Friday, July 01, 2005
The Unfinished Reform Agenda in Latin America
By: Paul Holden, The Enterprise Research Institute
For: The Cato Institute
The recent meetings of the World Bank and the International Monetary Fund highlighted the extent to which the so called Washington Consensus has fallen into disfavor. The term is shorthand for a set of economic policy prescriptions that include fiscal and monetary orthodoxy, trade reform and privatization. Most of the current criticism centers around the perception that the IMF, in particular, automatically instructs countries in balance of payments difficulties to implement harsh deflationary programs without taking into account whether the underlying fundamentals warrant such steps. In addition, frustration with the failure of the Russian economy to perform better has focused a spotlight on the limitations of what has become know as first generation reform. Countries in Latin America are also questioning the efficacy of reform to date.
While conventional orthodoxy attempts to improve relative price signals that are distorted by protectionist trade policies and high inflation, second generation reforms focus on removing impediments to the shifting of resources in response to improved incentives. 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. They increase an economy’s ability to withstand external shocks. 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.
A second generation reform agenda also sets out to address a focus of criticism arising from Washington Consensus type reform, namely that the benefits of the process only accrue to relatively small numbers of the ‘power elite’. Whether or not this perception is in accordance with the facts, there is no doubt that institutions in Latin America do not adequately support many activities that function as a matter of course in the more developed world. Insecure property rights, inadequate dispute resolution mechanisms, stifling regulation, and poorly functioning legal systems conspire to stack the deck against upward mobility and the diffusion of wealth and power. Simple political economy considerations dictate that the present value of the gains to reform needs to be larger than the present value of income from existing policies and that these gains are so distributed that wide and enduring support for the policies that have been put in place can be sustained. This implies the need to assure that the gains from reforms are widely distributed, that the gainers are made sufficiently strong to support continuing reform and the vulnerable groups in society are protected during the reforms.
For: The Cato Institute
The recent meetings of the World Bank and the International Monetary Fund highlighted the extent to which the so called Washington Consensus has fallen into disfavor. The term is shorthand for a set of economic policy prescriptions that include fiscal and monetary orthodoxy, trade reform and privatization. Most of the current criticism centers around the perception that the IMF, in particular, automatically instructs countries in balance of payments difficulties to implement harsh deflationary programs without taking into account whether the underlying fundamentals warrant such steps. In addition, frustration with the failure of the Russian economy to perform better has focused a spotlight on the limitations of what has become know as first generation reform. Countries in Latin America are also questioning the efficacy of reform to date.
While conventional orthodoxy attempts to improve relative price signals that are distorted by protectionist trade policies and high inflation, second generation reforms focus on removing impediments to the shifting of resources in response to improved incentives. 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. They increase an economy’s ability to withstand external shocks. 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.
A second generation reform agenda also sets out to address a focus of criticism arising from Washington Consensus type reform, namely that the benefits of the process only accrue to relatively small numbers of the ‘power elite’. Whether or not this perception is in accordance with the facts, there is no doubt that institutions in Latin America do not adequately support many activities that function as a matter of course in the more developed world. Insecure property rights, inadequate dispute resolution mechanisms, stifling regulation, and poorly functioning legal systems conspire to stack the deck against upward mobility and the diffusion of wealth and power. Simple political economy considerations dictate that the present value of the gains to reform needs to be larger than the present value of income from existing policies and that these gains are so distributed that wide and enduring support for the policies that have been put in place can be sustained. This implies the need to assure that the gains from reforms are widely distributed, that the gainers are made sufficiently strong to support continuing reform and the vulnerable groups in society are protected during the reforms.