Working Paper: NBER ID: w11429
Authors: Sebastian Edwards
Abstract: In this paper I analyze the role of foreign advisors in stabilization programs. I discuss from an analytical perspective why foreigners may help a developing country's government put in place a successful stabilization program. This framework is used to analyze Chile's experience with anti-inflationary policies in the mid 1950s. In 1955-58 Chile implemented a stabilization package with the advice of the U.S. consulting firm of Klein-Saks. The Klein-Saks program took place in a period of acute political confrontation. After what was considered to be an initial success -- inflation declined from 85% in 1955 to 17% in 1957 -- the program failed to achieve durable price stability. I argue that the foreign advisors of the Klein-Saks Mission gave initial credibility to the stabilization program launched in 1955. But providing initial credibility was not enough to ensure success. Congress failed to act decisively on the fiscal front. Consequently the fiscal imbalances that had plagued Chile for a long time were reduced, but not eliminated. I present empirical results on the evolution of inflation, exchange rates and interest rates that support my historical analysis.
Keywords: No keywords provided
JEL Codes: F30; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Kleinsaks mission involvement (D74) | initial credibility of stabilization program (E63) |
| initial credibility of stabilization program (E63) | congressional approval for economic measures (F59) |
| Kleinsaks mission involvement (D74) | sustainable economic stability (Q01) |
| failure of Congress to act decisively on fiscal reforms (H69) | failure of stabilization program (E63) |
| Kleinsaks mission involvement (D74) | persistence of fiscal imbalances (H68) |
| persistence of fiscal imbalances (H68) | failure of stabilization efforts (H84) |