Session 5
Barbara Stallings and Wilson Peres, Growth, Employment, and Equity: The
Impact of the Economic Reforms in Latin American and the Caribbean,
2000, Chaps. 1 and 7
Chapter 1 : “A New Approach Analyzing Reforms: Macro-Micro Linkages”
Intro
Through a series of structural reforms, an increasing number of Latin American countries have
moved from the closed, stae-dominated economies that characterized ISI model to economies
that are more market oriented and more open to the world
Aspects of the process have accorded a new priority to macroeconomic stability, particularly
lower inflation rates, and to increasing expenditure in social areas (it was expected that these
changes would speed up growth, increase productivity gains, create more jobs and improve
equity.)
While impossible to make more than a preliminary analysis about the success of these reforms,
drawing tentative conclusions is helpful 1. to determine if new policies are moving in the right
direction, 2. whether they would benefit from mid-course corrections, and 3. if they would be
useful in other regions
The Literature on the Reforms
 Extensive literature on the topic; despite initial rigid views, a more nuanced evaluation
has emerged
 Most analysts study reforms in terms of their impact on growth
 While most focus on the aggregate level, ECLAC is an exception
 On employment, consensus is that job creation was generally insufficient, more bc of
relatively slow growth than bc of problems of employment elasticity
 More disagreement exists with respect to the impact of reforms on equity
 Measuring the impact of the reforms on growth was difficult since many other things
happening simultaneously
 Efforts to quantify the reforms often confuse policy and performance variables – easier to
devise measures of the results of an action than to measure the action itself – as a result,
many studies mix the two types of indicators
 In addition to methodological problems, four substantive limitations appear in the studies
reviewed
o Failure to disaggregate the variables
o Failure to emphasize the mechanisms of articulation between national
economies and the international context
o Failure to consider that the package of reforms and policies may be internally
inconsistent
o Scant attention to the articulation of the dynamics of employment and the
distribution of income with the rest of the model
A New Conceptual Framework
 To make significant advances on the existing literature, it is crucial to focus less
exclusively on the macroeconomic and regional levels and more on countries and the
microeconomic behavior of firms, grouped by sector, size, and ownership characteristics
o Knowing what lies behind the aggregate is essential for designing policy
measures to improve future economic performance
o Also necessary for analyzing outcomes other than growth, especially the
generation of employment and any chance in the patterns of distribution
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Given the centrality of economic actors in this approach, authors suggest that we
consider reforms as a set of signals in the form of government policy decisions
(governmental decisions are essential for creating a new environment in which the
private sector can more dynamically operate)
o In addition to signals and the environment, must think about the reception of
policy signals at the microeconomic level in decentralized economies
o Information alone not sufficient – must be credible and perceived as so
o Beyond information and credibility, economic actors must have access to
domestic of int’l financial resources that enable them to invest
To look further into the processes of signaling, response, and the resulting outcomes, the
authors have developed a conceptual framework (figure 1-1), which begins with the
“external context”, moves into “initial conditions”, then to governments “decisions” on
reforms, and finally ends with three dependent variables, “growth”, “employment” and
“equity”, which are then further disaggregated by sector, size and firm, etc. (take a look at
this simple chart on page 10, as computer-challenged Kim is unable to recreate it for you
here!)
Six Propositions
o Authors use this framework to explore set of six propositions; take as a point of departure
the previous judgments on the impact of reforms: growth in LA has been modest;
employment growth has been slow with problems in job quality; and inequality has not
improved and may even have gotten worse
1. initial conditions in the nine countries studied were diverse and effected extent to
which reforms were adopted
 of particular importance were macro stability, economic distortions, past
growth rates, and degree of governability
2. govts often introduced reforms that were inconsistent with their macro and social
policies
 obvious case is when high rates of inflation and deficits continued,
leading to uncertainty for economic actors
3. reforms were slow to produce an impact on micro level bc of uncertainty
 lead to hesitation of investors to engage in large-scale projects
4. uneven response of actors helped to explain both the less-than-hoped-for
performance as well as the differential performance across countries
5. positive effects of reforms were frequently undermined by unfavorable trends in
int’l economy
6. reforms were incomplete in that they lacked the proper institutional support
typically found in the industrial world
 lack of proper regulatory framework to complete privatization
Methodological Considerations (implied that authors use and others do not)
o issue of timing – most literature centers on comparisions between 80’s and 90’s, which
creates bias in the results bc in 80’s low growth and social indicators
o best possible comparison would be with a similar economic situation in which no
reforms had been implemented
o nine countries were selected – Bolivia, Chile, Costa Rica, Mexico, Argentina, Brazil,
Colombia, Peru, and Jamaica bc they were the oldest reformers in region
o also, represent vast majority of population (81 percent of population; 90 percent
of aggregate GDP; and 88 percent of int’l trade), are relatively diverse, and have
substantial geographic diversity
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Chapter 7: “A Policy Agenda for the Next Decade”
The Reforms and Their Impact
o First generation reforms included: import liberlization, domestic financial liberalization,
capital account opening, privatization, and tax reform – additionally, macro policies
became more equilibrated and social expenditure increased considerably
o Generally, countries will less to lose were more aggressive in their reforms
o Principal aggregate level results can be summarized as follows:
1. growth recovered, but no surge in output
2. exports increased substantially, but imports grew faster (large trade deficit)
3. investment and productivity recovered, but no major gains occured
4. employment lagged behind modest growth rate, quality of jobs poor
5. inequality increased slightly
 (See pp. 204-06 for specifics on individual countries)
 Looking at the sectoral level, trade liberlization and privatization had important impact on
investment, productivity, and employment
o Investment was concentrated in a relatively small number of sectors (such as
telecommunications) (Only Chile increased investment in all sectors.)
o Productivity gains were more evenly spread across broad sectors
o Trade Liberlization led to two different patterns of export growth in 90’s:
manufacturing in Mexico, Central America and Caribbean vs. concentration in
natural resource-based commodities in South America
o Privatization was instrumental to investment recovery and modernization
 Strengthened property rights were essential in attracting foreign
investment
o When concentration of growth in capital-intensive activities created few jobs,
services became the residual source of employment
o Small and medium-sized business maintained their market share
o Wage differentials between larger firms and micro-enterprises increased, esp. in
second half of 1990s
Recommendations to Improve the Outlook for the Region
o Avoid across-the-board policy recommendations (violated in 80’s/90’s)
o Obtain necessary information and engage in the appropriate analysis before making
irreversible policy decisions (also violated in 80’s/90’s)
o Analysis must include the individual country, sectoral, and micro-levels rather
than vague generalities
o Policymakers must be specific about what they hope to achieve from a new round of
reforms and policy changes
o Despite some calls for deepening the first generation of reforms, authors believe that vast
majority of benefits from initial reforms have materialized and that a new set of reforms
are needed
o Policy discussion is organized around three central issues:
 The need to engage in competiveness policies and invetment promotion
to increase growth, to undertake a major offensive in the social area, and
to maintain and improve macro stability
 Two topics that cross the three above issues are also considered: the
need for closer relations between public and private sectors and for
policies to deal with external vulnerabilities
Policies to Increase Growth (these are general, for specifics, read 212-221)
o While all countries require more investment, it must be efficient allocation of
investment
 Earlier reforms did not generate the incentives necessary to achieve
faster capital accumulations
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Investment depends on expected rates of return, which can be affected
through prices, costs, and management of uncertainty
o Little can be done about pricing, but can provide better access to
and lower cost of credit, more modern infrastructure and
generalized tax reductions; also possible to reduce uncertainty
caused by unexpected policy shifts
Design policies to attract more FDI greenfield investment
Reduce transaction costs of foreign trade operations
Establish sector-wide regulatory framework
Focus on diffusion and adaptation of technolofy rather than innovation,
due to limited resources
Special focus on training (combine school with apprenticeship)
A Social Offensive
o Labor-intensive activities, such as housing and infrastructure construction, should
be encouraged by public policy
o Find ways to provide services and public goods to small production units (cluster
solutions may reduce costs)
o Govts should make sure that social spending is protected when hard times come
(as long-term losses through crises are never recovered – education)
Macro Policy
o Without macro stability is it impossible to advance either in competitiveness or on
social issues
o Growth and its finance, as well as issue of volatility, are now on the macro
agenda
o Fiscal consolidation must be emphasized, so govt can make its own
contribution to savings
o Fiscal and regulatory policies should avoid boom-bust cycles
o Macro policies should be strongly counter-cyclical
Cross-Cutting Issues: Public-Private Relations and Int’l Economic Management
o New relationship does not imply elimination of states’ economic role
o Boundaries between public and private sector responsibilities will depend on
willingness of each society to pay for states services
o Regardless of relationship, essential that it be transparent to all
Concluding Comments
o While faster growth is needed, growth alone cannot provide better quality of life
o Policy package presented here is expensive and cannot be implemented all at once –
govts will have to determine the relative weight of each individual measure
o Institution building through public-private partnerships central to future progress
o Macro stabilization and first generation of reforms were timely and crucial in late
80’s/early 90’s; now is time for action on growth, competitiveness, employment and
equity
o One way of characterizing the change in LA is that the region is now an integral part of a
single global economy – very different from 20 years ago
o In general terms, reforms have had three result:
1. solved some longstanding problems, such as excessive protectionism and inefficient
public utilities;
2. opened up unexpected possibilities, such as the export potential demonstrated by
Mexico and some Central American and Caribbean countries
3. created new problems and exacerbated old ones: employment being the most
serious, given the implications it has for equity
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