Concluding Comments

For most developing countries, a critical macro-micro linkage in policy analysis is the taxing effect of an overvalued exchange rate and the ability of privileged producers of tradables to obtain insulating trade restrictions. Very few groups in a developing country benefit in the short run from deflationary macroeconomic policy, and only those ultimately taxed by overvaluation are short-run gainers from devaluation. Because long-run benefits are hard to sell politically in any society, macroeconomic reform typically occurs only when a country has exhausted all delaying options. Hence, it is much easier to steer a developing economy off its best macroeconomic policy path to long-run development than it is to make the painful corrections usually needed to return to that path.

This unfortunate reality causes special difficulties for agriculture and rural-based small industry in countries with distorted macroeconomic policy. The tradable outputs of rural producers are taxed by the overvalued exchange rate, but rural entrepreneurs generally do not have the political clout to receive quantitative protection to negate that macroeconomic disincentive. Therefore, rural interests in distorted economies feel the taxing effects of macroeconomic policy, whereas urban industrialists receive insulating protection through effective quantitative restrictions. The few developing countries that successfully protect their agricultural producers with import quotas as part of price stabilization programs do not usually experience large and persistent exchange-rate overvaluation; not coincidentally, in those countries, successful commodity policy is accompanied by nondistorting macroeconomic policy.