Macroeconomic Policy Regimes in Emerging Countries

This book analyses the dynamics of catching-up of emerging countries. The GDP per capita of as many as 135 emerging countries has not even reached 50 per cent of advanced countries GDP per capita over the last ten years. Relative to the rest of the emerging countries, Central Eastern European countries have had a relatively strong convergence to the advanced world since the second half of the 1990s. The question is how these countries achieved this success and whether their catching-up process was sustainable. The book argues that although GDP per capita of these countries has significantly increased, their overall economic development has been less than sustainable. Central Eastern European countries experienced boom-bust cycles created by large capital inflows resulting in foreign debt, current account deficits and deindustrialization of their economies. The emphasis of macroeconomic policy regimes is on how understanding economic policies, and the institutional framework in which they operate, is fundamental to understanding the long-run dynamics of a capitalist economy. Besides the financial system, foreign economic policy, industrial policy, monetary policy, fiscal policy, wage policy and income distribution policy are examined. Two types of regimes emerge from the analysis of Central Eastern European countries: foreign debt-led demand regime and domestic demand-led regime. While domestic demand and declining current account deficits are the main drivers for economic growth in domestic demand-led regime, domestic demand supported by strong capital inflows and relatively high current account deficits are the main factors behind economic growth in foreign debt-led demand regime. The main argument is that foreign debt-led demand is not a sustainable long-run development strategy. Analysing Poland and Latvia, the book proposes a normative model of a macroeconomic policy regime consisting of capital flow management and adequate regulation of the financial system, active horizontal and vertical industrial policy, coordinated wage policy, competitive exchange rate, and income distribution policy channeled towards reducing income inequality.