Understanding Economic Policy Reform Essay Example for Free

Understanding Economic Policy remediate adjudicateWhat is the point of loudly proclaiming reforms if these are not aimed at improving the well-being of a large majority of the population? And if that is their goal, why should reforms be unpopular? In more areas of policy, there may ex1 Quoted by Jose female horse Maravall in Luiz Carlos Bresser Pereira, Maravall, and Adam Przeworski (1993). T ist technical uncertainty as to what the appropriate solution is to the problems at hand. approximate of President Clintons health care plan, for example, or of global warming. Consequently, reforms will arouse opposition if they are viewed as applying the wrong fix or if they are perceived as being primarily redistributive (that is, zero-sum). What is unprecedented about current fashions in economic development policy (as applied to both developing and transitional economies), however, is the extent of convergence that has developed on the broad outlines of what constitutes an appr opriate economic strategy. This strategy emphasizes fiscal rectitude, competitive exchange rates, free trade, privatization, undistorted trade prices, and limited intervention (save for encouraging exports, education, and infrastructure).Faith in the zing and efficacy of these policies unites the vast majority of professional econo overclouds in the developed world who are concerned with issues of development. 2 2 The convergence is not complete of course. But compared to cardinal decades ago, the various sides allow moved well closer to each other. One indicator of this is the recent news by Bresser Pereira, Maravall, and Przeworski (1993), which advocates a social parliamentary approach. The views expressed in this book concede an inor- 9 10 Journal of Economic Literature, Vol.XXXIV (March 1996) we survey such instances of collective irrationality. The events of the last decade have belowscored the need to understand the political-economy of policy making. One of the eve ntual(prenominal) consequences of the global debt crisis that erupted in 1982 was a wave of market-oriented economic reforms, the likes of which have never been seen. The reforms were strongest and most sustained in Latin America, where countries like Bolivia, Mexico, Argentina, Peru, Colombia, and Brazil joined chili con carne in orthodoxy.But this was precise much a global phenomenon. Stabilization and structural adjustment became the primary preoccupation of government leaders in Asia and Africa as well, even though the commitment to economic orthodoxy varied across countries and over time. These countries were in turn short joined by the previously socialist economies of Eastern Europe and the former Soviet Union. Economists who had cut their odontiasis in Latin Americas economic quagmires became the advisors and analysts of these transitional economies.Even India, the giant archetype of a closed, import-substituting economy among developing countries, embarked on a process of economic liberalization in 1991 (see Jagdish Bhagwati 1993 and Arvind Panagariya 1994). These reforms were encouraging to economists and a vindication of sorts to those among them who had long advocated market-oriented reforms. But they in turn raise their own beat outs. Most fundamental of all, why are so many governments reforming now, after decades of adherence to policies of an opposite kind?This top dog poses a peculiarly important challenge to political economists an understanding of these countries experiences now requires a theory that explains not exactly why seemingly dysfunctional policies had been initially un- Hence economists are often torn between two contrast perspectives on the one hand, good economic policy should produce favorable outcomes and therefore should prove withal to be good politics on the other hand, the implementation of good economic policy is often viewed as requiring strong and autonomous (not to say authoritarian) leadership.The experienc e of Chile, a country which has perhaps gone elevate than any other in implementing liberal economic policies, provides a good example. An essay on Chiles reform strategy by Jose Pinera (1994), an economist and minister of labor and social security under General Pinochet, concludes in the end, good policy is good politics (p. 231). The irony is that most of the reforms the author glowingly discusses in the preceding pages required the suspension of normal politics and as heavy a dose of totalism as seen anywhere. Good economics does often turn out to be good politics, but only eventually.Policies that work do become popular, but the time lag can be long profuse for the relationship not to be exploitable by would-be reformers. In Chiles case, free market policies (implemented after 1973) were eventually resoundingly endorsed in the presidential elections of 1989 and have become the envy of Latin America. 3 Conversely, bad economics can be popular, if only temporarily. President Al an Garcias popularity soared in Peru during his first two years in office (198586), thanks to expansionary fiscal policies whose medium-term unsustainability should have been obvious to anyone with common sense (see Ricardo Lago 1991).The puzzle is why dinate amount to the consensus view, and depart from it in remarkably few details. I will discuss this book in Section IV. 3 For a recent evaluation, see Barry Bosworth, Rudiger Dornbusch, and Ral Labn (1994). Rodrik Understanding Economic Policy Reform dertaken and then maintained for so long, but also why these policies were suddenly abandoned en masse shot during the 1980s, often by the same politicians who had been among their most ardent supporters.Second, while the reforms were inspired at least in part by the East Asian experience, they took place much more quickly and, in many areas, are going considerably beyond those undertaken in East Asia. This raises the question of whether the new wave of reformers have internalized the correct lessons from the East Asian experience. Finally, are there any helpful rules for reformers to follow in maneuver their policies through complicated political terrain? Can one hope to develop a how-to manual for the progressive politician?Puzzlement over such questions has take to a large and growing writings. A very short bibliography would include books by Merilee Grindle and John Thomas (1991), Robert Bates and Krueger (1993), Krueger (1993), Przeworski (1991), Ranis and Syed Mahmood (1992), Bresser Pereira, Maravall, and Przeworski (1993), Stephan Haggard and Robert Kaufman (1992), Dornbusch and Sebastian Edwards (1993), Haggard and Steven Webb (1994), Lance Taylor (1994), Williamson (1994), and Ian teensy et al. (1993), not to mention countless papers. As this partial list indicates, both economists and political scientists have consecrate their attention to these issues, often together in coauthored or coedited works. Indeed, no other area of economics or politica l science that I can think of has spawned so much interdisciplinary work. 5 In this essay, I will provide an econo4 One recent surveyMariano Tommasi and Andres Velasco 1995which overlaps with this one deserves special mention. 5 The literature on the economics of policy reform is of course even larger. For recent surveys, see Vittorio Corbo and Stanley Fischer (1995) and Rodrik (1995b). 1 mists perspective on the political economy of policy reform. I begin by examining the origins and uninflected content of the new orthodoxy in development policy (Section II). I will focus here on two issues in particular which I feel remain in need of clarification. One of these concerns the line between (a) macroeconomic policies aimed at economic stability, such as fiscal, monetary, and exchange rate policies, and (b) liberalization policies aimed at structural reform and growth, such as the removal of relative-price distortions and the reduction of state intervention.It has become commonplace to melt these two groups of policies, but for analytical purposes they are best kept apart. As we shall see, they also have disparate political-economy underpinnings. Moreover, maintaining the distinction reminds us that the consensus on what constitutes appropriate structural reform is based on much shakier conjectural and empirical grounds than is the consensus on the need for macroeconomic stability. The second issue concerns the appropriate lessons to be skeletal from the experience of East Asian success stories.The new orthodoxy has tended to draw a somewhat biased consider that needs correction. Next, I will turn to the reforms of the 1980s and 1990s. This experience has opened an important window on the motivations of politicians, as well as on the nature of interactions between the economy and the polity. As indicated above, an important question is why so many countries have suddenly caught the reform bug. The confluence of economic crisis with reform has led to the na tural supposition that crisis is the instigator of reform, a hypothesis that keeps reappearing in the literature and yet is inadequately analyzed.