ABSTRACT
Developing countries are commonly considered to be caught in a poverty trap from which they cannot escape. This chapter describes distinguish between underdeveloped countries, newly industrializing countries and newly industrialized countries. Import substitution and export diversification are discussed as the main development strategies. An important condition for a successful development is an adequate institutional infrastructure. Macroeconomic instability is a severe economic problem of most developing countries. The correlation between the expansion of the money supply and inflation can clearly be seen for Argentina and Brazil. Expansion of the money supply in the early 1990s surprisingly had at first neither an effect on the price level nor on the exchange rate. This might be the temporary result of the policy of an active crawling peg, attempting to stabilize the expectations on the foreign exchange markets. The predominant philosophy was that the world markets would offer interesting opportunities to the domestic producers.
