8 In response to the worsening externat and internal deficits, the Philippine government reversed trade liberalization policies and restricted imports rather than abandoning its i..appropriate speniing and exchange rate policies. Subsequently, witb exports falling and access to additional external finance dwindling, the government was forced to seek a rescheAduling of its huge external debt in 1983.

The growth rate o' the Philippine economy declined steadily after i978 despite the government's efforts to prop it up. The growth thti was attained under the mlismanaged macroecono-ic policies proved to be shortlived and expensive. Real GNP declined by over 5 _%_ in 1986 and 3 % in 1985,and per capita income in 1990was still below the 1980 level." A contrasting example is that of India during the same period. '3 The oil price increases worsened India's vulnerable external accounts and exacerbated inflation. Although the economy was already in recession, the govemment decided against borrowing abroad to absorb this new shock. Instead, domestic savings were boosted from 14 percent of GDP in 1965-72 to 19 percent in 1973-78 by raising taxes and interest rates, reducing public spending, and tightening monetary policy. Domestic energy prices were also raised quickly to the new international levels. By 1978, India had a small trade and current account surplus, a comparatively low debt to GDP ratio and large foreign reserves. Despite the second oil price increase, India's growth rate during 1979-84 averaged 5.1 percent a year, compared with 3.6 percent a year in 1950-79. India, however, expanded its borrowing abroad - both commercial and short term- in the later half of the 1980s to finance its growing budgetary deficits.

The nature of the adjustment prices followed by the highly indebted countries in Latin America has been documented elsewhere. **'4** Tn Brazil, the import substitution policy was supplemented with a heavy relia -e on foreign borrowing to finance major investment projects. In Mexico, the populist policies that led to spectacular growth in the public sector and in the fiscal deficits lay behind the crisis. In Chile, the opening up of the Chilean economy allowed the private sector to finance huge increases in consumption - especially durables - with borrowing from abroad.

# **(3)** Macroeconomic **Policies"**

Third, the countries in the Asia region, by and large followed relatively cautious macroeconomic policies in the 1970s and 1980s, thereby avoiding inflation. The kind of policies that were pursued by the successful East Asian countries present a sharp contrast to those followed by the Latin American countries. South Asian countries had, until recently, followed prudent macroeconomic policies but their recent policy performance has raised senous questions. **I** he aifference in the case of South **Asian** countries iies more in ineir inward-oriente regime rather than the set of macroeconomic policies in the later half of the 1970s and early 1980s.

The Chinese case is quite different and mixed. External borrowing has not been a major issue so far. The development performance has been impressive, but the unfinished reform agenda is long. Over the last decade, China's GDP growth **has** averaged 9.5 percent per annum. Investment was high throughout **and** was matched by a strong savings performance, which contained the need for external borrowtng. Industrnal modernization increased the competitiveness of China's manufactures in the international market and merchandise exports grew from $18.3billion in 1980 to $52.5billion in 1989. China's share of international trade rose from 0.97 percent to 1.7 percent during the same period. The average incomes of the 800 million rural 1<sup>3</sup> World Development Report 1985, Box. 4.2 1<sup>4</sup> Edwards, S. 'Structural Adjustment Policies in Highly Indebted Countries.' (UCLA Working Paper 453,September 1987).

**1**<sup>**5**</sup> **The** discussion in the following paragraphs on the macroeconomic policies of East Asian countries draws heavily upon F. Larrain and R. Vergara (1991), 'Investment and Macroeconomic Adjustment: **The** case of Asia. (mimeo, **The** World Bank).