<!-- Start of picture text --> Prcrt d GDP Thailand Thaland _<br>10<br>8<br>4<br>10 ~ ~~~~~~~0<br>_ _I_1980_1__ _1__ _ _1__ _ _19__ _ _ _o_19i2 1i84 199<br>1980 1982 1984 1986 1988 1990 1992 1994 1996 Qxral t d3 fit Posaer azsUjon Np n -- x iwet capt TOM<br><!-- End of picture text -->

**Macroeconomic Policies During the Early** Inflow **Period.** The macroeconomic strategy in East Asian countries during the early inflow period had two characteristics. First, an exchange rate regime oriented toward enhanced competitiveness, i.e., the achievement of a real exchange rate target to complement the outward orientation embodied in structural policies. This policy was implemented through step devaluations in the currencies of several countries in the region during the mid-1980s, followed in some countries by continuous depreciation, in some cases more than offsetting the differential between domestic and foreign inflation. In East Asia, therefore, unlike in many countries of South America, nominal exchange rate management during the capital inflow episode was not primarily devoted to the establishment of a nominal anchor. This exchange rate policy indeed seems to have been relatively successful in avoiding currency overvaluation over the decade spanning the mid-80s to the mid-90s.

The second macroeconomic component was the adoption of a tight medium-term stance for fiscal policy. Overall public sector budgets in the region, which had exhibited deficits not out of line with those which characterized other middle-income developing countries at the same time, moved steadily into surplus after mid-eighties. As the economies of these countries grew and the tight fiscal stance restrained and at times reversed the growth of public-sector debt, public-sector debt-to-GDP ratios fell throughout the region, which coincided with the arrival of capital inflows. By the mid-1990's, several countries in East Asia had achieved sizable fiscal surpluses and ratios of debt to GDP substantially below those of many industrial countries. This fiscal stance also promoted the depreciation of the long-run equilibrium real exchange rate, which favored not only tradable goods relative to nontradables, but also prevented the emergence of exchange rate misalignment in the form of undervaluation of the domestic currency.

Overall, then, the macroeconomic policy mix pursued can be characterized as one in which the nominal exchange rate was assigned to a competitiveness objective, while fiscal policy was assigned the objective of price level stabilization. Other policies, of both structural and stabilization dimensions, that were being pursued simultaneously, however, turned out to have important implications for subsequent events. On the structural side, the economies of East Asia continued the process of liberalization that had begun in the mid-80s. Trade liberalization, capital account liberalization, and especially financial sector liberalization, all proceeded during the inflow period. On the stabilization side, countries placed heavy reliance on monetary policy as a short-run stabilization instrument, varying the intensity of sterilized intervention in the foreign exchange market in accordance with domestic macroeconomic needs.

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