What Washington Means by Policy Reform.docx

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