By Steven R. Tabor
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Extra resources for Agricultural research in an era of adjustment: policies, institutions, and progress
Higher taxes, reduced public spending, and a rise in real interest rates all act to reduce real domestic spending. These policies do not necessarily reduce the output of tradable goods; rather, they cut domestic consumption of tradables as real spending comes into line with domestic income. This improves the trade balance. Nevertheless, the decline in aggregate demand can result in marked reductions in the output of nontraded goods. If, in the short run, prices of nontradable goods are fully flexible downward, the effect of a reduction in absorption will be to create an initial condition of excess supply in the home goods market.
The importance of this issue lies in the fact that domestic policy changes to reduce absorption and external solutions involving additional foreign financing are likely to have quite different distributional consequences. Hence, whether the problem is perceived as temporary or permanent is important in deciding what sort of policy to adopt; and after that choice is Page 6 made, the outcomes for the real incomes of various groups are likely to be quite different. It is in this sense that the past matters a great deal.
Most adjustment programs include policy reforms that alter production incentives, investment levels, public sector spending, the management of public sector institutions, and private sector demand for new technology. The linkages between comprehensive economic policy reform, economic activity, and institutional development are far-reaching and complex. Economic theory provides a guide to the policies that countries may pursue under the adjustment umbrella and to the likely response of different individual and institutional actors to changes in public policy.
Agricultural research in an era of adjustment: policies, institutions, and progress by Steven R. Tabor