Nader Nazmi - Economic Policy and Stabilization in Latin America

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ECONOMIC POLICY and STABILIZATION in LATIN AMERICA

Economic Policy and Stabilization in Latin America

Nader Nazmi

First published 1966 by M.E. Sharpe

Published 2015 by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
711 Third Avenue, New York, NY 10017, USA

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright 1996 Taylor & Francis. All rights reserved.

No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Notices
No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use of operation of any methods, products, instructions or ideas contained in the material herein.

Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility.

Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

Library of Congress Cataloging-in-Publication Data

Nazmi, Nader, 1960
Economic policy and stabilization in Latin America / Nader Nazmi.
p. cm.
Includes bibliographical references and index.
ISBN 1-56324-583-3 (hc : alk. paper).ISBN 1-56324-584-1 (pbk. : alk. paper)
1. Economic stabilizationLatin AmericaCase studies.
2. Inflation (Finance)Latin AmericaCase studies.
3. Monetary policyLatin AmericaCase studies.
4. Latin AmericaEconomic policyCase studies.
I. title.
HC125.N39 1995
339.5'098dc20
95-30476
CIP

ISBN 13: 9781563245848 (pbk)
ISBN 13: 9781563245831 (hbk)

To
Corinna

Contents

Tables

Figures

A book such as this naturally brings its author many debts. The research for this book began four years ago with generous funding provided by a CICALS grant from Michigan State University. A FulbrightHayes Research Grant supported my in-country study in Brazil. Parts of this book were written while I was a visiting scholar at the Center for Research on Economic Development at the University of Michigan. Various research grants from Lake Forest College made my travels to Argentina and Mexico possible. The University of So Paulo and El Colegio de Mexico made their research and library facilities available to me with great courtesy. To all these institutions I remain indebted.

My debts to individuals, too, are considerable. I am especially grateful to Bruno and Hilda Gut for their exceptional hospitality. Many individuals have read various parts of this book and have given me helpful comments and suggestions. While thanking all these individuals, without implicating, I am particularly grateful to William Moskoff, William Gruben, Eliana Cardoso, Werner Baer, Albert Fishlow, Miguel Ramrez, Paul Newbold, and Lydia Paulini for their input. Very special thanks should go to Corinna, for everything.

ECONOMIC POLICY and STABILIZATION in LATIN AMERICA

The 1980s were years of unusual hardship for the people and economies of Latin America. Repeated external shocks and domestic economic mismanagement combined to bring about the most devastating decade in modern Latin American history. During this decade, living standards fell sharply as real per capita income dropped considerably, the debt problem assumed unforgiving magnitudes, and inflation reigned triumphant (see ).

In response to these conditions, Latin American countries have employed a wide variety of stabilization blueprints in an effort to restore economic balance and control inflation. In addition to stabilization attempts, some countries introduced unprecedented reform programs aimed at revitalizing their economies. The short-term stabilization efforts, together with the longer-term structural reforms, comprise the so-called adjustment programs. While these programs have generally resulted in stabilization, in most cases they have failed to restore economic growth.

The profound economic crisis that engulfed Latin American countries during the 1980s and early 1990s, and policy responses to it, offer important lessons for understanding the causes of macroeconomic instability and for choosing policies that restore economic equilibrium and growth. First, the Latin American experience allows us to explore the intricate relationship between economic stability and economic growth. Second, it helps us identify the origins of high inflation. Third, it provides broad guidelines for ending chronic inflation and hyperinflation. Fourth, from the Latin American vantage point we can draw general conclusions about the impact of inflation and stabilization on income distribution and poverty. Finally, the Latin American experience can help us choose pro-growth policies.

The 1980s witnessed an important controversy between the orthodox and heterodox (nonmainstream) camps regarding what types of economic pro

Basic Economic Indicators: Argentina, Bolivia, Brazil, and Mexic o

, we shall see how each of these schools diagnosed the root causes of inflation differently and prescribed fundamentally different policies for fighting inflation. Here, we give a brief overview of the orthodox approach and sketch possible alternatives to it.

During the 1960s and 1970s, the International Monetary Fund (IMF) and conservative think tanks recommended an orthodox approach to economic management to Latin American countries based on the Chicago school monetarist framework, Today the support pillars of the orthodox view in Washington include the United States government, the Federal Reserve Board, and the IMF and its sister institution, the World Banka combination of heavyweights that give the neoliberal perspective unparalleled political and financial clout.

While support for the orthodox view spreads far beyond the Washington Beltway, here we use Williamson's (1990b) "Washington consensus" to identify the neoliberal perspective. The ten ingredients for an economic management recipe that is to Washington's liking, as set forth by Williamson (1990), combine to create a policy mix that is decidedly in favor of relying on the market system, opening the economy to foreign competition and foreign investment, securing property rights, and maintaining fiscal balance.

The Washington consensus requires the government to adhere to fiscal discipline through keeping its spending low and by introducing a broad-based taxation system with low marginal rates. In achieving fiscal balance, the government is expected to redirect its spending priorities from subsidies to education and human capital development. Washington also strongly supports privatization programs that reduce the role of the state in the economy.

Measures designed to strengthen the market system include the introduction of well-defined, secure property rights, widespread deregulation aimed

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