April 27, 2003

The Economist Calls for More Aggressive Pro-Market Reforms in Latin America

The Economist calls for "second generation" neoliberal reforms in Latin America: "The way forward, Mr Williamson concludes, is to 'complete, correct, and complement the reforms of a decade ago', not to reverse them. But can this new formulation command a consensus? However cautious, references to selective capital controls, the role of the state, and income distribution all point to the reform agenda moving towards the centre. Some free-marketeers will object. On the other hand, the region's new centre-left governments, such as that of President Luiz Inácio Lula da Silva in Brazil, might agree with much of this new agenda. One interpretation of the past six months in the region is that the left has signed up to the 'Washington consensus', at least in practice. Lula's government has not only tightened monetary and fiscal policy, it is pursuing the structural reforms espoused by its predecessor. This is not simply tactical, insists a member of Mr da Silva's inner circle of advisers. The government's targets include doubling the efficiency of existing social spending in four years, and raising exports by 10% a year... "

Certainly Latin America (outside Argentina) looks like it has a very bright potential economic future. But it has looked like it had a very bright potential economic future many times in the past. And problems--usually large-scale government failure of jaw-dropping magnitude--have kept the continent very far indeed away from its economic growth potential.

Economist: ...a dozen or so years ago, most Latin American countries, many of them newly democratising, changed course: they implemented a set of free-market policy reforms. These came to be known as the “Washington consensus” (a term coined in 1990 by John Williamson, of the Institute for International Economics, a think-tank in that city). At first, the results were promising: inflation, a chronic Latin vice, was slayed; growth surged again, and poverty began to fall.

Subsequent recessions and financial crises, especially severe in South America, have wiped away some (in places much) of those gains. They have also prompted much heart-searching as to what has gone wrong. Many Latin Americans conclude that the answer is the “neo-liberal” reforms themselves. These are held not just to have failed to deliver sustained growth, but to have made the region more vulnerable, and to have increased unemployment, poverty and inequality. Privatisation in particular has become deeply unpopular: privatisations of a water firm in Bolivia in 2000, and of an electricity generator in Peru last year, were scrapped after riots. As a result of all this, some political pundits assert that Latin America is sinking back into populism and/or anti-market leftist nationalism. And they wonder whether the reform process will survive political change.

Moisés Naím, the editor of Foreign Policy magazine and a former Venezuelan trade minister, was surely right when he declared last year that the “Washington consensus” is a “damaged brand”. But are the critics right that the reforms failed, and if so, why? Is the “Washington consensus”, in fact as well as rhetoric, being abandoned by the region's governments? If so, what might (or ought to) take its place?

Some of these questions have been addressed in a new book by a group of (mainly Latin American) economic reformers, co-edited by Mr Williamson and Pedro-Pablo Kuczynski, a former Peruvian economy minister*. But before considering their proposed revisions to the reform agenda, another question must be asked. What did the original “Washington consensus” really mean? Not what is often claimed by its critics, for whom it quickly became a synonym for the “neo-liberal” (more accurately, neo-conservative) agenda of the governments of Ronald Reagan and Margaret Thatcher. Mr Williamson points out that his original article was “a reporting job” rather than a manifesto, in which he tried to sum up (for a conference held in Washington, DC) in a 10-point list a reform agenda that was emerging among Latin American policymakers (the article can be found at www.iie.com/jwilliamson.htm). His list did not include monetarism, supply-side economics, or a minimal state. What it did comprise, in summary, was fiscal and monetary discipline, opening up to foreign trade and investment, and large-scale privatisation and deregulation.

To the critics, the prime exhibit in the case against the “Washington consensus” is Argentina's dreadful slump. Yet that, too, is a misreading. What brought Argentina down was the combination of its fixed exchange rate, which made its currency uncompetitive, with persistent fiscal deficits. Not only were these mistaken policies; they were in explicit contradiction with Mr Williamson's list.

Elsewhere, the reforms did bring lasting benefits. In Chile, an early reformer, fast growth saw poverty halved, to 23%, between 1987 and 1996. Overall, macroeconomic management in the region improved dramatically compared with, say, the 1970s. There was social progress, too (see table 4). Partly because governments pulled back from running steelworks and factories, they spent more on education and health. In some countries, such as Brazil and Mexico, new, targeted, anti-poverty programmes were introduced. Where income inequality worsened, it was mainly because of recession, not reform.

Privatisation was not the blanket failure painted by the critics. There is little argument over the sale of state industries. Public utilities are more controversial. In some countries, their sale was badly handled: either tainted by corruption, or by private monopolies, or because regulation has been poor. But private provision of telephones, electricity and water has vastly increased their coverage and quality. However, that has generally come at a price: as subsidies were withdrawn, tariffs often rose, before later starting to fall.

None of this is to deny that, overall, the return from reform has been disappointing. There were several reasons for that. Most relate to long-standing Latin American weaknesses. First, there was the region's chronic vulnerability to balance-of-payments crises. Second, the basic macroeconomic reforms were not fully implemented. In particular, most governments failed to save in good times, and piled up debts. Third, it was quickly accepted that if macroeconomic reforms were to produce higher investment and thus more jobs, they needed to be complemented by “second-generation” or institutional reforms. These range from improving education to bankruptcy proceedings. They are easy to list but hard to do. And fourth, some reformers, as well as critics, argued that in a region of deep income inequality, growth alone would not swiftly reduce poverty.

Posted by DeLong at April 27, 2003 01:19 PM | TrackBack


Brad must've liked the Chile thread-drift theme from the Milton Friedman thread.

Posted by: buckydent on April 27, 2003 02:01 PM

Brazil has just begun to give title to homes built by poor families on public land around Sao Paolo. This could be of signal importance. Also, Brazil has been rapidly increasing trade with China and other Asian countries. I am much encouraged by the policies of the new government.

Posted by: jd on April 27, 2003 02:41 PM

Brazil Finds a Market for Exports and a Friend in China

SÃO PAULO, Brazil, April 22 — In Portuguese, "business from China" means a deal sent from heaven, a once-in-a-lifetime chance to get rich. So it should be no surprise that Brazilian business is suddenly looking east.

To wean itself from dependence on foreign investment, Brazil needs to export more, and China, the world's most populous and fastest-growing economy, is a new priority for producers of everything from soybeans and chicken to iron ore, compact cars and regional jets.

And while even the biggest Brazilian companies often cannot compete with North American and European rivals in trade financing, their prices are usually lower and they have another, vital competitive advantage: China seems to like them....

Posted by: jd on April 27, 2003 02:51 PM

Much of Latin America desperately needs land reform which at its most benign simply means establishing clear title but generally means a massive redistribution of property. One way or another western europe has done this and the U.S. didn't really need to in that most land was public (though kudos for parcelling it out to small landowners).

Most other reforms should be put on the back burner until some progress can be made there.

Posted by: Atrios on April 27, 2003 09:07 PM

Certainly Latin America (outside Argentina) looks like it has a very bright potential economic future. But it has looked like it had a very bright potential economic future many times in the past. And problems--usually large-scale government failure of jaw-dropping magnitude--have kept the continent very far indeed away from its economic growth potential.

Yeah. No need to mention the massive structural restraints impossed by an insane foreign debt load. Nor the greater sensitivity to global economic shocks. Nor the massive concentration of ownership. Nor the descent in many places to working in factories while substinence farming to eat.

Nope, it all comes down to mismanagement. Which is why no country after Britain has industrialized without massive state intervention and mercantilist trade policies. Ever. (That includes the U.S., Canada, Italy, Germany, Japan, South Korea, etc. etc.)

Sorry to be so glib, but the notion that South America's problems are solely the result of mismanagement irks me to no end.

Posted by: Lorenzo on April 28, 2003 10:25 AM

Dollarization in Argentina could only have worked if Argentina had had the option of becoming a member of the United States of the Western Hemisphere. Institutional reform needs to be homegrown - it will most probably not be achieved via remote control at the hands of the most current generation of members of the Chicago school of economics. (Jetlag may not be conducive to remembering to check whether Bolivia has a coastline).
Gunder Frank was in error - deSoto seems not to. Expect centrist-led Latin American economies to perform better than others on the continent.

Posted by: Joerg Wenck on April 28, 2003 01:10 PM


Jetlag is almost irrelevant when going along a meridian, so if they do not know the coastline of Bolivia, it is common ignorance.


Posted by: Antoni Jaume on April 28, 2003 01:19 PM

That Bolivia fiasco was Bechtel, and they screwed it up as they screwed up the Big Dig in Boston. Get ready, Iraq.

Posted by: John Isbell on April 28, 2003 03:40 PM

Brad, I am wonder whether Latin America's slow growth is due to structural long run things like lack of "institutions" as they called them in my Latin America class, or just due to the overhang of various past macroeconomic crises and the risk of future ones. I realize the two issues aren't completely separable. Also this is a question of *how strong* the effect of each is as opposed to *whether* each should be addressed (which they should b.

Posted by: Bobby on April 28, 2003 03:47 PM

Atrios - the US approach to directing land to smallholders was actually sovereign risk in action. It prevented Europeans acquiring landholdings by making most of their efforts non-viable - which often led to a (further) wealth transfer to the people of the USA (as opposed to the land sales institutions) since the land buyers' associated improvements represented a separate capital transfer, embedded in their divestments. As the process didn't particularly make the smallholdings viable in the long run, at a later stage many of the smallholders suffered too, with wealth transfers to financing bodies like banks that foreclosed on mortgages.

All very oversimplified and two dimensional of course, but those processes did occur - and no kudos are deserved whatsoever, as it was an artefact of who had a vote and who hadn't. It even features in the background to where Billy the Kid came from.

Posted by: P.M.Lawrence on April 28, 2003 09:41 PM

"Dollarization in Argentina could only have worked if..."

It was never tried in Argentina, though I believe it is in place in Ecuador. What Argentina had was dollar PEGGING, where dollarising means using the dollar itself as a currency. The difference is no quibble - it means that Argentina got any seignorage that was going, though that was limited to whatever the USA generated.

Posted by: P.M.Lawrence on April 29, 2003 05:02 PM
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