byes art ot José ara Fat and Gry Mabon ator) Jor Mai Fan and Gary Mestaen ter) Understanding Market Reforms in Latin America Similar Reforms, Diverse Constituencies, Varied Results Edited by José Marfa Fanelli#3 ‘Understanding Market Reform in Latin Attics Similar Reforms, Diverse Constituencies, Varied Retuts ‘Jost Maria Fanell Chapter 1 {Introduction Latin Ameion has gone through period of itcae mae reforma inthe last twenty-five yews. Tn contrast the Jat enthusiasm inthe late eighties and ely ninetig, 4 vivid Aebats curve exists ss to whether marker reforms have been intrumeatal in forte development abd whether reforms should be deepened or revered. Those ho far # deepening consider successful Chile the Msgship signaling the path to fllew. Those wo favor allecative stategiee argue tht the Argentine exes or te ttsfonans i the Venezuelan polity well lasts the vulnerabilities tat he marke-enely programs can reste. Tis debate hasan importnce tar goes fr beyond acoder cite tothe extent that the eyumeats and conelusions nll undoubtedly infleace fre. development strategies f be adopted not only in Lata Ameria but also in ees developing regions, This book seeks to conibute to this debate. presents a set of cave stuties of racket, refoms in Latin America (LA), which were produced within the framework of fhe Understanding Reform Project (URP) that compcses a lzge ct of ate studies of macket reforms ie developing countries embracing al epi In the world’ The ewe sues Coniined in this book are all authored by researchers aye fun the respective Lain ‘American cowtes that ae fear with de intntional tad pola! pecans of her ‘own counties. ll of he sues are comparable, given tat they all deve from the sno Aaxply coordinated sees pojes ‘The research vk discussed here has suuaber of distinctive features that are pcivalwiy relevant to the cureat policy debate To begin with the country stds ‘comprise the most ota cited reform cases in Latin Ameria concern both succes and filure. The cases are Argentina (Chaptr 2), Braxil (Chapter 3), Chile (Cheper 4), ‘Mexico und Per (Chapter 3) Paagsay (Chapter 6), Unugucy (Chapt), cod Venezele (Chapter 8). The studies epic ‘pesto thet are ceatal tothe policy debat such es! Why refocn? What was reformed? Were the rests inline with expettons? Aas, why di similar reforms work differently? The wit of analysis in the cae sti are ‘ot particular forms (ie, wade o” Final reforms) ft the make eons process 3 © Whole, conccived of as instances of insitvtonal change that eal for nteaive policy Implemestation. The research methogology assigns a centrale to the analysis of the ‘spetific intel coditons an the details of the processes by which reforms were teached 5 The ce os apd a fealty te Osta Developme Noyce (ODN wk dig fom de Won Dae Gove ofan Govern of Austin Ts onconced Tee ese te Sof Sia not Senay (CEDES), Der As aol QBN. Ta fot ly ‘faces seatinn 0s 3909 eessnd implemented. Unlike most existing snlyse that tend te focus on economic outcomes, the authors view macket reforms as exercises in intttion buling embeded in specific scenomic, polite) institutional, and eral contexts, With te am of dmentnghing the dels of the proces, the projet lized the eatestdy metiodalogy and adopted ‘nultidscipinary approach that combines economie,insittions, and pide analysis to Structure th narratives ofthe reform experiences, The main goal ofthis introductory chapter i > presen an overview and to asses the research findings of th cour sles contained int boc. It fcuses em he isues that are at center sage inthe curent policy debate ax reforms in Latin Ameria? aad the chapter is stuctured accordingly. From the analytical point of view, the dactasion ries hhaily on the empire! snd analytical resis ofthe Understanding Reform Project which se presented in Fane ané MeMshon 200Se, 2006). Furtkermare, this chapter must be Fead se complement tthe arte tat Forteea aad Toramasi (2006) produced fr the URP ona Lata Americ. [athe remsining par of this sston we briefly diacuts the concephal fide of such results. Section Two precens the most slat fetirs ofthe eight reform ‘crperenoesacalyzed, describes commonalities and difference betmecatheoe experiences fan lentes stylized facts conceming initia conditions and oulcomes of risen i ‘couoties under soalyis. Section Three addresses te problematic side of refs. feuses on implemectation, susainsbiliy, and the legiimacy of the reform, With the guidance of the conceptual framework diccused inthe intodustion, we pinpoiat several tnsolved questions, which basally have to do with the deternans of instittiocal Dricence und change under suctral conditions le thse in Latin Amesice:tonltioas that iactude macro volatility, exses and extemal wulnebiliy, highly skewed wealth distibution, and polity in trnaformaton from authortaanisn to dence). Section Four conch the capt and craws policy inplieations A Brief Look atthe Conceptual Approach ‘We will now suromarze the essential features of the conceptal framework (er more etd discussion see Fanelli ead MeMsbon, 20056 and 20060), Marker reform ‘A macket ref ie defined a the implementation of changes in the res ofthe economic tgane by «lege auorty to widen the role of masts ac the pivte seat an to miske ‘he entte economy more open. This defaiton has implications fr the analytical approech to understanding reforms. Te most relevant dimension ee scope, depth and eonssten0), cedveness,sustaiabiliy, disrbutionalcealict and polieal economy, uacertaiaty ed Teaming, nd the features ofthe policy. Scope, depth and consstoney Refers primarily alet the formal res ofthe game ofthe insitutional sete. Since the instutional stir consists of rules paraning to differet hieazchis in diverse social domains tat show varying degroce of fonmality, the scope and depth of & poste Learns Loto 0b) dP 44 Yates O00) Sv die opens Tama 08)‘efor package wil largely depend on the hierarchy ofthe rest be mould andthe domains involved, Furherece, be functional linkages between hierarchies, domains, 2d Infeemaliestitons vill pose coastency soatsnts on refonna; dytunetnal efomns Wl key led to unsustainable inetatonal changes, Bfeciveness Tobe effective (0 permanclly change consesins tad incentives he changes inthe mules ofthe game must be dengue, excited, and enfored. An efetive sale and the quality of ie preening orpanizations aod inetitone er cet in thie regard. The fest generation of paper on tefonn focused on the analysis ofthe factors dat induce the initiation of ‘eforns (rises, altsion way eft the dernteat of the factors that contribute to making {sfonusfurtatabe, Most LA conte have been blo lnuach reforms, bu oly a small mumiber ofthe reforms were sstinble, Sestainabity ‘he fotrs het impinge on sutnability are not eaeyo grasp because sussincbiity ases the problem of the deersnaate of isintional pertaaenee aud change, hich snalyseally 2 ll in evadelig lotion Thre mes are wort highlighting fs ar inten can be selfenfereing in it darain but dysfunctional with epard 1o the tet of the domi rales ff upper fuerrchies; second, patdependence is central to underanding insttusonal Solution placing idcsyncratclacfors st conta sage and tin sine exogenovs shocks ‘an change the rameters of to inatutonal yam, the fetes ofthe shock-peneaing Stochass process matter to sustainability Disrbntional confit and poitisal economy Reforms sult Hom a conseious choos to ehange the rlas ofthe gue and can affect the sneome, welt snd poles! power of vari sei] groups. For example, diffrent Pareto ‘fieient outcomes ena diferent resource. datibuions aud, Renee, forvar-lonking teens will take the probable datibutinal effete into aceoust. Since market reforms impinge on rae petaining lo eilferent sociel dimensions and hier, thoy affect soups of inividals and erginigaions of varying aes, Who wll pay Aifeent roles as Sakcholirs to ifrent transacons ruled by the govemsnce stuces that will be ‘fected by cefomns, The sly fr callestive aztion ofa given group of indvidnal ot ‘vguzations can differ ubstinily depending onthe cbaricer ofthe tressactons and {overmnnce sictures the reat stale, Ie flows ta the bility t salve collective action problems and diztibutional conflict are ebgential componants of reforms and ae not Independent ofthe (ype of ear invelved. Uncertainty and leoring ‘Uncen makes it dca o antipat what the reform path il be Rene, the bilty to change the rule ender uncer, to learn, al Yo recy are ficors inoenccg the oki a in Ai 00, Dk 00, Tm) ‘Shei nd own dente On ental charge, dt = Ach (20) and en ad Neth toooref path, Important vacabls in thi respect are the ways in which politcal dessins are trade, the feaires ofthe shock generting stochastic processes tte and organizations! ‘Hectveness; and the ability fr insistions and orpanizasont to lea, to change ‘elif. Macro instability le inimical to cooperation and lenming to refosm becuse i erence uncertainty, foots distributional stugles, xd typically indaces a short-term bias In decisionmaking “The features of the poli pale eles the picture because «ep sthority must implemect the changes in the Iles ofthe gate and reforme mut be supported by sulable poliel coalition and en Cece see, The way in which legal authority is legitimized, nuhoriy fs exerted, and Sonliions ate bull ia primal determined by the chareceitis ofthe polity (Le, wheter itis evhontaian ot democratic, whetber i is liberal or iliberal; whether te sate is pretory or developmental) Politica! instiutions we key to procesing confit among avous takcholde withoot resorting 19 violas or civil diobedience. However, we Cannot ase tha thee iastinions are completely exogenous to reform iler-omporal ‘precmente depend on “sate” variables uch asthe csiibulon of poicl power (political ‘stivions), te distbution of resources, and relevant belie Jn tis egard simp to determine whether reforms are imposed by speci incest, whetb= the gains a ‘widerpread, and whether site capture phenomena are present. These elemens impinge on (he legitimacy ofthe reform, “Tus eight reform experiences analyzed in this book ae cuter dissimilar therefore the studies do not noses deal with te same aspect of reforms pinpoint the same set btempical ses, or embrace all the dimensions covered by the above concepts. We wl hext summarize ea ofthe county studies nd pinpoint the sues thal hey exhale2. ight Latis American Reforms: Sitar Pacinges, Varied Resute The design ofthe reforms in each of the eat counties was extent inspired by the ‘Washington Consensus (WC) snd—to varying degree “by the ensuing “penestions” of reform blnepist? a ight of ths fact, the variety of reform resulte—moving frm clear suceeses (Cie) to ough ales (Argenion, Vencola, Paruguay)—is efit striking Tae evidence provided ty the set of case states included in tis book ean help cocoa for this fact. The eden sevel that, indeed, the spcii refer packages preeat diferent scopes and depth, ranging from gradual to big bang and from onhodny to pragmatism, ‘Thay cover a wide gamut of poly iniaves, implementation problems, sod outcomes The Git pat of hie fecton sumsoarizes the coatent ofthe country sade. The second pet presents ome stylized facts tat we have identified coneeming intl conditions, goals nd Summary of the country stakes Argentina The sy comprises the marke farms iplemented in he nine. The spe and dept f the policy packages was Tareeacing, coliciag several tw ‘in the instttonn irerchy al the eanoae domain. Ope alieat fare of he Argentine strategy of efor vas the bundling of mensures, sich 2 prvasoaion and market deepsltion, vit ubiieaion (eoavertbilty er curency board. Tue reform prooess was partculcly ensve inte eatly 1990s, Despite igicatealy stoves, ten info serous difialies by the end ofthe decade, utnately lating ts a Tul-sown eeonomi sed politi! eis he Argentine experience vividly luster te fact hat the efactve implementation of legal ehaages isnot sulicient to ensize reform sustainability. The following poinis ee worth higlibiing:(@ Although the 1989 typecafainsry eras di foster ef, he Argentine case suggests that cies do not necessarily prade good-quality policies eri indocod instil, dsrutions, macroeconomic, and poltal disaraye crested path dependence elects tat severely conscned society’ instition sling sity. (@) Aer hyperinflation, it was nocessary to build iasittions to ena suslaneblemasoecononic finéamentals.” “Convey” (dhe curency bowd inplemerted. in 1991), wae an ‘national short towards the buldiag of such instutions tut dd not work, Budget iseguliria primary ssccited with Savors to overepesented provinces ldmately dominated the careney boar regime. (6) The ekiractrisic of the polity influenced sstanabilty President Menez le the county fran 1989 to 1999 and inplenented mos of ie refonme—resorted to clientele pole machineries which, in tw armed ‘the quay of institutions end eeded the potical legtinsey of the whole proces, (2) Under these cirumsances, the iioeyneei detibution ot police power an the ait for coltive action of sume interes groups (power provineial governors, some union lenders and conglomerates that paicipateé in the prviiation process) hindered the quality ofthe reformed instutians. (2) Argentina was engaged asthe poste ld of the Washington Consensus reforms and the ofons mere exlicily support hy mated‘organizations and market patcipaats Aer the demise of the reforms, not only the fpoveraments legitimacy but also that of the interatonal players weakened. It ie m0 ‘wonder th the ensuing govenszent adopted an anteform eiseourse Brasil The study embraces the eae period of reform from the fist stabilization and fade liberalization iisives of te eighties The authors classy the experience ax gradvalist bectise market reforms in Brel are eseeoaly loosely coordisted roots of paral She revenchment that spans ‘he last fveny yeu. Since the ination and deepening of ‘forms were Sequetly motorized by the goal of reducing macro instability, niuases iastiasonal change were ofea bundled logeder with otier urgent ee popular policies to fciltate thir approval. They were not enacted osu cobeent, overall change in developnentsategy, bute an incomplete, flexible, mostly disconnected reform proces The sy stress the what stands ot ia Drees reform proces, in omnia wih thet, developing counties, is ot 30 much the depth snd stare of the refom, ot the Tain cote factors encouraging i bt rather the why” and “how” of reform. A democrats polly canied out the relumts; democracy was restore in 1985 after a tvoudecade futoritarian mlitry goverment. The ftagmented character of the political system, together withthe importance of the federal estes favoced pragmatism aa negotinions tout eels intiaiven Ideology 2nd pertsm politics played lesser fle fe Dotriag ‘mickst reforms in Brathan in other countries of the region, Thesfore, elon in Brazil tendo to be contested, piecemeal, and preg, in ist they Largely txgeed specie problem solving. Te Brazilian siate has been particularly effective at transforming sme Beas lagely thanks & the quality of the bureavercy it inherted fom the previous interventionist regime For example he stthors eal ateation to te intensive pation of the BNDES~the Bravlan development bunk--in the privaicaton proces The (ucomss ae mixed. Reformers succeeded at widening the paription of private payer, haacing productivity in certs sectors, and reducing the ination rae, They als induce higher uade and fnancsl opeaness but wero unable to ecelrete growth or induce substantial change in the skewed dsuibtion of icome, The achieved growth rats se not Comparable to those observee during the impor subetution indatalization period Ined, reduced sate intervention in the economy Was more te renlt of» pragamic reaction of the political elie to extemal presures and # Tack of alteratives than the Suiceme of newZound ideological conviction, hte ‘The Chilean market eforms ha ample scope and depth; they were a ange eae exeviee in insition building tat radically changed Chile's instintional lnndscape. On the basi of the findings analyze, it is only natural to clasfy Chil a «reform sues, In the lst 20, ‘esr it bas trmsformed itself fom an “evernge” Ltn American eouty isto a dyaamic ‘csonomy thst now exhibits sccleratod gwowth ‘ated and. deceased voll. This experience Is played prominent role i LA in tha, first it pioneered te implementtion of prosmarkt polices and, soso, several countries Wid to emit Chilean rforns. The market ovested refonns were inated in the early seventies and were gente by the denise ofthe previous regine, which bad socsteretation and had undergonesevere mecroecosomis sist ia the period inmodintely preteding the coup d'état thst (General Pinochet [od in September 1973, The case sadly deseies the etre reform process swith emphasis an the pole economy and ineatves behind the two main polis! regimes that undertook than: the autontarian goverameat of General Pinochet between ‘97S and 1980 and the democracy that suecendd it Despite the postive outcomes, the process went though periods of severe dinequliria ding the inplementation stage "The ‘ort important cceued inthe cary elghtes as »consequeace of both domestic policy Iisakes~indied bythe nase sequencing of wade snd financial reforms and misleading macroeconomic plicies-and external shocks, wiagred by the det crisis. Despite this, he futhortan goverament Was able to implement measures to se the maskel reforms on ‘mace ance egta. The curency was devalued substantially andthe authorities latervened {ntensivey inthe benking sector ta bal ou he system. The acceleration of growth after 1985 played a central vole in making rlorms rosainale and encouraging the TEs Gemocaic governmest—the cpposiion won the election—to maitan the course of reforms. Other imporantfctors inthis regazd were the negative “demonstration effect” [rove bythe deep macroeconomic disemtlitrium thatthe frst goverment of tbe nowy Teeovered Aspealine democracy experienced in the eighties and the fall of the socialist, cystem. Beyond the importa! economic outcomes ofthe refonn, wha x oat sigiicat ftom the poof view af ur anata inert i that: (the tratafomation a the polity reinforces refonms—th charges i the wppe-leve instaions ofthe hierarchy veinforced rather than dbiitated the functionality of economic isitutions and (b) Cale managed to overcome a sisable crisis in the ciples tat war lergely due to the ilbdesgred imlementtion of matt reforms, in other counties this typeof crise sled or reversed refi etext Mesico and Pere ‘The chapter on Meno and Peru presets stctural sefora change the insttionlaeting a which the economy operse, rnuactio between agents within acentel policy demain so as to ale the pattem of interaction betweea politcal and ‘ronomic rules for the purpose of mpsoving the economy's performance. Peru and Meco Ge takea as contrating exemples of the ey in which reformer, solve complex Iinplemeniation acd sutinablty problems. Peruvian and Menican reformers operated lider diferent formal and iofomaa!inttiond geting, eftiough they shared salar dificult and uted informal enforcement merbenians to posh the reform process. The hopes argues thatthe fsituional eniraunens provides the seg abd tckne trees bor or enforce the proposed deals in the ef proces, The suhors expbasie the ole (ofthe mental models that ages employ. Te reform proces in Mexico wes pofual and ‘Spannod almost twenty yeas fom its beginning in 1982, following the deb crisis ad the Shundoamant ofthe poptlietpoiccesesocited with ol soveres and igh pies i the Seventies Tho paper dstingnthes = umber of dierent groupe relevant 10 polis, bracing techaoests, PRI politeens, and eter pola! forest the PRI and the technocrats fst power afar the Tequla Css in 1994. The coraupon sandal assorlated i Saline’ presidency alo uliatelycontbted to thie reel. The weakening of te PRL andthe strengthening of new players in Congress and Be regions resulted inthe stalling oF reforms. Grown acceleration aid not acoar despite Mexico's signing of the NAFTA agreement in 19 siction oF macrossonemi balancer Before Inenchingreforms in the nineties, Peru went though deep macroeconomic disequlibria, The most important indicator wat the acceleration of inflation tat tok the county tothe brink of typetnfation. On the political fon, the demosric polity faced the challenge of the ‘Shining Path guerilla movement. Pyjimor'sststegy inthe nineties was a kid ef shock ‘berapy, bundling. structural veforns with stabilization, Tho goverment adopted. an Increasingly authoctrian siace, which included a sepromoted coup @'@at and a ‘modification ofthe enstution fo allow Fujimoe' reelection, His regime callapoed ia le 2000 when comp polite agreements were reveled. The reform process ost momenta and legitimacy. The esuing government war ot efextive st deepening the refmns, The ‘thoes conde that compen is associated with the lack of strong and operative forte inwitutional channels to make reforms effective. Thi izes he usporeance of “peal” informal insitutionsl channels and results in the jacking of the refoom egends and ‘ourption. This problem was more severe in Peru thn in Mexicn. They al argue tht the Sy to ste ietrtemporal agreement in Mexico favored pradalist and sustaiaablity Tn Menico, PRI's lengthy tenure provided s longer horizon and cardntion capacity. Wit slong horizon & gradual reform proces is mace creole ae specific transactions Can be advanced gradually. Ie Merice, succesive president insisted on ineluding PRI's opposition in the refara negotiasons and the central sdminertion provided the means to delve the presidents! promises. Fujinon, om the contrary, edo detey any opposition, "The scope ofthe reforms implinented in Paraguny was narowes than in other countries of ‘he region, altiough Paraguay had been traditionally open to te, Privatizations were not important and financial ibevalztioncealied in two fnaselal exses. In explaining the failures, the authors emphasize pahdependence effete asocatsd with the prdeloyy harate ofthe state under Stocstoe's dicttoreip. The demise of this prealoy sale fceared as a consequence of the exhmton of the tadtonel sources of ren (Oe expansion of te agrcultral frontier and the cotton of lage deme nascoxinton With ‘Argentina snd Bri). The reform proces begen inthe ealy 199% within te conten of ‘he transition toward democracy but the aew polity fled to replace fe insttatons ofthe predatory site with new development-fienclyinstintions. A cenral proportion of fe fase snd is tha successful policy reform in Paraguay ban bec imposed bythe ba gusty ofthe political insituions the couatry inherited from the old regime, The lack of 2 effective bureaucracy and the increasing, demande of woikers, peas, axl te civ society dung the transition to democracy were addifonal obstacles’ ‘The exising Insttons could ueterprotct th property sights of seta! end potential ivesors st provide politcal sili, nor easue hat pote ees (patel the Colors par) ed effective, formal coaevalats on ther betavion. Nether could these sme inmitone promote the putcipation of a bread cross-section of the society in ether the formal economy or in the politcal life ofthe nition. Given the aiportance of patdependence, he ‘uthors wodertake a biiet analysis of Paraguy's politcal history to highlight «et of lements and evens tat contibuted to the file of insiion tulding and poly refomns, suchas authoritarian personalities, fv bloody war, anda poiicl caltse ee interpersonal relations based on kinship, fendship, and partisan alleginnces prevaled regularly over impersonal rleioships, rile, and obligaons The case stay iaminate,in his way he importace of cultural actor and rasetions that ae goverot by rules of the geme inthe shadow ofthe In. These factors render xe changes i he leg vruture [teil and the reforms tltiatey produced a set of moet cyefoncona inssutons. Since the polity also felled to rengzen the legitimecy ofthe proces, is not suprising that therefor proved tbe unsustaisale, Uragusy Like az, Uruguay can elzo be cistiied ss gradual sefom process The case study ‘overs the extended period of suture reform tht has been tang pace in Urguay sace ‘democracy was restored in 1985, The authors opt a wide approses to market reform, The ‘nays deals not enly wit the reforms as hey have been summarize in the WC, but also ‘with pol reform and the contlidaton of democracy. The geacal gol isto understand feform in a broad economis and poies| tte. The study doce not merely asees the ‘efor implemented, bul tie to uicertend wy the maet end reforms moved fasts in sme areas ban in oter, who promoted and Who opposed refer, and how the politial pores shaped the ref, ‘One msn pont tt the sty highlight i thst cil rocery Played a cental role plebscies appuoved or ejected specie iatalives, which decisively [feted the content and tening of reforms. They als pinpoint tht plrliem vas a cearal feature ofthe polity. lndasd, Uruguay i «paradigas of how polital economy vrables tthe implementation and eastaasblity of reforms. The imate outcome of such ¢ rest is an amalgam of rules of the game comespinding 1 diferent egies. The Suthorties advanced sbstatally concerning trade and fnaccia} Liberalization, bat there Ibas been lite progress conceming labor makes and privatisation because of ltholden" oppostioa. The reform prooses has been leo affeted by the county's exer vulnerability. As in the cave of Breil, altbough 8 left-sing psy yea the lst lowing dere have en no efor reverts. The autre conclude tat reformits have hot won the bate for puble opinion inmost policy ares in Unaguay, Toe disappointing ‘economic perfomance ofthe county in recent years and Argeatinn's collapse contbulad te dasetingpro-mattt efor, However, te sane te, coil sd poltial cares in UUnaguy have been very limited dicing the eis, end the plital system til spear tobe rong. The ewthorsconcloda that political plulisn explains the puzze; the isiutions provided chameleon legal means (plebiscite) for Yoea goaps le expres disagreement ‘Tur strengthened politeal lepiimacy, The cases of Bree) and Uruguay suggest tht zadulim and prigmtem cen resice the spood and eope of reform, but an also Srougly benefit ustanabiity Veneuela The sty comprises ZI Gran Viraje (The Grest Tumaround), an ambitious agenda of rmscrocoononi nad stctial refers led by Presiet Caroe Andy Pere ducing Bis second presidency (1989-1993 and the Agence Venarunla, which was impemcted daring fhe Caldera administetion ia 1996, From the evidence dicosoal it fillows at Venezia’ limited but revealing experience with natket-orened reform can be classed 8a fale. The authors sue thet stu Venazula' allure to rform maybe supvisina in light of its masive ol revenue, itis ot the case once iathvica and political ‘vonomy varinbles bave bed taken into acount. They sens tit oil evens aloe