Growth and reforms in Latin America and the Caribbean in the 1990s

This paper is an attempt to shed some light on the connection between the growth performance in the 1990s and economic reforms in seventeen Latin American and Caribbean countries. It presents a classification of the countries studied based on comparison of the growth rates in the 1990s and the 'base period' (1951-1980);. Three groups of countries are identified: leaders, laggards and intermediate cases. An attempt is made to see if there emerges a pattern or any kind of regularity with respect to the causes of the adoption of reforms. Relevant short-term and long-term factors are identified. The way reforms were implemented, and in particular, whether different levels of intensity of macroeconomic stabilization and structural reforms were related to the growth performance in the post-reform period, is also analyzed. Several characteristics define countries in each of the three groups identified. The 'leading' economies had a lower average rate of growth in the base period than in the 1990s and low or negative growth rates coupled with huge macroeconomic imbalances immediately before the reforms took place. That sparked the reform process that was much more comprehensive than in other countries. 'Laggards', in contrast, fared much better during the three post-war decades than during the 1990s. Also, their growth rates immediately before the adoption of reforms were not as low as the ones of the 'leading' economies, and in most cases they did not experience hyperinflation. As a consequence, the pressure to change was not as strong as in the countries hit harder by the crisis. The intermediate cases have some characteristics of both groups. An attempt has been made to explain these patterns using political economy concepts. In countries where growth was strong during the base period, powerful interests had a stake in maintaining the status quo and hindered the reform process. In slow-growing economies, in contrast, such vested interests were weaker and less ubiquitous, and thus possibility of change was greater. In addition, pre-reform crises in the former economies did not weaken vested interests enough to enable reformist governments to act successfully. In the latter, crises did have that kind of effect. Moreover, many governments faced credibility problems because of numerous failed attempts at macroeconomic stabilization. Those that adopted far-reaching structural reforms and macroeconomic stabilization signaled their commitment to reforms. Others that lacked a combination of strong stabilization and strong reforms made things worse with partial reforms since the absence of positive results further undermined the support for reforms.