41728
Inflation and Stabilization
STEPHAN HAGGARD
In this selection, Stephan Haggard seeks to explain why some
developing countries have been more successful than others in
promoting stable macroeconomic policies. Blending domestic
societal and state-centered approaches, he argues that both the
density and composition of social groups and how they express
their interests through state institutions shape policy outcomes.
Haggard’s analysis of middle-income Latin American and East
Asian countries suggests that a combination of interest-group
pressure and the nature and design of particular institutions
determines the incentives faced by state leaders to pursue stable
macroeconomic policies. The developing countries with the
highest inflation, he finds, have been those featuring urban labor
movements mobilized into populist parties within relatively
polarized party systems.Why have some middle-income developing countries had histories of high inflation
over the past two decades, while others have pursued stable macroeconomic
policies? Among countries experiencing inflation, why do some governments
move to stabilize with alacrity, while others postpone the adjustment decision,
often with disastrous costs? Once the decision to stabilize is taken, why are
some countries capable of sustaining stabilization policies while others falter
and reverse course?
A wide array of economic factors is important in understanding particular national
experiences with inflation, including the severity of exogenous shocks. Nonetheless,
inflation often has political roots, and whatever its causes, stabilization poses
profound political dilemmas.
This chapter reviews some current thinking about the political economy of
fiscal policy and advances some hypotheses about differences in inflation and
stabilization efforts among middle-income developing countries. The rent- and
revenue-seeking approach of the new political economy is useful for understanding
the political incentives to government spending and explains why subsidies and
state-owned enterprises become politically entrenched. This approach, however,
does not explain cross-national differences in fiscal performance and inflation.
Such variation can be accounted for in part by pressures for government spending
that result from interest group and partisan conflict. The organization of urban
labor and its incorporation into the party system appear to be important factors.
The developing countries with histories of high inflation, mostly in Latin America,