Private Sector Investment and Savings Behaviour: The PolicyImplications of Capital Account Disaggregation (The DistinguishedlLecture)

After a prolonged period of macroeconomic adjustment, lastingat least a decade in most LDCs, much has been learned (and in many casesre-learned) and a consensus reached about many key policy points, suchas the virtues of budgetary balance, the need for a strong real exchangerate, and the requirement for microeconomic reforms if markets are towork properly. To a considerable extent, moreover, there has beensuccess in closing current account deficits, reducing governmentexpenditure and moderating rates of inflation. Much of this logic isreflected in the standard policy models employed by the Bank and theFund which I shall discuss today. However, to the extent thatmacroeconomic adjustment is intended to lead on to renewed growth (andeventually poverty alleviation) the debate is far less consensual. Twomain lines of critique have been directed at what can be called the’Washington Consensus’: The first suggests that macroeconomic adjustment- as theorised and practised – has had negative effects in terms ofemployment, income distribution and even the environment, particularlybecause of the reduction in real wages and key public expenditures. Thesecond line of dissent from the standard model stresses the deleteriouseffect of orthodox macroeconomic adjustment packages on output growthitself, both through unnecessarily severe demand reductions on the onehand, and excessive adjustments (upward) to real interest rates and(downward) to public investment levels without taking into account thedomestic implications of external debt positions.