Macroeconomics of structural adjustment and public finances in developing countries : A heterodox perspective

Purpose – This essay aims to analyze the process of structural adjustment in developing countries. Its focus is on macroeconomic stabilization in the short‐term, but the analysis is situated in a wider context to consider how it relates to the implications of structural reform in the medium‐term and the prospects for economic growth in the long‐term. Design/methodology/approach – The paper begins by setting out the contours of the orthodox, the Keynesian and the heterodox perspectives on stabilization and adjustment to highlight the differences. Such different perspectives on macroeconomic theory and policy, it suggests, are attributable to differences in objectives, assumptions and beliefs. These are made explicit. Findings – The paper argues that the relationship between stabilization and growth is characterized by inter‐connections rather than trade‐offs and suggests that outcomes depend on modes of adjustment. It also provides a macroeconomic analysis of government deficits and public finances, which are critical in the process of adjustment. This highlights the macroeconomic significance of government deficits and points to the fallacies of deficit fetishism based on accounting frameworks. The intersection of economics and politics in the design and implementation of macroeconomic policies is also explored. Practical implications – Going beyond a critique of orthodox stabilization programmes, it shows that there are alternatives in macro‐management for economies in crisis, for which it is necessary to shift the focus from the financial to the real economy, from the short‐term to the long‐term, and from equilibrium to development. Originality/value – The paper develops a heterodox perspective on the macroeconomics of structural adjustment and public finances. And, it sets out an alternative framework which straddles time horizons, to understand the restructuring of economies over time.