Stabilization and Economic Growth in Developing Countries (Invited Lecture)

The need for stabilization typically arises when a country experiences an imbalance between domestic aggregate demand and aggregate supply, which is reflected in a worsening of its external payments position and an increase in the rate of inflation. To combat these twin problems, policies are required that restrain domestic demand and, at the same time, expand the production of tradeable goods, thereby easing the balance of payments constraint. Policies to influence the aggregate level or rate of growth of domestic demand and absorption, generally labelled as “demand side policies”, include the whole range of monetary and fiscal measures, while the shifting of resources towards the production of tradeables involves altering the country’s real exchange rate through devaluation. In general, monetary and fiscal policies and exchange rate action are considered an integral, if not an indispensable component of any stabilization programme.