The Political Economy of Inflation and Stabilization in Middle-Income Countries

Abstract

In a number of middle-income developing countries, the severe inflationary crises of the 1980s coincided with political liberalization and an expansion of the arena of distributive politics. This wave of democratization raises questions that have recurred throughout the post-World War II period. This paper provides a comparative analysis of the politics of inflation and stabilization in seventeen Latin American and Asian countries, paying particular attention to social movements and governments that seek to mobilize the popular sector. The paper reviews the arguments linking political constraints to macroeconomic policy and inflation, especially the role that populism might play in propagating inflation. It examines the inflation histories of three groups of middle-income countries: those that have maintained relatively stable macroeconomic policies over the long-run; those that have periodically experienced severe difficulties, but managed to adjust; and those that experienced recurrent cycles of very high inflation over an extended period. The paper draws more extensively on case studies of particular inflation episodes to examine the conditions under which inflation has been brought down, paying particular attention to the effect of regime type on stabilization efforts.

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