Stabilization

Business Cycle

When viewed in terms of the business cycle, stabilization as the dynamics of economic stimulation is progressively reached, up to a state of noninflationary growth of output and higher utilization of productive factors. Such economic reconstruction involves financial, institutional, and technological restructuring across the path of economic growth. Examples of financial instruments are the public holding of national and international issues, forced government borrowing in national and financial markets, and joint ventures between the private sector and public sectors, in which international borrowing and financing of projects becomes necessary. Examples of such induced financial effects were the Marshall Plan of Europe following World War II and today’s International Monetary Fund structural adjustment programs to guide countries into a balanced external sector of international trade. The World Bank prescribes such stabilization by its growth agenda, and more recently by the poverty-centered models of development financing.

Yet, for all such instruments in social stabilization, in the presence of a business cycle of an underperforming economy, there are costs that hinder smooth convergence into the state of economic stabilization. Among these real costs of adjustment is government spending to correct the underemployment situation of low-performing inputs of production in the range of underemployment levels of output, and thereby employment of inputs. There is also the cost incurred in private-sector borrowing, with interest rates to raise capital for economic stabilization. Among the types of social costs is the one linked with trade off (opportunity cost) between price levels (inflation) and unemployment levels as the economy nears its long-run full-employment level of output, where monetary and fiscal policy effects on economic growth are neutralized.

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