What Washington Means by Policy Reform.docx
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What Washington Means by Policy Reform.docx
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WhatWashingtonMeansbyPolicyReform
WhatWashingtonMeansbyPolicyReform
byJohnWilliamson,PetersonInstituteforInternationalEconomics
Chapter2fromLatinAmericanAdjustment:
HowMuchHasHappened?
EditedbyJohnWilliamson.PublishedApril1990.
November2002
©PetersonInstituteforInternationalEconomics
NostatementabouthowtodealwiththedebtcrisisinLatinAmericawouldbecompletewithoutacallforthedebtorstofulfilltheirpartoftheproposedbargainby"settingtheirhousesinorder,""undertakingpolicyreforms,"or"submittingtostrongconditionality."Thequestionposedinthispaperiswhatsuchphrasesmean,andespeciallywhattheyaregenerallyinterpretedasmeaninginWashington.ThusthepaperaimstosetoutwhatwouldberegardedinWashingtonasconstitutingadesirablesetofeconomicpolicyreforms.Animportantpurposeindoingthisistoestablishabaselineagainstwhichtomeasuretheextenttowhichvariouscountrieshaveimplementedthereformsbeingurgedonthem.
Thepaperidentifiesanddiscusses10policyinstrumentsaboutwhoseproperdeploymentWashingtoncanmusterareasonabledegreeofconsensus.Ineachcaseanattemptismadetosuggestthebreadthoftheconsensus,andinsomecasesIsuggestwaysinwhichIwouldwishtoseetheconsensusviewmodified.Thepaperisintendedtoelicitcommentonboththeextenttowhichtheviewsidentifieddoindeedcommandaconsensusandonwhethertheydeservetocommandit.ItishopedthatthecountrystudiestobeguidedbythisbackgroundpaperwillcommentontheextenttowhichtheWashingtonconsensusissharedinthecountryinquestion,aswellasontheextenttowhichthatconsensushasbeenimplementedandtheresultsofitsimplementation(ornonimplementation).
TheWashingtonofthispaperisboththepoliticalWashingtonofCongressandseniormembersoftheadministrationandthetechnocraticWashingtonoftheinternationalfinancialinstitutions,theeconomicagenciesoftheUSgovernment,theFederalReserveBoard,andthethinktanks.TheInstituteforInternationalEconomicsmadeacontributiontocodifyingandpropagatingseveralaspectsoftheWashingtonconsensusinitspublicationTowardRenewedEconomicGrowthinLatinAmerica(Balassaetal.1986).Washingtondoesnot,ofcourse,alwayspracticewhatitpreachestoforeigners.
The10topicsaroundwhichthepaperisorganizeddealwithpolicyinstrumentsratherthanobjectivesoroutcomes.TheyareeconomicpolicyinstrumentsthatIperceive"Washington"tothinkimportant,aswellasonwhichsomeconsensusexists.Itisgenerallyassumed,atleastintechnocraticWashington,thatthestandardeconomicobjectivesofgrowth,lowinflation,aviablebalanceofpayments,andanequitableincomedistributionshoulddeterminethedispositionofsuchpolicyinstruments.
Thereisatleastsomeawarenessoftheneedtotakeintoaccounttheimpactthatsomeofthepolicyinstrumentsinquestioncanhaveontheextentofcorruption.CorruptionisperceivedtobepervasiveinLatinAmericaandamajorcauseoftheregion'spoorperformanceintermsofbothlowgrowthandinegalitarianincomedistribution.Theseimplicationswillbementionedbelowwheretheyseemtobeimportant.
WashingtoncertainlyhasanumberofotherconcernsinitsrelationshipwithitsLatinneighbors(and,forthatmatter,withothercountries)besidesfurtheringtheireconomicwell-being.Theseincludethepromotionofdemocracyandhumanrights,suppressionofthedrugtrade,preservationoftheenvironment,andcontrolofpopulationgrowth.Forbetterorworse,however,thesebroaderobjectivesplaylittleroleindeterminingWashington'sattitudetowardtheeconomicpoliciesiturgesonLatinAmerica.Limitedsumsofmoneymaybeofferedtocountriesinreturnforspecificactstocombatdrugs,tosavetropicalforests,or(atleastpriortotheReaganadministration)topromotebirthcontrol,andsanctionsmayoccasionallybeimposedinsupportofdemocracyorhumanrights,butthereislittleperceptionthatthepoliciesdiscussedbelowhaveimportantimplicationsforanyofthoseobjectives.PoliticalWashingtonisalso,ofcourse,concernedaboutthestrategicandcommercialinterestsoftheUnitedStates,butthegeneralbeliefisthatthesearebestfurtheredbyprosperityintheLatincountries.ThemostobviouspossibleexceptiontothisperceivedharmonyofinterestsconcernstheUSnationalinterestincontinuedreceiptofdebtservicefromLatinAmerica.Some(butnotall)believethisconsiderationtohavebeenimportantinmotivatingWashington'ssupportforpoliciesofausterityinLatinAmericaduringthe1980s.
FiscalDeficits
Washingtonbelievesinfiscaldiscipline.CongressenactedGramm-Rudman-Hollingswithaviewtorestoringabalancedbudgetby1993.Presidentialcandidatesdeplorebudgetdeficitsbeforeandafterbeingelected.TheInternationalMonetaryFund(IMF)haslongmadetherestorationoffiscaldisciplineacentralelementofthehigh-conditionalityprogramsitnegotiateswithitsmembersthatwishtoborrow.Amongright-wingthinktankstheremaybeafewbelieversinRicardianequivalence—thenotionthatindividualsadjusttheirsavingbehaviortoanticipatefuturetaxation,sothatwhetherpublicexpenditureisfinancedbytaxationorbondshasnoimpactonaggregatedemand—whoarepreparedtodenythedangeroflargefiscaldeficits,buttheyclearlystandoutsidetheWashingtonconsensus.Left-wingbelieversin"Keynesian"stimulationvialargebudgetdeficitsarealmostanextinctspecies.
Differencesofviewexist,however,astowhetherfiscaldisciplineneednecessarilyimplyabalancedbudget.Oneviewisthatadeficitisacceptableaslongasitdoesnotresultinthedebt-GNPratiorising.AnevenmorerelaxedcriterionwouldnetoffthatpartoftheincreaseddebtthathasacounterpartinproductivepubliccapitalformationandsimplyseektopreventanincreaseinthenetliabilitiesofthepublicsectorrelativetoGNP.Anothermodification,whichIfindpersuasivealthoughmuchofWashingtonregardsitastoo"Keynesian"toendorseexplicitly,arguesthatabalancedbudget(oratleastanonincreasingdebt-GNPratio)shouldbeaminimalmedium-runnorm,butthatshort-rundeficitsandsurplusesaroundthatnormshouldbewelcomedinsofarastheycontributetomacroeconomicstabilization.(NotethatGramm-Rudman-HollingsisautomaticallysuspendediftheUSeconomygoesintorecession.)Avariantofthatview,heldinsomequarterswhere"Keynesian"isregardedasatermofabuse,isthatprogresstowardthemedium-termgoalofabalancedbudgetshouldbesufficientlycautioustoavoidtheriskofprecipitatingarecession.
Thebudgetdeficithastraditionallybeenmeasuredinnominalterms,astheexcessofgovernmentexpendituresoverreceipts.In1982BrazilarguedwiththeIMFthatthiswayofmeasuringthedeficitisseriouslymisleadinginahigh-inflationcountry,wheremostofthenominalinterestpaymentsongovernmentdebtarereallyacceleratedamortizationofprincipal.TheIMFhasacceptedthisargument(Tanzi1989),ifinitiallywithsomereluctance,andhenceitsometimesnowpaysattentiontothe"operationaldeficit,"whichincludesinexpenditureonlytherealcomponentofinterestpaidongovernmentdebt.(PoliticalWashingtonhasnotyetdiscoveredthissensibleinnovation,whichthusremainstobeexploitedasameansofrelaxingtheGramm-Rudman-Hollingsconstraintswhenthesethreatentobite.)Indeed,Tanzi(1989)alsoindicatesthatinformulatingprogramstheFundhasincreasinglybeenusingthe"primarydeficit,"whichexcludesallinterestpaymentsfromthedeficit,onthegroundthatthisincludesonlyitemsthatareinprincipledirectlycontrollablebytheauthorities.(Thatgoestoofarformytaste,sincerealinterestpaymentscertainlyhaveimplicationsforaggregatedemandandtheevolutionoftherealdebtofthepublicsector.)
Theexaggerationofbudgetdeficitsbyinclusionoftheinflationarycomponentofinterestongovernmentdebtisnottheonlyinadequacyofpublic-sectoraccounting.Mostoftheotherquestionablepracticesseemtoinvolveunderstatementofthetruedeficit:
∙Contingentexpenditures,suchastheguaranteesgiventosavingsandloaninstitutionsintheUnitedStates,arerarelyincludedinreportedbudgetoutlays.
∙Interestsubsidiesandsomeotherexpendituresaresometimesprovidedbythecentralbankratherthanfromthebudget.
∙Privatizationproceedsaresometimesrecordedasrevenuesratherthanasameansoffinancingafiscaldeficit.
∙Thebuildupoffutureliabilitiesofthesocialsecuritysystemisnotincludedinbudgetoutlays.
Despitethesignificantdifferencesintheinterpretationoffiscaldiscipline,IwouldmaintainthatthereisverybroadagreementinWashingtonthatlargeandsustainedfiscaldeficitsareaprimarysourceofmacroeconomicdislocationintheformsofinflation,paymentsdeficits,andcapitalflight.Theyresultnotfromanyrationalcalculationofexpectedeconomicbenefits,butfromalackofthepoliticalcourageorhonestytomatchpublicexpendituresandtheresourcesavailabletofinancethem.Unlesstheexcessisbeingusedtofinanceproductiveinfrastructureinvestment,anoperationalbudgetdeficitinexcessofaround1to2percentofGNP1isprimafacieevidenceofpolicyfailure.Moreover,asmallerdeficit,orevenasurplus,isnotnecessarilyevidenceoffiscaldiscipline:
itsadequacyneedstobeexaminedinthelightofthestrengthofdemandandtheavailabilityofprivatesavings.
PublicExpenditurePriorities
Whenafiscaldeficitneedstobecut,achoicearisesastowhetherthisshouldbeaccomplishedbyincreasingrevenuesorbyreducingexpenditures.On
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