NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Establishing Credibility: The Role of Foreign Advisors

Sebastian Edwards

NBER Working Paper No. 11429
Issued in June 2005
NBER Program(s):   IFM

In this paper I analyze the role of foreign advisors in stabilization programs. I discuss from an analytical perspective why foreigners may help a developing country's government put in place a successful stabilization program. This framework is used to analyze Chile's experience with anti-inflationary policies in the mid 1950s. In 1955-58 Chile implemented a stabilization package with the advice of the U.S. consulting firm of Klein-Saks. The Klein-Saks program took place in a period of acute political confrontation. After what was considered to be an initial success -- inflation declined from 85% in 1955 to 17% in 1957 -- the program failed to achieve durable price stability. I argue that the foreign advisors of the Klein-Saks Mission gave initial credibility to the stabilization program launched in 1955. But providing initial credibility was not enough to ensure success. Congress failed to act decisively on the fiscal front. Consequently the fiscal imbalances that had plagued Chile for a long time were reduced, but not eliminated. I present empirical results on the evolution of inflation, exchange rates and interest rates that support my historical analysis.

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Document Object Identifier (DOI): 10.3386/w11429

Published: Sebastian Edwards The Decline of Latin American Economies: Growth, Institutions, and Crises, , pages 291-332, 2007.

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Edwards Establishing Credibility: The Role of Foreign Advisors in Chile’s 1955–1958 Stabilization Program
 
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