Information about Asia and the Pacific Asia y el Pacífico
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8 Structural Adjustment: Lessons from the Southeast Asian Experience

Author(s):
Ungku Abdul Aziz
Published Date:
March 1990
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Information about Asia and the Pacific Asia y el Pacífico
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Author(s)
JORGE MARQUEZ-RUARTE

This paper discusses some general, important principles of economic policymaking, illustrates their application in some of the Southeast Asian economies,1 and discusses several economic issues that are coming to the forefront of the policy debate in some countries in the region. The paper is organized around the theme of “successful policies for structural adjustment.” Structural adjustment can be defined as the creation of conditions for sustained, noninflationary growth, and the elimination of impediments to the full and efficient use of resources. Furthermore, adjustment must permit the attainment of certain basic, and widely shared, social goals.

I would like to comment on each part of this definition. To begin with, structural adjustment must permit the attainment of growth of output that is both noninflationary and sustained. In practice, it has been difficult to sustain inflationary growth for long, even if its makers seek to achieve both steady growth and price stability in the medium term. Structural adjustment must also promote the elimination of impediments to the full and efficient use of resources. In this sense, adjustment consists of reducing distortions that discourage saving, investment, production, or employment, or that encourage the use of resources in sectors that are not the most advantageous for the community. Finally, structural adjustment must not prevent the pursuit of widely shared social and human goals: individual freedom, satisfaction of basic needs, and equity in the distribution of income and wealth. Whether these goals are actually sought or not is a political question, but adjustment must, at least, not make it impossible to pursue them.

On the basis of the preceding definition of structural adjustment, let me characterize successful strategies for such adjustment. The first point to make is that there is not one set of policy measures that is successful. Actual policies must be formulated in very specific country contexts. Although the policy approach of one country can be enriched by the experience of another country, it is dangerous to focus on instruments or specific measures rather than on the broad thrust of the policy approach. For example, Japan's annual round of simultaneous wage negotiations is sometimes given credit for helping to maintain price stability. One should not conclude that such a system might have the same impact in other countries. It is quite conceivable that, in a different social context and underlying financial conditions, annual rounds of wage negotiations could exacerbate inflationary pressures rather than subdue them. The main point here is that certain practices and arrangements are endogenous; price performance is the result of an overall policy approach, not of any one feature of the adjustment strategy.

Then, what characteristics do successful strategies share? First, successful strategies assign top priority to financial stability. Second, successful strategies recognize the usefulness of markets, and the constraints they place on government policies.

FINANCIAL STABILITY

Financial stability has several dimensions, the most important being price stability and external viability. Of course, these two characteristics are linked, but each of them is important on its own. Price stability means that prices are stable and are expected to remain stable. At times, a jump in the price level is appropriate (for example, when increases in world oil prices or in domestic sales taxes are passed through to consumers), but sustained increases in the price level cannot but impair economic performance. Theoretically, stable and perfectly anticipated inflation might not cause much harm. But the kind of inflation that is generally observed is rarely stable or perfectly anticipated. Therefore, inflation hurts in many ways. It distorts economic planning, making it difficult to identify changes in relative prices and incentives. It discourages investment and saving and brings about unwarranted changes in the distribution of income and wealth. It is not a coincidence that the fastest growing, best performing economies in Southeast Asia are low-inflation economies. But the same is true around the world. Among industrial countries, Japan enjoys both the highest rate of growth and the lowest rate of inflation. Among developing countries, those in Asia show both the highest rates of gross national product (GNP) growth and the lowest rates of inflation (Table 1).

Table 1.Inflation and Growth in Developing Countries(Compound annual rates of change, in percent)
Average 1981–88
InflationGrowth
Developing countries38.73.4
Asia8.77.3
Net creditor countries9.00.7
Net debtor countries44.33.9
Four newly industrializing Asian economies13.28.5
Fifteen heavily indebted countries2111.21.5
Note: Estimates based on the data and country classification contained in World Economic Outlook: A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington: International Monetary Fund, October 1989).

Hong Kong, Korea, Singapore, and Taiwan Province of China.

As defined in World Economic Outlook.

Note: Estimates based on the data and country classification contained in World Economic Outlook: A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington: International Monetary Fund, October 1989).

Hong Kong, Korea, Singapore, and Taiwan Province of China.

As defined in World Economic Outlook.

The second element of financial stability is external viability. The events since 1982, when the world debt crisis set in, have shown that a vulnerable external position can severely affect economic performance. From 1981 to 1988, real gross domestic product (GDP) in the 15 most heavily indebted developing countries rose by only 1.5 percent a year, while GDP in all developing countries, on average, grew by 3.4 percent a year. This does not mean that developing countries should eschew borrowing: as long as the marginal productivity of capital is sufficiently high, it pays to borrow. Indeed, net debtor countries grew consistently faster than net creditor countries during the period 1981-88. But there is a case for government monitoring of foreign borrowing. In this respect, the experience of Korea is interesting.

Quite early in Korea's development process, the Government recognized that foreign savings could make a positive contribution to the country's development, provided that it did not lead to unwise investment or an excessive debt burden. Through the years, the Government acquired a major role in coordinating foreign borrowing and, until the emergence of large current account surpluses in 1986, comprehensive foreign borrowing programs were essential components of the Government's annual economic management plans. Within the borrowing programs, major syndications and bond issues were spaced throughout the year to avoid saturating the market at any one time. Regulations were issued to affect the maturity structure of external debt in line with government objectives. From 1983 to 1986, the Government reduced sharply the level of short-term external debt, in order to lessen Korea's vulnerability to disruptions in international capital markets. Careful government management of foreign borrowing, based on timely and comprehensive information on external debt, appears to have contributed greatly to maintaining Korea's creditworthiness at times when other large borrowers were facing severe difficulties.

Of course, the ultimate determinant of financial stability is not an adequate debt-monitoring system but appropriate financial policies. Other sessions in this seminar have dealt in depth with fiscal, monetary, and exchange rate policies. In the successful countries in the region, financial stability was supported by restrained fiscal and monetary policies and a realistic and flexible (although not freely floating) management of the exchange rate. Though, at times, financial policies were relaxed to deal with weakening economic activity, or the fiscal position was affected by special factors, such episodes were followed by decisive moves toward restraint.

For example, in Korea, the government deficit rose to high levels (3½ percent of GDP) during the economic crisis of the early 1980s, but was reduced steadily during 1983–86, owing to expenditure control and strong revenue performance. The fiscal position then shifted into a significant surplus during 1987–88. In Thailand, budgetary policy was countercyclical in years when growth weakened, particularly in 1982 and 1985. Therefore, the central government deficit fluctuated countercyclically between 3 percent and 6 percent of GDP during the first half of the 1980s. However, as the fiscal position of the public enterprise sector improved, the overall deficit of the public sector declined from 7 percent of GDP to 5 percent of GDP during the first half of the decade. Since 1986, public sector finances in Thailand have undergone a transformation. Rapid economic growth boosted revenue while expenditure was kept under tight control. As a result, the fiscal position shifted to surplus in 1988.

These examples can serve to illustrate several principles of sound fiscal management. First, if the government is to engage in countercyclical fiscal policy—and not everyone would agree that it should—it must do so symmetrically, that is, in both the downswing and the upswing of the cycle. In practice, this means strict fiscal discipline in periods of economic vigor. In the cyclical upswing, when revenue growth is strong, there is a temptation to maintain a high level of spending or even to increase it. Such a temptation must be resisted—as it was done in the cases of Korea and Thailand—for two reasons: (i) during a cyclical recovery the government should adopt a contractionary stance to moderate cyclical influences; and (ii) the fiscal position will suffer in the longer term if it is not consolidated in periods of strong growth.

Second, control of spending is essential if fiscal adjustment is to take place. Revenue measures have an important role to play in fiscal adjustment, but there is a risk that revenue gains will reinforce pressures for spending rather than for fiscal adjustment. What is the optimal level of public spending? It is difficult to say in general, but there are two rules that may prove useful. One is that the recurrent budget should not be in deficit; this means that recurrent expenditures should be fully paid out of taxes and other ordinary revenue. And investment projects must be undertaken only if they are economically and financially sound. In assessing the benefits of projects, of course, nonpecuniary or external benefits should be included, but only if taxes can be generated to pay for those benefits. In this respect, medium-term projections of the government's fiscal position would help to evaluate the viability of the investment program. A third general principle of sound public finance, and closely related to the previous point, is that public enterprises should be self-supporting. There is no obvious reason why the government should subsidize public enterprises except to the extent that they supply clearly identified public goods.

Besides a sound fiscal position, financial stability requires prudent monetary and exchange rate policies. In these policy areas, which have been studied at length, I would like to comment on certain issues that have become increasingly important, particularly in the Southeast Asian region: the issue of targets and indicators of monetary policy, and the problem of current account surpluses. The first issue is to what extent monetary policy can be focused on the growth of the money stock. In a simpler world, with few alternative financial assets and flexible exchange rates, the growth of the money stock could be an adequate target for monetary policy. But this is not the case at present. In several countries in the region, the authorities manage the exchange rate and allow exchange market pressures to be reflected, to a considerable extent, in the foreign reserve position of the central bank. Furthermore, residents usually have the opportunity to invest in assets other than domestic bank deposits, including foreign deposits, although sometimes not legally. Therefore, the demand for money may shift drastically with expectations of devaluation or revaluation. Even when such expectations are stable, changes in domestic credit may be associated, to a significant extent, with changes in foreign reserves rather than changes in the money stock. To complicate matters further, financial liberalization has increased the attractiveness of bank deposits and led to shifts in the demand for money.

What are the implications for monetary policy? One implication is that a focus on the growth of the money stock alone may elicit an unsuitable policy response. For example, if the authorities were maintaining a fixed exchange rate and the public began to feel that a devaluation was imminent, liquidity preference might shift away from domestic bank deposits and toward foreign bank deposits. This would lead to a loss of foreign reserves and a decline in the money stock, which cannot be interpreted as monetary tightening because the demand for money has also contracted. I would suggest that, in a fixed exchange rate regime, the appropriate monetary target would be the external position of the monetary authorities. The appropriate (short-term) policy response to the undesired loss of reserves would be an exchange rate devaluation or higher domestic interest rates, or both.

The opposite situation—an upward shift in the demand for money balances—is also common. Given that yields on bank deposits may increase with financial liberalization, the expansion of the stocks of money and bank credit may accelerate as liberalization takes hold. Such expansion is not inflationary, reflecting increased financial intermediation through the banking system. This scenario has been observed in several countries in the area and may severely complicate the interpretation of monetary developments. These countries are not alone. Financial innovation and liberalization has caused moderate-to-sizable shifts in the demand for money of many industrial countries. Some central banks have responded by moving to narrower monetary aggregates, others by moving to broader aggregates, but a common response has been to reduce the focus on money stock itself, and broaden the range of indicators that guide monetary policy.

The issue of the appropriate monetary target is related to the problems created by the large external surpluses of certain Southeast Asian countries. The surpluses are associated with an acceleration in monetary expansion, and the following question arises: should the authorities try to sterilize the increase in foreign reserves and contain monetary expansion? I cannot hope to answer this question in a definitive way, but I will offer a few considerations that I believe important. The appropriate monetary policy response to a shock that affects the balance of payments probably involves adjustments in three variables: the exchange rate, domestic interest rates, and foreign reserves. The weight to be assigned to each of these variables depends on the source of the shock and on whether the shock is perceived to be temporary or permanent. For example, a shift in preference from foreign to domestic monetary assets would be translated into a surplus in the balance of payments and an increase in monetary growth. The response would involve some appreciation of the domestic currency, some decline in domestic interest rates, and some increase in foreign reserves. If the shift is believed to be temporary or nonrecurrent, the authorities may prefer to minimize the appreciation and absorb the increase in foreign reserves.

This issue is related to one of the “dilemma cases” of classical balance of payments theory: a country is faced with a balance of payments surplus and inflationary pressures at the same time. How do the authorities use their policy instruments, namely, exchange rate and financial policies? There is no question that an appreciation is appropriate because it reduces external demand and therefore helps achieve both external and internal balance. It is not clear, however, whether financial policies should be expansionary or contractionary. Expansionary policies help to reduce the external imbalance but exacerbate inflationary pressures, while contractionary policies help contain inflation but do not help on the external side. The policy response could be fine-tuned if the true model of the economy were known, which is not the case. Therefore the dilemma persists. In highlighting this issue I am not trying to elicit a definitive answer, only to emphasize that such “theoretical” questions are alive in Asia today.

THE ROLE OF MARKETS

The second important element of successful strategies for structural adjustment is the recognition that markets play an important role in adjustment and place constraints on government policies. The stimulus for reform has originated in several factors. As economies grow and become more complex, it becomes progressively more difficult to manage the economy through direct controls. For example, credit controls on a handful of banks are much simpler to enforce than credit controls on a system of numerous banks and other types of financial institutions. Also, institutions become more sophisticated, and the benefits of evasion from control generally increase, with economic development and the strictness of control. The increasing complexity of the economy also makes it more difficult to assess the effects of controls on resource allocation, as well as the macroeconomic effects of controls, that are essentially microeconomic. Finally, governments have come to recognize that, in general, controls have adverse consequences on resource allocation and on the economy's ability to adapt to shocks. The two most important areas of economic activity that are undergoing a process of deregulation in Southeast Asia are the financial system, on one hand, and the industrial and trade system, on the other. Other sessions have dealt with financial reform,2 and I will briefly provide a few examples of reform of the industrial and trade system.

During the past four years, the Government of Indonesia has introduced a series of trade deregulation packages designed to bring about a progressive liberalization. These measures—which were formulated in consultation with the World Bank staff—have focused on phasing out nontariff barriers, reducing and simplifying import tariffs, providing inputs to exporters at international prices, and simplifying customs procedures. On the internal front, recognizing that excessive regulations had blunted competition and impaired economic efficiency, the Government initiated, in 1985, a reform program to liberalize and streamline investment licensing and to promote foreign investment. Accordingly, the number of required licenses was reduced, and capacity expansion regulations were eased, and most activities were opened for investment if at least 85 percent of production was destined for export. Additionally, to encourage foreign direct investment, the validity of investment licenses issued to foreign investors was extended, the level of minimum initial local ownership was reduced, and the transition period to majority ownership by domestic investors was lengthened.

In Malaysia, the need to strengthen private investment emerged as a key policy issue in the formulation of the Fifth Malaysia Plan (1986–90). The Plan emphasized both an improvement in the economic environment and a restructuring of public sector investment as a means of stimulating private investment. Toward this end, a number of measures have been taken over the last three years. The measures undertaken in 1985–86 included liberalization of licensing requirements under the Industrial Coordination Act; the relaxation of guidelines governing foreign equity participation; and increasing the availability of funds, including the establishment of the New Investment Fund to provide funding for priority projects. A new Promotion of Investment Act was introduced to replace the administratively cumbersome Investment Incentives Act of 1968; the new Act provides attractive tax incentives for the manufacturing and agricultural sectors. Several additional measures were instituted in 1987 to further expedite and simplify the procedures for investment licensing and tax exemptions.

Korea offers a very interesting example of shifts in industrial and trade strategies. In the 1970s, the Government of Korea shifted its trade strategy from the promotion of labor-intensive light industries toward the promotion of capital-intensive heavy and chemical industries. It was envisaged that these industries would substitute imports in the short term, but that they would eventually export a large share of their production. Government support, which was generous, included fiscal preferences, low-cost credit, and protection from competing imports. Thus, the program represented a reversal of the progress made in preceding years in financial reform and import liberalization.

The consequences of the program have been clear for some time. Many of the program's goals have been achieved: indeed, exports of the heavy and chemical industries have become very important, but the cost of the program was substantial. There is a large level of unused capacity in these industries. The sizable investment necessary to set up those industries was financed through a rapid expansion of bank credit, which led to an acceleration of inflation and to an eventual worsening of the financial position of the banks. The overvaluation of the won that accompanied the increase in inflation, together with the imposition of restrictions on imports that competed with the heavy and chemical industries, resulted in a substantial erosion of the external competitiveness of other exports. The consequences of the attempt to promote the heavy and chemical industries are widely blamed for exacerbating the severity of the 1980 economic crisis,3 and for retarding progress in financial reform.

During the 1980s, partly in reaction to the experience of the heavy and chemical industries, the Government adopted bold programs to liberalize imports and rationalize the tariff structure and caused a gradual shift in industrial policy away from industrial targeting. In December 1985, the Government formally acknowledged the shift by enacting the Industrial Development Law, which replaced existing promotional laws and provided new guidelines for industrial policy. The new law confined the role of industrial policy to coping with market failures, thus greatly reducing government intervention in industry. The Government would emphasize nonsectoral, functional intervention, such as the promotion of research and development and training of labor, instead of selective, industry-specific intervention, such as financial assistance to priority industries.

The common thread in these examples is that the countries in Southeast Asia are moving away from strict control of trade, production, and investment and toward a market-oriented approach. Even in the case of Korea, which is widely held to be one of great government intervention in industrial planning, the Government has recognized the risks and costs of such strategy. The state has probably played the smallest direct role in Hong Kong. To be sure, the Government has been involved in the economy in the usual spheres—building and maintaining infrastructure, maintaining law and order, providing primary education, and contributing to secondary and higher education. It is also a major builder of public housing, providing rented lodgings for nearly 40 percent of the population. However, the Government does not own or run the utilities, or large parts of the transportation system; makes no attempt to influence the labor market; and does not provide any concessions for capital investment, nor does it provide grants or loans to industry.

To summarize, the Southeast Asian countries are succeeding with a policy approach that involves financial restraint and a recognition of the importance of market forces in development and structural adjustment.

Comment

MUKUL A. ASHER

The paper by Mr. Marquez-Ruarte is wide ranging and there is much in this paper with which there can be little disagreement. For example, it is difficult to imagine any disagreement with the author when he defines structural adjustment as consisting of “… the creation of conditions for sustained, noninflationary growth, and the elimination of impediments to the full and efficient use of resources. Furthermore, adjustment must permit the attainment of certain basic, and widely shared, social goals” (p. 156, emphasis added).

A case can also be made for including environmental objectives in the above definition. This is because of two reasons. First, policies, particularly those relating to adjustment should not unduly depreciate the primary resource of the earth—its environment. Second, structural adjustment programs, though of a short-term nature, can significantly influence economic strategies in the developing countries, and inappropriate policies have the potential to create great damage to the environment. This is a complex area, both technically and politically. No simple or quick solutions are in sight. But the point remains that if adjustment policies push countries to depreciate too rapidly such assets as rainforests, all countries—rich and poor alike—will be the losers.

The following comments, therefore, may be regarded as complementary to the discussion in the paper. They are designed to raise some of the issues that are only implicit in the paper and to elaborate on some of the general principles and policies emphasized in the paper.

Marquez-Ruarte associates successful policies for structural adjustment with two characteristics. The first is assigning top priority to financial stability. The second is recognition of the usefulness of the markets in designing economic policies. Before commenting on his discussion of these two characteristics, it may be useful to note that he appears to regard structural adjustment as a technical issue or at best appears to take what Toye has called a technocratic view of politics (1987, pp. 40–42). This view is based on “… an implied belief that the internal politics of developing countries can, and should, be so arranged that development policies get a clear run” (Toye (1987, p. 41)). But as Toye notes “… yet, no one knows how to do it. That is the fundamental difficulty” (1987, p. 41).

If a technocratic view of politics is insufficient, so is the view that structural adjustment is just a technical problem. As Dornbusch has noted in the Latin American context:

Financial discipline and reasonably efficient markets are quite desirable, even indispensable, in the medium term. But that does not mean, of necessity, that the transition should take a form hostile to society and progress. We therefore have to look to ways of shaping a broad social consensus supportive of stabilization. But this means, of course, that incomes policy is the cornerstone of effective, socially acceptable conditionality. Effective stabilization is, above all, not a technical issue but a political one (Dornbusch (1983, p. 229), Dornbusch's italics).

The political nature of the problem noted by Dornbusch could be extended to the international level. It may be argued that if developing countries had more influence and voice in designing structural adjustment policies, and if appropriate incentives were built in, then they would be more likely to follow the types of adjustment policies favored by the economists. That political consensus at the international level is lacking at present is indicated by the following quote:

What is particularly unacceptable to developing countries … is the inequity of a system where a few major contributing countries, which basically do not use the [International Monetary] Fund's resources and are thus unaffected by its policies, are the ones that seek to impose, by way of their control of the policy-making process, their view of economic organization and management. Similarly, these countries have confronted a system wherein, even granting the centrality of a few developed countries in exchange rate arrangements, decisions in this regard are exclusively taken by a narrow set of these countries—this, despite the clear effect of such decisions on the economies of the developing countries (Ferguson (1988, p. 230)).

The central point is that widespread adoption of structural adjustment policies advocated by Marquez-Ruarte and about which there can be little disagreement would require coming to grips with not only their technical but also their political aspects, both at national and international levels. Integration of these two aspects requires strong institutional support. Where this is lacking, institutional reform may also be needed.

Let us now turn to the two characteristics that Marquez-Ruarte associates with structural adjustment policies. As noted, the first concerns assigning top priority to financial stability. He examines several dimensions of this stability, including price stability and external viability. He shows that high rates of GNP growth are correlated with low rates of inflation. His explanation of the casual relationship between the two is, however, rather sketchy. Some elaboration is needed because in the table presented by him showing inflation and growth rates for the 1981–88 period, there are instances when marginal differences in inflation rates are associated with strikingly large differences in growth rates. Thus, inflation and growth rates for the 1981–88 period for Asia are shown as being 8.7 and 7.3 percent, respectively. The corresponding inflation rate for net creditor countries, however, is only marginally higher at 9.0 percent; their growth rate is only 0.7 percent. Incidentally, the manner in which inflation rates are computed for groups of countries is not clear from the paper. This is relevant because results may be sensitive to the way individual country inflation rates are aggregated.

The author regards the second element of financial stability as external viability. While he rightly stresses the vital necessity of using debt for productive purposes, he does not discuss the present overhang of debt and the impediments faced by developing countries in following sound structural adjustment because of it. That is, effective measures to help many developing countries tackle the burden associated with the present debt overhang may be necessary to enable them to follow needed structural adjustment policies.

He correctly stresses the commitment of the policymakers in Southeast Asian countries to restrained fiscal and monetary policies. This commitment has been maintained even when it required sharp reductions in government expenditure, particularly development expenditure. Thus, in Malaysia the ratio of total expenditure to GDP fell from 40.1 percent during the 1981–85 period to 30.7 percent in 1988, the corresponding ratios of development expenditure to GDP were 13.9 and 6.3 percent, respectively (Asher (1989, Table 1.1)).

The need for making public enterprises financially viable as stressed by Marquez-Ruarte has also been recognized in Southeast Asian countries.

The second characteristic of structural adjustment policies stressed by the author is the recognition of the usefulness of the markets. I fully share his view that the market is a powerful mechanism to achieve economic objectives that no policymaker should ignore, and that strict control of trade, production, and investment is, as a general rule, likely to be counterproductive.

I would, however, like to make three points. First, greater reliance on markets can only be placed by governments that retain capacity to act decisively when the occasion demands. In other words, less reliance on the market could be a sign of a weak not a strong government. It could also be a reflection of a lack of development of durable and resilient internal institutions and mechanisms. Second, while recognizing the role of the markets, it is also necessary to keep in mind Kermit Gordon's (1975) comment in the Foreword to Okun's book that “the market needs a place and the market needs to be kept in its place” (p. viii). Moreover, in this region's literature, distinction between market and government is not drawn as sharply as in the North American literature. Even in the United States, there are calls for not drawing too sharp a distinction between the two. Thus, Etzioni has remarked: “The irony of the political, social, and psychological philosophies that celebrate the individual to the neglect of the community is that the individual they promote, and in a deep sense assume, is not to be found without a viable community” (1983, p. 25).

The third point concerns the need to ensure that policies ostensibly designed along the lines advocated by Marquez-Ruarte in fact achieve the objectives envisaged. Let me give an example from the privatization program in Singapore. It can be argued that at the end of Singapore's privatization program, the public sector is likely to have a stronger and larger role rather than the smaller role implied by such a policy. This could come about in the following way. Public enterprises in Singapore are generally profitable, and the government has an overall budget surplus. Therefore, when divestment of some of these enterprises occurs without loss of control, then the resulting proceeds are available for further investment. If this is done in the newer areas where Singapore could develop potential comparative advantage, then the public sector role could become greater not smaller. In the case of Malaysia, Ng and Wagner have argued that “… if the present methods of privatization are not altered, fiscal problems may be further exacerbated” (1989, p. 222). This is also contrary to general expectations.

It would be very helpful if Marquez-Ruarte could share his views concerning lessons from the Southeast Asian experiences concerning sequences in which various reforms in trade, financial, tax, and other policies should be undertaken so as to enhance ability for structural adjustment. It would also be helpful to indicate whether he regards structural adjustment as a short- or medium-term process.

It is also relevant to note that designing specific policies that are consistent with the general principles advocated by Marquez-Ruarte is not an easy task. This task is sometimes made even more difficult by a lack of consensus among the professionals involved. Let me illustrate from the area of tax reform. After reviewing more than a dozen papers from very eminent experts involved in design and implementation issues concerning tax reform in many parts of the world, Bates remarks that “… for each professional economist who confidently takes a stand on one side of a knotty issue, we note … the existence of another who asserts the opposite” (1989, p. 474). While the extent of disagreement among economists should not be exaggerated, the above observation by Bates does suggest that reform measures need to be situation-specific and that no standardized reform rules and procedures are likely to be adequate.

In conclusion, while the relevance of general principles for structural adjustment in this region advocated by Marquez-Ruarte is not in doubt, the key issues concern how to manage national and international politics of structural adjustment in such a way as to provide both incentives (and disincentives) as well the ability to follow these principles by the developing countries and the detailed designing and implementation of policies consistent with these principles.

BIBLIOGRAPHY

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1

In this paper, references to “Southeast Asia” include Korea, Taiwan Province of China, and Hong Kong, in addition to the countries that are geographically located in Southeast Asia.

2

Useful review of financial reform issues in developing countries can be found in R. Barry Johnston and Odd Per Brekk, “Monetary Control Procedures and Financial Reform: Approaches, Issues, and Recent Experiences in Developing Countries” (unpublished; Washington: International Monetary Fund, June 1989).

3

In 1980, real GNP in Korea declined by 5 percent, and inflation and the external current account deficit increased sharply. The proximate factors of the crisis were increases in world oil prices, a disastrous harvest, and domestic political disturbances.

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