The Political Economy of Adjustment and Rebalancing

Abstract

Debt and balance of payments crises are politically controversial. In the aftermath of such crises, conflict typically breaks out over how the burden of adjustment will be distributed. There is international conflict, between debtor nations and creditor nations, over how outstanding debts will be resolved. And there is conflict within nations, over who will make the sacrifices necessary to get economies back on track. These political conflicts often become so bitter and protracted that they impede productive bargaining over the adjustment process. The characteristics of socio-economic and political divisions within societies affect the battles over economic adjustment, as well as who will emerge victorious from these battles, and how difficult it may be to arrive at a productive resolution of the crisis.