Why should someone who is primarily concerned with long-term growth and development in emerging-market economies concern themselves with short-run macroeconomic performance? The answer to this question is that short-run macroeconomic stability has increasingly been recognized as an important determinant of long-term growth performance in such economies. Indeed, over the past two decades a significant consensus has emerged among professional economists and policymakers in developing countries that providing a stable and predictable macroeconomic policy environment and getting key macroeconomic relative prices “right” help to induce the accumulation of physical and human capital as well as the improvements in productivity that are the basic ingredients of long-term economic growth. A wide array of evidence is consistent with this proposition, derived from cross-country experience as well as from case studies of both successful and unsuccessful developing economies. The growing attention paid to macroeconomic issues by development-oriented institutions such as the World Bank is one consequence of this new perception.

What do we mean, however, by macroeconomic stability, and by “key macroeconomic relative prices”? In the emerging-market context, “stability” has come to mean the avoidance of high and variable rates of inflation, as well as of “financial” crises – a term that covers a variety of sins, including the public sector's inability to service its debts, domestic banks' inability to fulfill their obligations to their depositors, and the central bank's inability to sustain the value of the currency.