A DECADE AFTER THE GREAT WAVE A DECADE AFTER THE GREAT WAVE

OF STRUCTURAL REFORMS:OF STRUCTURAL REFORMS:

What Have We learned?What Have We learned?

A DECADE AFTER THE GREAT WAVE A DECADE AFTER THE GREAT WAVE

OF STRUCTURAL REFORMS:OF STRUCTURAL REFORMS:

What Have We learned?What Have We learned?

Eduardo Lora Eduardo Lora Research DepartmentResearch Department

Inter-American Development BankInter-American Development Bank

A Decade of Development ThinkingA Decade of Development Thinking

22

Structural Reform Index, average LACStructural Reform Index, average LAC

Reforms have stalledReforms have stalled

0.300.30

0.350.35

0.400.40

0.450.45

0.500.50

0.550.55

0.600.60

1985

1985

1986

1986

1987

1987

1988

1988

1989

1989

1990

1990

1991

1991

1992

1992

1993

1993

1994

1994

1995

1995

1996

1996

1997

1997

1998

1998

1999

1999

2000

2000

2001

2001

2002

2002

Source: Adapted from Lora (2001).

The great wave

33

……although the extent of reform has been very although the extent of reform has been very uneven by type of reform and by countryuneven by type of reform and by country

The Extent of the Reforms The Extent of the Reforms (Margin of Reform Put to Use) (Margin of Reform Put to Use)

Source: Adapted from Lora (2001).

Note: Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years

1989, 1994, and 1999.

-10%-10%

0%0%

10%10%

20%20%

30%30%

40%40%

50%50%

60%60%

70%70%

80%80%

TotalTotal TradeTrade FinanceFinance TaxTax PrivatizationPrivatization LaborLabor

Until 1989Until 1989 Until 1994Until 1994 Until 1999Until 1999 Until 2002Until 2002

44

Many people have turned against reforms...Many people have turned against reforms...

0

10

20

30

40

50

60

1998 2000 2001 2003

Support for PrivatizationsSupport for Privatizations

52%

25%

Source: Latinobarometro Opinion Surveys

55

Not to mention the top international economic Not to mention the top international economic advisersadvisers

Krugman declares himself in favor of a Krugman declares himself in favor of a capital curfew and other financial controls capital curfew and other financial controls (1998)(1998)

Stiglitz becomes the beacon of the anti-Stiglitz becomes the beacon of the anti-globalizers (2000-…)globalizers (2000-…)

Rodrik criticizes the emphasis on trade Rodrik criticizes the emphasis on trade liberalization and other key elements of the liberalization and other key elements of the Washington ConsensusWashington Consensus

Sachs pushes for more social protection and Sachs pushes for more social protection and less IMF-led debt-sustainability ideology less IMF-led debt-sustainability ideology

What have we learned on the What have we learned on the economic effects of reforms?economic effects of reforms?

77

AuthorsAuthors PeriodPeriod EffectEffect

Easterly, Loayza and MontielEasterly, Loayza and Montiel 1991-93 vs. 86-901991-93 vs. 86-90 2,2%*2,2%*

Lora and BarreraLora and Barrera 1993-95 vs. 87-891993-95 vs. 87-89 2,2%*2,2%*

Fernández-Arias and MontielFernández-Arias and Montiel 1991-95 vs. 86-901991-95 vs. 86-90 1,7%*1,7%*

Loayza, Fajnzylber, CalderLoayza, Fajnzylber, Calderónón1996-99 vs. 86-901996-99 vs. 86-90 1,9%*1,9%*

Lora and PanizzaLora and Panizza 1997-99 vs 85-871997-99 vs 85-87 0,7%0,7%

*Includes the effect of macro stabilization*Includes the effect of macro stabilization

The reforms seem to have helped growth...The reforms seem to have helped growth...

88

Effect of Reforms on GrowthEffect of Reforms on Growth

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1988-90 1991-93 1994-96 1997-99

Source: Lora and Panizza (2002).

……although the effects have probably been although the effects have probably been transitory and below the expectations created by transitory and below the expectations created by the reformersthe reformers

99

What have we learned on the What have we learned on the economic effects of reforms?economic effects of reforms?

Trade reforms are no panaceaTrade reforms are no panacea

Although trade is good for growth it is still Although trade is good for growth it is still unclear how good trade liberalization isunclear how good trade liberalization is

Appreciated exchange rates reduce the Appreciated exchange rates reduce the export-promotion effect of tariff reductionsexport-promotion effect of tariff reductions

Complementary policies are key:Complementary policies are key:Access to marketsAccess to marketsInfrastructureInfrastructureIndustrial and innovation policies Industrial and innovation policies

(Hausmann & Rodrik)(Hausmann & Rodrik)

1010

What have we learned on the What have we learned on the economic effects of reforms?economic effects of reforms?

Financial liberalization does increase financial Financial liberalization does increase financial depth and efficiency in the financial sector depth and efficiency in the financial sector (Levine; Galindo at al.), but:(Levine; Galindo at al.), but:

May lead to crisis when creditor rights and the May lead to crisis when creditor rights and the rule of law are weak, or when regulation is rule of law are weak, or when regulation is deficient (Caprio & Hanson; Demigurc; Arteta)deficient (Caprio & Hanson; Demigurc; Arteta)

1111

What have we learned on the What have we learned on the economic effects of reforms?economic effects of reforms?

Privatization does lead to higher profitability of Privatization does lead to higher profitability of the firms privatizedthe firms privatized

……which result from efficiency gains, not from the which result from efficiency gains, not from the consumers or the fisc (Chong & Lconsumers or the fisc (Chong & López de S.)ópez de S.)

However, some failures do occur due to:However, some failures do occur due to:

Corruption, inadequate regulation and deficient Corruption, inadequate regulation and deficient corporate government institutions.corporate government institutions.

1212

What have we learned on the political What have we learned on the political economy of reforms?economy of reforms?

Great theories (Tommasi & Velasco, Rodrik) Great theories (Tommasi & Velasco, Rodrik)

……but little explanatory power (Lora & Olivera; but little explanatory power (Lora & Olivera; Navia & Velasco) Navia & Velasco)

More important is to understand the actual More important is to understand the actual policy making processes and the political policy making processes and the political factors that affect the ability of policymakers factors that affect the ability of policymakers to pursue and implement reforms (Spiller, to pursue and implement reforms (Spiller, Stein & Tommasi).Stein & Tommasi).

The great wave of reforms may be over The great wave of reforms may be over

but research on the economic, social but research on the economic, social

and political effects of the reforms has and political effects of the reforms has

just begun.just begun.