6 - INTERNAL AND EXTERNAL EQUILIBRIUM

Summary

Fiscal and monetary measures are frequently used in both industrial and developing countries to resolve the problems of internal and external disequilibrium, or imbalance; henceforth the words ‘equilibrium’ and ‘balance’ are used indifferently, as are ‘disequilibrium’ and ‘imbalance’. The main purpose of this chapter is to analyse the efficacy and relevance of these instruments for attaining the objectives in question especially when used in developing countries. We first examine the meaning of and significance for LDCs of internal and external equilibrium. We then analyse the nature of imbalances commonly experienced in LDCs and indicate the main categories of remedial measures available to them. In the light of this analysis, we examine the monetary approach to imbalances, concentrating on the approach of the IMF (the Fund) – a leading advocate of the monetary approach. To give a concrete impression of the scope and method of operation of the Fund, we also present some factual data on its organisation, resources and credit facilities.

THE MEANING AND SIGNIFICANCE OF EQUILIBRIUM

Strictly, the word equilibrium, borrowed from the mechanical sciences, describes a condition in which there is no endogenous tendency to change. In Economics, however, the word often carries a normative connotation, signifying a ‘satisfactory’ or ‘desirable’ state of affairs. It is in this normative sense that we shall examine the meaning and significance of internal and external equilibrium.