.7 Rise in the World Interest Rate

7.6 Policy Responses to Capital Inflows

7.6.1 Sterilization

7.6.2 Exchange Rate Flexibility

7.6.3 Fiscal Adjustment

7.6.4 Capital Controls

Forms of Capital Controls

Pros and Cons of Capital Controls

7.6.5 Changes in Statutory Reserve Requirements

7.6.6 Other Policy Responses

7.7 Summary

Appendix - Measuring the Degree of Capital Mobility

8. FINANCIAL CRISES AND FINANCIAL VOLITILITY

8.1 Sources of Exchange Rate Crises

8.1.1 Inconsistent Fundamentals

8.1.2 Rational Policymakers and Self-Fulfilling Crises

8.1.3 Third-Generation Models

8.2 Currency Crises: Three Case Studies

8.2.1 The 1994 Crisis of the Mexican Peso

8.2.2 The 1997 Thai Baht Crisis

8.2.3 The 1999 Brazilian Real Crisis

8.3 Banking and Currency Crises

8.3.1 Causes of Banking Crises

8.3.2 Self-Fulfilling Bank Runs

8.3.3 Links between Currency and Banking Crises

8.3.4 Liquidity Crises in an Open Economy

8.4 Predicting Financial Crises

8.5 Financial Volatility: Sources and Effects

8.5.1 Volatility of Capital Flows

8.5.2 Herding Behavior and Contagion

8.5.3 The Tequila Effect and the Asia Crisis

8.6 Coping with Financial Volatility

8.6.1 Macroeconomic Discipline

8.6.2 Information Disclosure

8.6.3 The Tobin Tax

8.7 Summary

Appendix - The Mechanics of Speculative Attacks and Interest Rate Defense

9. POLICY TOOLS FOR MACROECONOMIC ANALYSIS

9.1 Assessing Business Cycle Regularities

9.2 Financial Programming

9.2.1 The Polak Model

9.2.2 An Extended Framework

9.3 The World Bank RMSM Model

9.4 The Merged Model and RMSM-X

9.4.1 The Merged IMF-World Bank Model 380

9.4.2 The RMSM-X Framework

9.5 Three-Gap Models

9.6 The 1-2-3 Model

9.6.1 The Minimal Setup

9.6.2 An Adverse Terms-of-Trade Shock

9.6.3 Investment, Saving, and the Government

9.7 Lags and the Adjustment Process

9.8 Summary

Appendix - Money Demand and Cointegration

10. GROWTH, POVERTY, AND INEQUALITY: SOME BASIC FACTS

10.1 A Long-Run Perspective

10.2 The Power of Compounding

10.2.1 Growth and Standards of Living

10.2.2 How Fast Do Economies Catch Up?

10.3 Some Basic Facts

10.3.1 Output Growth, Population, and Fertility

10.3.2 Saving, Investment, and Growth

10.3.3 Growth and Poverty

10.3.4 Inequality, Growth, and Development

The Kuznets Curve

Education and Income Distribution

10.3.5 Trade, Inflation, and Financial Deepening

10.4 Summary

Appendix - Common Measures of Poverty and Inequality

11. GROWTH AND TECHNOLOGICAL PROCESS: THE SOLOW-SWAN MODEL

11.1 Basic Structure and Assumptions

11.2 The Dynamics of Capital and Output

11.3 A Digression on Low-Income Traps

11.4 Population, Savings, and Output

11.5 The Speed of Adjustment

11.6 Model Predictions and Empirical Facts

11.7 Summary

Appendix - Dynamics of k, the Output Effect of s, and the Speed of Adjustment

12. KNOWLEDGE, HUMANCAPITAL, AND ENDOGENOUS GROWTH

12.1 The Accumulation of Knowledge

12.1.1 Knowledge as a By-Product: Learning by Doing

12.1.2 The Production of Knowledge

12.2 Human Capital and Returns to Scale

12.2.1 The Mankiw-Romer-Weil Model

12.2.2 The AK Model

12.3 Human Capital and Public Policy

12.4 Other Determinants of Growth

12.4.1 Fiscal Policy

Government Spending

The Dual Effects of Taxation

Budget Deficits and Growth

12.4.2 Inflation and Macroeconomic Stability

12.4.3 Trade and International Financial Openness

12.4.4 Financial Development

12.4.5 Political Factors and Income Inequality

12.4.6 Institutions and the Allocation of Talent

12.5 Summary

Appendix - Determinants and Costs of Corruption

13. THE DETERMINANTS OF ECONOMIC GROWTH: AN EMPIRICAL OVERVIEW

13.1 Growth Accounting

13.2 The East Asian "Miracle"

13.3 Growth Regressions and Convergence

13.3.1 Diminishing Returns and Convergence

13.3.2 Convergence and Cross-Section Regressions

13.3.3 Testing the Mankiw-Romer-Weil Model

13.4 The Empirics of Growth

13.5 The Econometric Evidence: Overview

13.5.1 Saving and Physical and Human Capital

13.5.2 Fiscal Variables

13.5.3 Inflation and Macroeconomic Stability

13.5.4 Financial Factors

13.5.5 External Trade and Financial Openness

13.5.6 Political Variables and Income Inequality

14. TRADE AND LABOR MARKET REFORMS

14.1 Trade Liberalization

14.1.1 The Gains from Trade

14.1.2 Recent Evidence on Trade Reforms

14.1.3 Trade Reform, Employment, and Wage Inequality

14.1.4 Obstacles to Trade Reform

14.2 Trade and Regional Integration

14.3 Reforming Labor Markets

14.3.1 Labor Markets in Developing Countries

Basic Structure

Employment Distribution and Unemployment

Wage Formation and Labor Market Segmentation

Minimum Wages

Trade Unions and the Bargaining Process

14.3.2 Labor Market Reforms and Flexibility

14.4 Summary

Appendix - Reforming Price Incentives in Agriculture

15. FISCAL ADJUSTMENT AND FINANCIAL SECTOR REFORMS

15.1 Fiscal Adjustment

15.1.1 Reforming Tax Systems

The Excess Burden of Taxation

Fighting Tax Evasion

Guidelines for Reform

15.1.2 Expenditure Control and Management

15.1.3 Civil Service Reform

15.1.4 Fiscal Decentralization

15.2 Pension Reform

15.2.1 Basic Features of Pension Systems

15.2.2 Pension Regimes and Saving: A Framework

15.2.3 Recent Evidence on Pension Reform

15.3 Interest Rate Liberalization

15.3.1 A Simple Framework

15.3.2 Potential Pitfalls

15.4 Sources of Financial Fragility

15.4.1 The Nature of Banks' Balance Sheets

15.4.2 Microeconomic and Institutional Failings

15.4.3 Moral Hazard and Perverse Incentives

15.4.4 Macroeconomic Instability

15.4.5 Premature Financial Liberalization

15.5 Strengthening Financial Systems

15.6 Summary

Appendix - Structural Policy Indices

16. AID, EXTERNAL DEBT, AND GROWTH

16.1 The Effects of Foreign Aid

16.1.1 Aid Effectiveness and the Fungibility Problem

16.1.2 Aid, Investment, and Growth

The Situation without Aid

The Effects of Aid on Investment

16.1.3 Aid and Growth: Cross-Country Evidence

16.2 Growth, Debt, and Fiscal Adjustment

16.3 The Debt Overhang and the Debt Laffer Curve

16.4 Measuring the Debt Burden

16.4.1 Conventional and Present Value Indicators

16.4.2 Sustainability and External Solvency

16.5 Debt Rescheduling and Debt Relief

16.6 Summary

Appendix - The Theory of Stages in the Balance of Payments

17. SEQUENCING, GRADUALISM, AND THE POLITICAL ECONOMY OF ADJUSTMENT

17.1 Stabilization and Structural Adjustment

17.2 The Order of Liberalization

17.2.1 Liberalization of External Accounts

17.2.2 Financial Reform and the Capital Account

17.2.3 A Formal Framework

Analysis of Liberalization Policies

Financial Deregulation

Relaxation of Capital Controls

Trade Liberalization

17.3 Sequencing and Labor Market Reforms

17.4 Political Constraints and Reforms

17.4.1 Modeling Political Conflict

17.4.2 The Benefits of Crises

17.4.3 Political Acceptability and Sustainability

17.5 Shock Treatment or Gradual Approach?

17.6 Summary

Appendix - Calculating the Welfare Effects of Reform

References

Figure Credits

Index

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