[OUTLOOK]Making Latin America developIn late 1989, as Latin America emerged from its debt crisis and the Berlin wall came down, there was an unusual degree of consensus about the main elements of the policy agenda that Latin American countries should pursue. They needed to act more like the OECD countries, or for that matter the East Asian countries, so as to curb inflation, give more scope to market forces and open up their economies to trade and foreign direct investment.
Until some time in the 1980s, these ideas had not been part of the conventional wisdom in many developing countries. Prior to that there was a sort of intellectual apartheid, which in most developing countries held that quite distinct policies were appropriate from those of industrial countries. To convince a skeptical Washington that important reforms were in progress, I laid out criteria by which to judge how much policy reform had occurred in Latin America, and termed this agenda “the Washington Consensus.”
To my surprise, the term became famous (or notorious). Some of the reformers wore it as a badge of honor that would associate them with the ideology of the side that had just won the Cold War. But others resented it as suggesting that reform was being imposed on them by Washington rather than adopted out of rational self-interest.
Opponents of reform were of course only too pleased to exploit such resentment to attempt to discredit reforms. To that end they reinterpreted the term to imply a distinctly more right-wing agenda ― including a minimal government and rapid elimination of all capital controls ― than had ever commanded a consensus in Washington or anywhere much else. They then blamed “the Washington Consensus” for the disappointing economic outcomes in Latin America of recent years ― repeated crises, low growth, rising poverty and a continuation of strikingly unequal income distribution.
But the Argentine tragedy, as an example, was not caused by import liberalization or privatization or any of the other good reforms that the country made in the early 1990s, but by two fatal decisions. One was the attempt to peg the peso firmly to the dollar, which proved disastrous especially after the devaluation of the Brazilian real and the upward levitation of the U.S. dollar. The second was the decision to splurge when Argentina was the darling of Wall Street instead of using the good times to work debt down to a safe level. Since a competitive exchange rate and fiscal discipline were two of the “10 commandments” in what I called the Washington Consen-sus, the program can hardly be blamed for Argentina’s crisis.
Nevertheless, economic results in Latin America in recent years have by any standard been disappointing. It seemed to be time to re-examine the policy agenda that the region should be pursuing to see whether a reorientation of policy might be needed to launch a period of faster, sustainable, and more equitable growth. After all, even those who sympathized with my original summary of the policy agenda in 1989 would surely agree that times have changed and one ought to reconsider what needed doing now.
The policy agenda in the book that the Institute for International Economics has just published (After the Washington Consensus: Restarting Growth and Reform in Latin America) differs from the original Washington Consensus in two distinct ways. One is that time has passed and some reforms, such as the liberalization of foreign direct investment, have already been accomplished, while new priorities have become evident. The other is that this is our agenda and not an attempt to discern what commands a consensus among third parties. But note that it is similar to the original Washington Consensus in being specifically directed at Latin America: There was never any intention to argue that the same reform agenda was needed everywhere in the world.
The new agenda does not reject the stabilizing and liberalizing reforms of the Washington Consensus. On the contrary, it argues there is a need to push liberalization further in some dimensions, like making labor markets more flexible.
But it also recognizes the need to complement those reforms by building or strengthening those institutions needed for a smart state to play its key roles in stimulating and regulating a market economy. And we also argue that policy needs to pursue lessened income inequ-ality as an objective along with faster growth. Fiscal instruments can help, but they need to be paralleled by efforts to supply the poor with assets that will enable them to work their way out of poverty.
But the overwhelming priority is to make the Latin American economies less vulnerable to crises, especially by showing far more discipline in public debt and by using the latitude that would provide to make fiscal policy anti-cyclical.
* The writer is a senior fellow at the Institute for International Economics
by John Williamson