Financial systems and development

edly, in Argentina, Brazil, and Mexico. Most of in the Chinese economy, the exchange rate adjustthese
attempts have met with outright failure. ments of the early 1980s were essential in making
Their chief defect has been a lack of fiscal improve- Chinese enterprises more competitive. China has
ment. Stabilization programs that leave the funda- become a major exporter of manufactures in a very
mentals inconsistent with low inflation are bound short time. The Chinese government also avoided
to fail. Where the fiscal deficit has been cut relying too much on external borrowing. It postappropriately-as
in Mexico-the programs have poned ambitious industrial investment programs
been more successful.
in the late 1970s and again in the early 1980s. More
Some highly indebted countries (Costa Rica, recently it has faced difficulties in macroeconomic
C6te d'Ivoire, and the Philippines) have adopted policy. Domestic credit has been allowed to exfiscal
programs with moderate success, although pand too quickly, which has led to inflationary
the programs have yet to be sustained. Often, sev- pressures and shortages.
eral years of austerity have been followed by a Economic reforms in Eastern Europe, although
burst of spending that reverses the earlier gains. similar to those in China, have had less spectacular
Such instability retards saving, investment, ex- results, and some countries are in considerable difports,
and growth. Nonetheless, some debtor ficulty. Several factors explain this. One is that low
countries have made good progress on fiscal re- costs of production, at present exchange rates,
form. Chile, Colombia, Mexico, Morocco, and have enabled China to compete successfully
Uruguay have all reduced their budget deficits against middle-income exporters of manufactures.
through tax reform, higher revenues, and lower In contrast, costs in Eastern Europe are generally
spending.
higher; competing against the newly industrial-
Some countries, again including Chile, Mexico, ized economies of East Asia and the lower-income
and Morocco, have also pursued trade reform. For members of the European Community (EC) has
example, since 1985 Mexico has liberalized its trade therefore been difficult. Moreover, some of the
regime and maintained its competitiveness. Costa countries tried to modernize their industries with
Rica and the Philippines have focused on labor- heavy investment financed by foreign borrowing
intensive manufactured exports; in these countries and without reforming economic management.
the share of manufactured exports increased stead- This proved costly when real interest rates rose in
ily between 1982 and 1987, and manufactures now the 1980s.
account for about half of all exports.
Development issues
Adjustment in the centrally planned economies
The slow pace of adjustment in many countries is a
The centrally planned economies face a formidable major concern. But the task is neither simple nor
challenge in moving toward decentralized deci- purely economic. It requires institutional capacity
sionmaking and greater reliance on markets. The and political skill. It is inhibited by vested interprices
of many of their products have little to do ests, for it affects acquired rights, income, benefits,
with costs. The responsibilities of managers for rents, and costs. Where economic structures have
production and investment are badly defined. Fi- been in place for some time, the pain of adjustnancial
systems are rudimentary, and the tools of ment can be enormous. If reform is to last, it must
macroeconomic management are underdeveloped. not be rushed. The burden will have to be fairly
Few mechanisms allow labor and capital to be re- shared. And support from the international comallocated
as economic conditions change.
munity must be forthcoming.
Governments in many of these economies have
recognized the need for reform. The task is daunt- Poverty, population growth, and the environment
ing, but the benefits could be immense. The experience
of China during the past ten years demon- In many countries poverty cannot be separated
strates this. The reform of agriculture, the opening from rapid population growth. As per capita inof
the economy to foreign trade, technology, and comes rise, population growth rates eventually deinvestment,
and the new reliance on incentives in cline. That process has been at work in such counthe
industrial sector have led to an average growth tries as the Republic of Korea and Thailand, as it
rate of more than 10 percent a year during the was earlier in the high-income economies. But the
1980s. demographic transition is still at an early stage in
Although prices still play a relatively modest role some low-income Asian countries, such as India
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