Transcript Baloney, Neo-liberal Reform

Neo-liberal Reform
PLSC 400
Carl Baloney, Jr.
Washington Consensus or
Washington Confusion
Moises Naim
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The Making of a Global Brand Name
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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.
The Original 1989 Consensus
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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.
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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
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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.
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Four Sets of Discovers on Reform
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The Discovery of Economic Orthodoxy
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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.
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The Discovery of Institutions
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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.
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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.
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The Rediscovery of Underdevelopment
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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
The Five I’s of Economic Reform
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International
Economic
Instability
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Investment
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Inequality
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Institutions
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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
•Economic Reforms and Economic
Growth: efficiency and politics in
Latin America -Luis Pereira
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(Stabilization) Economic Reforms in New Democracies
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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
Consolidation
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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
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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
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Latin America
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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
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Understanding the Latin American Crisis
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Instead of the WC perhaps The Pragmatic Approach
best explains the Latin American Crisis ( it suggest a
more efficient approach with lower cost)
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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)
The Fiscal Crisis
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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
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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
The Appropriate Reforms
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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
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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