Crisis, Stabilization, and Economic Reform: Therapy by by Michael Bruno

By Michael Bruno

This publication examines the phenomenon of the excessive inflation procedures of the Seventies and Eighties as exemplified through Argentina, Brazil, and Israel. It explores the typical features of such strategies and their attainable cures--with a few emphasis at the classes of the Israeli event in appreciate of the position of earning coverage and the political financial system of stabilization. The dialogue of the theoretical underpinnings of ''shock'' remedies offers a superb instance for the mixing of a couple of disciplines: classes of monetary background, open economic system financial and macro concept, game-theory purposes to financial coverage layout (concepts comparable to dynamic inconsistency, govt popularity, and credibility) and the clarification of earning coverage.

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In Chapter 7 we consider the most recent stabilization and reform experience in six Eastern European countries, starting with the earlier Yugoslav and Polish shock programmes of 1990 and followed by Czechoslovakia, Bulgaria, and Romania in 1991. Hungary, which had a much longer and earlier reform experience, also carried out a successful and more conventional stabilization programme in 1991. The analysis of the dramatic developments in Eastern Europe concentrates on the underlying similarities of the macro-economics of stabilization across countries and regions, and attempts to isolate the particular problems that are common to Eastern and Central Europe but substantially different from the earlier experience elsewhere.

In political economy terms, this part of the budget is easiest to slash since there is no immediate political constituency that gets hurt, only the welfare of future voters. 4 Ballooning Internal and External Debt The harmful implications of the large deficit and the very size of the public sector have manifested themselves in a number of areas, especially in a rapid increase in the external and internal debt. The growth in the external debt was associated with persistent balance-of-payments problems and the need for price-level adjustments—devaluations and subsidy cuts—which, given the well-lubricated and accommodative wage–price–money supply mechanism, led to sustained shifts in the inflation rate (see next chapter).

Argentina and Brazil had a tax/GDP burden of about 30 per cent right through the 1980s, and Israel was running a ratio of around 40–50 per cent (with the lower bound occurring only once, before the height of the crisis). 13 Moderate versions of chronic inflation, exhibiting some of the characteristics of indexation and monetary accommodation, were already apparent in Latin America in the 1950s. An early reference to the qualitative difference between hyperinflation and what at the time was termed chronic inflation appears in an important study by Felipe Pazos (1972), based on an analysis of inflationary experience in Latin America during the immediate post-war period up to the end of the 1960s (1949–70).

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