ABSTRACT

The prevailing assumption was that economic decline undermines the ability of democratic governments to consolidate democratic values and institutions. A particular concern was whether the "fragile" new democracies could manage the problems of consolidating their new political regimes while coping with the distributional problems of economic adjustment. Granted, the management of macroeconomic policy is just one dimension of the problems that developing countries face in trying to achieve economic recovery without inflicting any more political pain than is necessary. In a market-based economy in which individual transactions determine the allocation of resources, those resources will always be distributed unequally. Economic performance is also expected to be sensitive to price stability, represented by the rate of inflation. Economic growth is significantly hampered by transaction costs, as expected, and by the size of government as represented by government consumption as a percentage of gross domestic products.