Friday, July 01, 2005
Emerging Economic Issues in Latin America: A Second Generation Agenda
By: Paul Holden, The Enterprise Research Foundation, and Sarath Rajapatirana, The World Bank, 1997
Starting with Chile in 1973 and then with many other countries in the decade from the mid-1980s, most countries in Latin American embarked on episodes of economic reform that in many cases were quite radical. Inflationary, inward looking and distortionary policies were, in the most part, abandoned. They were replaced by fiscal probity that reduced the chronically high inflation rates that were a characteristic of the region. Trade reforms removed quantitative restrictions and lowered and simplified tariffs. Financial reform removed financial repression. Exchange rate restrictions were replaced by policies that often included full convertibility and large scale privatizations reduced state ownership in most countries. Elsewhere we have characterized reform programs. Those that involve changes in macroeconomic variables, we described as first generation reform. They prepare the ground work for creating the conditions for second generation reforms, or reforms at the microeconomic level which are needed to make the changes brought about by the first generation reforms sustainable.
Second generation issues focus on removing impediments to the shifting of resources in response to improved incentives. They increase an economy’s ability to withstand external shocks. They more strongly define property rights. They reform institutions by making their role more automatic than discretionary in order to reduce the probability of disequilibrium induced by policy reversals or other endogenous developments. The second generation agenda also relates to increased concerns regarding income distribution, small and medium sized enterprises and decentralization and power sharing between the central government, provinces and municipalities.
The paper is divided in into six sections. Following the introduction, Section II recounts the host of policy reforms undertaken under the first generation agenda and the outcomes of these reforms. Section III describes the unfinished elements of the first generation agenda. Section IV places second generation issues within an overall reform strategy, while Section V develops some specific elements of the second generation agenda. Section VI gives conclusions.
Starting with Chile in 1973 and then with many other countries in the decade from the mid-1980s, most countries in Latin American embarked on episodes of economic reform that in many cases were quite radical. Inflationary, inward looking and distortionary policies were, in the most part, abandoned. They were replaced by fiscal probity that reduced the chronically high inflation rates that were a characteristic of the region. Trade reforms removed quantitative restrictions and lowered and simplified tariffs. Financial reform removed financial repression. Exchange rate restrictions were replaced by policies that often included full convertibility and large scale privatizations reduced state ownership in most countries. Elsewhere we have characterized reform programs. Those that involve changes in macroeconomic variables, we described as first generation reform. They prepare the ground work for creating the conditions for second generation reforms, or reforms at the microeconomic level which are needed to make the changes brought about by the first generation reforms sustainable.
Second generation issues focus on removing impediments to the shifting of resources in response to improved incentives. They increase an economy’s ability to withstand external shocks. They more strongly define property rights. They reform institutions by making their role more automatic than discretionary in order to reduce the probability of disequilibrium induced by policy reversals or other endogenous developments. The second generation agenda also relates to increased concerns regarding income distribution, small and medium sized enterprises and decentralization and power sharing between the central government, provinces and municipalities.
The paper is divided in into six sections. Following the introduction, Section II recounts the host of policy reforms undertaken under the first generation agenda and the outcomes of these reforms. Section III describes the unfinished elements of the first generation agenda. Section IV places second generation issues within an overall reform strategy, while Section V develops some specific elements of the second generation agenda. Section VI gives conclusions.