Neo-liberal Reform

1. Neo-liberal Reform PLSC 400 Carl Baloney, Jr.

2. Washington Consensus or Washington ConfusionMoises Naim • The Making of a Global Brand Name • The ideas derived from the Washington Consensus for market reform had a huge influence on the economic reforms of many countries. • The Washington Consensus acquired a life of its own, and was often misinterpreted as a step by step guide rather than “a useful summary”. (The IMF and the World Bank made loan conditional on adoption of census policies) • The popularity of the Washington consensus is largely because it was formed in the late 1980s as the Soviet Union collapsed leading developing countries to seek new ideologies.

3. The Original 1989 Consensus • Fiscal Discipline: Large and sustained fiscal deficits contribute to inflation and capital flight. Therefore governments should keep them to a minimum. • Public Expenditure Priorities: Subsidies need to be reduced or eliminated. Government spending should be redirected towards education, health, and infrastructure development. • Tax Reform: The tax base “should be broad” and marginal tax rates “should be moderate”. • Interest Rates: Domestic financial markets should determined a country's interest rates. Positive real interest rates discourage capital flight and decrease inflation. • Exchange Rates: developing countries must adopt“competitive” exchange rates that bolster exports by making them cheaper abroad.

4. Trade Liberalization: Tariffs should be minimized and should never be applied toward intermediate good needed to produce exports. • Foreign Direct investment: Foreign investment can bring needed capital and skills and, therefore should be encouraged • Privatization: Private industry operates more efficiently because managers either have a “direct personal stake in the profits of an enterprise or are accountable to those who do”. State-owned enterprises ought to be privatized. • Deregulation: Excessive government regulation can promote corruption and discriminate against smaller enterprises that have minimum access to the higher reaches of bureaucracy. Governments have to deregulate the economy. • Property Rights: Property rights must be enforced. Weak laws and poor judicial systems reduce incentives to save and accumulate wealth

5. Evolution of Pattern • Popular Policy implemented >Policy provide comfort >unstable occurrence > doubts in policy adequacy arise. • Policy makers in countries saw the bar for success being raised to impossible expectations leading to apprehension, the apprehension was often coined as Populism.

6. Four Sets of Discovers on Reform • The Discovery of Economic Orthodoxy • The WC marked the end of the decoupling between developing economies and mainstream economies. • The WC’s prescription for deregulation, decreased subsidies and protectionism expelled the idea that LDC’s could not benefit from freer trade. • The 1980s debt crisis made many countries turn to the WC, the more orthodox macro policies of the WC helped many countries turn there economies around. • However countries found that there were boundaries in how far orthodoxy could carry an economy.

7. The Discovery of Institutions • Policy makers realized that macroeconomic change was necessary but not sufficient reform. • The success of NAFT served as proof that institution were necessary to protect trade and investment. • Reforming countries also realized that infrastructural institutions had to secure: trade, education, healthcare, etc. • The Discovery of Globalization • The WC overlooked policies that would allow newly open economies to cope with globalization. • This lead to periodical financial crashes in the 1990s • Crashes made people question the benefit of open markets, trade liberalization, fixed exchange rates, etc.

8. The Rediscovery of Underdevelopment • Underdevelopment could not be tackled without a broad based approach stressing the importance of inequality, institutions, structural factors, cultural factors, and the constrains of the international economic environment

9. The Five I’s of Economic Reform • International Economic Instability • Investment • Inequality • Institutions • Ideology Strong Banking systems and other institutions can mitigate the effects of economic shocks High savings rates and foreign investments are need to protect financial institutions and can lead to growth The search for minimized inequality may lead to healthy focus on public institutions , especially education and healthcare Political and economic changes can affect institutions, so resources should be allocated Economic reformers should foster a widely shared commitment to a set of policies

10. Economic Reforms and Economic Growth: efficiency and politics in Latin America -Luis Pereira • (Stabilization) Economic Reforms in New Democracies • The collapse of authoritarian regimes was often accompanied by economic crisis. (because of over regulation, protectionism) • Since economic crisis often coincide with transitions to democracy, there is a double challenge. 1) How to resume growth. 2) consolidating nascent political institutions • Success in new democracies are often hampered by vast expectations, stabilization is necessary for growth • Stabilization slows inflation and improves the financial position of the state • Stabilization is coupled with privatization to achieve long run economic growth

11. Consolidation • The second criterion for success is consolidation of democratic institutions • All groups must channel there demands through the democratic institutions • Democratic institutions can be consolidated on if they offer politically significant groups incentives to process there demands through the institutional framework

12. Neo-liberal policies – The Washington Consensus • Based on assumption than an exclusive reliance on markets will bring massive relocation of resources, however, market orientation may not be sufficient to generate market coordination toward collective prosperity • the focus on mobilizing saving, infrastructure, and shaping sectoral priorities shows that the WC proposition is based on the assumption that the markets are complete and that there is a market for every contingent state of nature

13. Latin America • Stabilization's double challenge: • Must be both economically effective, and politically feasible • The social cost to change and implementation must not be to high socially or economically • In the 1980s several Latin American democracies struggled with economic crisis due to stagflation in the midst of a change to democracy

14. Understanding the Latin American Crisis • Instead of the WC perhaps The Pragmatic Approach best explains the Latin American Crisis ( it suggest a more efficient approach with lower cost) • to resume growth countries must address the fiscal crisis, to recover the capacity for public saving and define a new strategic role of the state, so total savings are increased and technological progress can be promoted • Unlike the WC the PA dictates that expenditure cuts are regressive while tax increases can be a tool for income distribution • The PA promotes trade liberalization as a part of reform but not as a formula, reduced size of the state • The PA suggest the crisis is a result of the exhaustion of the form of state intervention ( the import substitution strategy)

15. The Fiscal Crisis • Due to five main components • Budget deficit • Negative or very small public savings • Excessive debt • Poor credit of state ( i.e. Brazil overnight mkt for treasury bonds • The governments lack of credibility

16. The loss of credibility of the state – its inability to finance itself except through seigniorage is a quintessential characteristic of fiscal crisis • In Latin America a major component of the crisis was unequal taxation, the L A states were unable to finance policies, as the wealthy do did not pay taxes • This is a component of the authoritarian roots of Latin American countries, the state was subject to the rich

17. The Appropriate Reforms • The appropriate reforms are not only suggest by the Washington approach • Stabilize ( control inflation) • Reduce role of the state (reduce intervention) • Overcome fiscal crisis (generate surplus, reduce public debt) • Define new strategy for growth (allow market to define role of government

18. Discussion Questions 1) Do you find the Washington Consensus or the Pragmatic Approach more realistic? 2) Is the pragmatic approach appropriate for Latin American countries that deal with more raw materials? 3) How can countries best resume growth after a crisis