Medium-Term Growth-Stabilization Relationship in Asian Developing Countries and Some Policy Considerations

Abstract

The monetarist/structuralist debate on the relationship between economic growth and stabilization in price and the balance of payments has existed since the. 1950s. Monetarists argue that though it may not be a sufficient condition, price stabilization is a prerequisite for promoting economic growth and protecting the balance of payments. Structuralists contend that in developing countries, economic growth inevitably brings inflation and deterioration in the balance of payments. The paper tests both hypotheses by examining the cross-sectional data of 13 Asian developing countries for the period 1980-1989. The finding of the study supports the monetarist view rather than the structuralist view. In light of this, this paper suggests that development policy measures should be taken within a stable and tight monetary-fiscal stance, to avoid inflation, a severe deterrent to economic development. To achieve economic growth with stabilization, aggregate supply should be increased while aggregate demand is controlled, as an increase in aggregate supply would lead to an increase in output without causing a rise in prices. The most important and desirable way to increase aggregate supply would be to increase domestic savings and enhance productivity.