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LATIN AMERICAN ADJUSTMENT: HOW MUCH HAS HAPPENED?

LATIN AMERICAN ADJUSTMENT: HOW MUCH HAS HAPPENED?

J. Williamson (ed.)

Chapter 2 (What Washington Means by Policy Reform)

A Summary 

In a Nutshell
This is the excerpt in which JW defines the Washington Consensus. What is remarkable is that the consensus is not half as specific as the subsequent literature makes out. Additionally although the consensus seems to be broad it is by no means ubiquitous in that there are points of disagreement and the author has different opinions to those of the IFIs at times. Most importantly it does not readily identify with what came to be known as neo-liberalism in that it is not itself a doctrine for how a country should develop its economic, political nor social life and policy. Rather it is a handful of specific recommendations for stabilizing crisis economies. The author even states that Washington is unsure if its recommendations are good for kick-starting growth – they are a tool for stabilization, not a long-term growth strategy. At times it is very specific, and at times very vague. Rather weirdly they do not take into account the welfare distribution of the effects of the policy (although they do take into account the effects they may have on corruption!) and this could be seen as a limitation: JW later said they should be supplemented with pro-poor redistributive policies. The key takeaway is that the WC is comprised of “policy instruments rather than objectives or outcomes”.

 There are 10 broad recommendations: 

  1. Fiscal deficits
  • IMF had long made fiscal control an element of conditionality.
  • Differences of view however on whether fiscal discipline need imply a balanced budget
  • A deficit of more than 2% is evidence of policy failure. 

     2. Public Expenditure Priorities

  • Reducing expenditures preferable to raising taxes.
  • Subsidies should be cut
  • Increased investment in human capital such as education and health. This helps disadvantage and gives a return to the state.
  • Public infrastructure investment also important.
  • In other words, away from wasteful subsidies etc. toward investment that can bring returns.

 

       3.Tax Reform

  • Broaden the base, and keep marginal rates low

      4. Interest Rates

  • Market determined
  • Positive to discourage capital flight

       5. Exchange Rate

  • Achieving a competitive rate more important than how it is determined. It is crucial as an element of outward looking policies.

      6. Trade Policy

  • Limited tariffs 10-20% to still help developing industries to a certain extent without hurting too drastically the economy.
  • End to import licensing
  • Not expected to occur overnight.

       7. FDI

  • Restricting FDI is silly 

       8. Privatization

  • Relieves budget pressures and increases effectiveness of enterprises

     9. Deregulation

    10. Property Rights.

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