Structural adjustment policies in developing economics.

This paper examines structural adjustment policies in developing economies, defined as policy responses to external or internal shocks that are carried out with the objective of regaining the pre-shock growth path. Examples of external shocks are the quadrupling of petroleum prices of 1973-74 and the world recession of 1974-75. Internal shocks may find their origin in Inappropriate economic policies, such as the excessively expansionary fiscal measures taken in Mexico after 1972, or in political events, such as the April 1974 Revolution in Portugal.

The introductory section of the paper reports on the policy experience of a number of developing countries after 1973, indicating that countries applying an outward-oriented development strategy were better able to cope with external shocks than economies following an inward-oriented strategy. It is further shown that the adoption of realistic exchange rates and interest rates, the avoidance of large budget deficits, and the productive use of the proceeds of foreign borrowing eased the process of adjustment.

The paper examines in detail the elements of a policy package that may be applied in response to external or internal shocks in the case prevalent in developing economies, when optimal policies are not applied. Thus, the recommendations simultaneously aim at responding to shocks and undertaking Incentives (the exchange rate, import protection, export subsidies, and price control), incentives to save and to invest, the choice of public investments, sectoral policies in energy and agriculture, budgetary policies, and monetary policies. In the conclusions, the interdependence of the various policy peasures is indicated, with further attention given to foreign borrowing. Finally, comments are offered on the international enviroment in which these policies operate.