World experience suggests that macroeconomic stability is a key factor for facilitating economic growth. Macroeconomic stability means that inflation is kept low and that the real exchange is stable at a competitive level. Moreover, the government budget deficit and foreign debt are kept within limits consistent with price and exchange rate stability. When the economy is struck by external shocks, such as an export price shock or a large rise in world interest rates, fiscal and monetary policy are adjusted quickly to avoid inflation or exchange rate volatility..
The high-performance East Asian economies have been very successful in creating macroeconomic stability. During the past three decades they have experienced:
Macroeconomic crises are very costly in terms of years of economic growth. For developing countries, the standard deviation of growth rates is four times the mean growth rate. Thus a single-year crisis (growth two standard deviations below mean growth) costs the equivalent of eight years of accumulated growth. Chile, for example, had on average from 1963 to 1988 zero growth in GDP per worker, largely because GDP per worker fell 16% between 1973 and 1975, and 19% between 1981 and 1983. Such dramatic shocks have been absent in the macroeconomic record of the high-performance East Asian economies over the past three decades.
Economic Growth in East Asia