Developing countries can increase their national saving rate best by increasing government saving. The most effective way to increase national saving is through a permanent tax hike, a cut in current public spending, and a macroeconomic framework in which inflation is low and incentives are predictable.The Policy, Rescarch. and Extemal Affair Complex distributes PRE Working Papers todissesninate the findings odwork in progrerA and to encouruge the exchange of ideas among Banrk staff ard all others interested in dcvclopment issues. Ihese papers carry the names of the authors, reflect only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own. 'hey should not he atributed to the World Bank. its Board of Directon. its management, or any of iLs mcmber coun;ries.

Ten years of inflation targeting worldwide provide valuable lessons. Inflation targeters (ITers) have been very successfulin meeting their inflation targets (ITs). Industrial output sacrifice during inflation stabilization and industrial outputvolatility has frequently been lowered after IT adoption. ITers have consistently reduced inflation forecast errors afterIT adoption. The influence of price and output shocks on the behaviour of inflation and output gaps has changed muchmore strongly among ITers than in non-targeting industrial countries in the course of the 1990s. IT has played a role instrengthening the effect of forward-looking expectations on inflation, hence weakening the weight of past inflationinertia. Central bankers’ aversion to inflation is, on average, not different among ITers in comparison to NITers but hasrisen in emerging-country ITers. ITers have gradually reaped a credibility gain, allowing them to achieve their targetswith smaller changes in interest rates in the late 1990s than the changes that were required in the early 1990

Unless very specific assumptions are made, theory alone cannot determine the sign of the relation between real exchange rate uncertainty and exports. On the one hand, convexity of the profit function with respect to prices implies that an increase in price uncertainty raises the expected returns in the export sector. On the other, potential asymmetries in the cost of adjusting factors of production (for example, investment irreversibility) and risk aversion tend to make the uncertainty-exports relation negative. This article examines these issues using a simple risk-aversion model. Export equations allowing for uncertainty are then estimated for six developing countries. Contrary to the ambiguity of the theory, the empirical relation is strongly negative. Our estimates indicate that a S percent increase in the annual standard deviation of the real exchange rate can reduce exports by 2 to 30 percent in the short run. These effects are substantially magnified in the long run. More than half a decade after the onset of the debt crisis, many countries are still struggling to achieve a current account situation that is compatible with reduced external financing and a moderate but sustainable rate of output growth. Given the sudden decrease in the availability of external funds, most of the initial adjustments have involved drastic reductions in imports and investment but only marginal increases in exports. A key element of a successful medium-term strategy of adjustment and growth is to move resources into the export sector. If the economy is close to full employment, the necessary reallocation of resources will require restrictive aggregate demand policies and a sustained real effective depreciation to make net exports more profitable (Fischer 1986, Khan 1987, Killick and others 1984). Unfortunately, this type of policy usually entails sharp short-run recessions. Export incentives which have smaller costs are needed. The main purpose of this article is to show that real exchange rate uncertainty is one of these

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