This book addresses the question of how the political capacity of the government of a developing country affects its ability to implement structural adjustments in its economy in response to external pressures. Specifically, it addresses the question of how a government's political capacity influences the choice of adjustment policies and the implementation of those choices. Most finance ministers understand that chronic large budget deficits or resorting to foreign borrowing to finance current levels of consumption can eventually lead to a foreign exchange crisis if new domestic sources of revenue are not tapped to cover these commitments. They understand that printing money to finance deficits will lead to excessive inflation. They are aware that the net effect of maintaining an overvalued exchange rate is reduced export earnings and falling foreign exchange reserves. Yet even those who understand these relationships often fail to do much to reduce fiscal deficits and continue to finance them by printing more money. They appear unable or unwilling to realign their currencies or to cut the consumer and producer subsidies that not only increase deficits but also undermine their economic stabilization programs. Why?
Such policy choices are seldom "mistakes" in the sense that government decision makers do not foresee the outcomes of their choices. Rather they reflect political weaknesses which undermine the successful implementation of structural reforms. These weaknesses typically take three forms. First, the government may have inadequate or inefficient means of extracting resources. It is not so much a matter of the central government lacking resources, but rather of it being unable to extract, mobilize and redirect the human and material resources nominally under its control in order to achieve policy objectives. Alternatively, some governments may be able to extract unusually high levels of resources, but the way they go about doing it is harmful to the