Stabilization: Adaptation to Crisis until the 1970s
During the first three post-war decades, stabilization programmes
worked out between Third World countries and their creditors tended to focus on:
- cutting budget deficits in countries experiencing economic
crisis, through reducing public spending and/or increasing public revenue;
- exercising monetary restraint (limiting the amount of
credit and money in circulation) in order to reduce inflation;
- improving the balance of trade of deficit countries through
increasing incentives for traditional exports and developing new export activities;
- reducing demand for imports and fighting inflation through
implementing deflationary economic policies, including wage restraint;
- ensuring that the exchange rate was set at a competitive
level for exports. When change has been required, it has been more likely to involve
devaluation than revaluation, although the latter could be recommended in some
circumstances in order to fight inflation.
These changes in public policy, which still form the core
of adjustment programmes, were generally contractionary in nature. They tended to hurt the
weaker members of society more than the stronger. Nevertheless governments did have some
room for manoeuvre. The burden of adjustment could be spread somewhat more broadly within
the population: government budget deficits could, for example, be attacked by raising
taxes on the wealthy; and the balance-of-trade deficit could be lowered by limiting
imports of luxury items, rather than basic goods. Whether such measures were taken
depended upon the ability of different groups within adjusting societies to promote and
defend their own interests.
The precise distribution of the burden of stabilization in
any particular case depended, however, not only upon the kind of political interests
sustaining the government of the adjusting country itself, but also upon the bargaining
power of specific deficit countries in the international economic arena, and on the
internal political agenda of creditor countries at the moment when terms of stabilization
agreements were being worked out. In this international sphere of bargaining, conditions
for Third World countries were far more favourable in the first two post-war decades than
they were to become from the 1970s onward or than they are today.
In the first place, the 1950s and 1960s were a time of
global economic expansion. Therefore while stabilization programmes implied hardship for
many people within the countries concerned, it was likely that policy reform would lead to
renewed growth. And, in fact, until the 1970s a period of adjustment-related recession was
generally followed by an upturn of the economy.
At the same time, the international balance of power
during the early Cold War period provided adjusting countries with strategic bargaining
tools. The great powers were concerned with rebuilding the "free world", and
international financial institutions understood the need to obtain support in Third World
countries. Economic assistance flowed toward allies in the Cold War, which also increased
their ability to deal with economic difficulty.
Finally, the domestic agendas being pursued in the
advanced industrial countries were congruent with nation building in the developing world.
Political coalitions in Europe and the United States supported the expansion of the state
in order to protect and improve people's livelihoods, both at home and abroad. The
reconstruction of Europe and Japan, and the improvement of welfare coverage throughout the
developed market societies, implied the expansion of public programmes. For this reason,
although stabilization efforts in the Third World during this period might well imply
reducing some areas of government activity, or responding to pressure to open some areas
of the local economy to greater international competition, they did not involve profound
free-market restructuring of the national economy.