13

4. Consensus-Style Reforms: Implementation

This section documents the intensity of reform implementation without assessing its
effectiveness. The latter is a most relevant dimension of inquiry but lies outside of the scope of
this paper. The reader is referred to the numerous sources that assess implementation
effectiveness more rigorously, often extensively, by type of reform.14

During the 1990s, most Latin American countries enthusiastically embraced Consensus-
style reforms, with the strong support from international institutions, particularly in the context
of IMF stabilization programs and policy-based lending programs of multilateral development
banks. While the record is mixed and varied across countries,15 the vigor of reform
implementation in the region was higher than at any time in memory. Eduardo Lora (2001)
detects a “great wave” of Consensus-style structural reforms during the 1990s, with particular
intensity and concentration in the first half of the 1990s (Figure 2). His structural reform index—
which is measured on a scale from 0 to 1 and combines policy actions in the areas of trade,
foreign exchange, taxation, financial liberalization, privatization, labor and pensions—rose
steeply from about 0.4 in 1989 to almost 0.6 in 1995. 16 As the structural reform process lost
momentum around 2000, the 1990s can be considered as the “glorious years” of the Washington
Consensus.

One key reform area concerned macroeconomic stabilization, where policy action was
impressive. It was in the 1990s when Latin America finally conquered inflation—bringing it
down from hyperinflation or chronically high levels to single digit rates in most countries
(Figures 3a and 3b). Behind this achievement were important reforms to central banking that
virtually eliminated the monetary financing of fiscal deficits. While progress on the fiscal front
was less impressive than in the monetary area, things generally moved in the direction of greater
viability, a process that, as noted, was aided in several countries by sovereign debt reduction
agreements reached with external creditors under the Brady Initiative. The average public sector
deficit in the region declined from minus 2.4 percent of GDP in 1980-1989 to almost zero during
the mid-1990s, while public sector external debt fell on average from 60 percent to 40 percent of
GDP during the 1990s, even if the total (external and internal) public debt did not decrease much
(Figures 4a and 4b).

14
For example, on capital markets reform see de la Torre and Schmukler (2007), de la Torre, Gozzi and Schmukler
(2006 and 2007). On pension reform see Mesa-lago (2002), Gill et al. (2004), Impavido, Lasagabaster and García-
Huitrón (2010, forthcoming). On labor and trade reform see Heckman and Pagés-Serra (2000) and Fajnzylber and
Maloney (2005).
15
This heterogeneity is in part captured by Lora’s (1997) classification of Latin American countries into four
groups: early reformers (Argentina, Chile, and Jamaica); gradual reformers (Colombia and Uruguay); recent (or late)
reformers (Bolivia, El Salvador, Nicaragua, Paraguay, Peru, and the Dominican Republic); and slow reformers
(Brazil, Costa Rica, Ecuador, Honduras, Mexico and Venezuela). See also Morley et al. (1999).
16
The advance of the reforms is measured as the margin for reform existing in 1985 that was utilized in subsequent
years—for trade, financial, tax and privatization policies (see Lora, 1997 and 2001).
 14

Figure 2. Latin American Structural Reform Index Average (1985-2002)

0.6

0.5

0.4
The Great Wave

0.3
1985 1990 1995 2000

Note: The advance of the reforms is measured as the margin for reform existing in 1985 that has
been utilized in subsequent years. The index combines measures of trade, financial, tax and
privatization policies.
Source: Lora (2001).

Considering specific components of structural reform, action was concentrated in the area
of liberalization, both in trade and finance. With respect to trade, the 1990s saw a confirmation
of a liberalization trend that had started in the mid-1980s, involving mainly the removal of
import quotas and the reduction of average import tariffs. The average tariff rate for the region,
which had fallen from nearly 50 percent in the early 1980s to around 33 percent in 1990,
declined further during the 1990s to around 10 percent by 1999 (Figure 5). The 1990s added to
this trend a new feature—a significant reduction in the variance of import tariffs to only one
fourth from 1990 to 1999.

But it was arguably in finance where—departing from Williamson’s cautious

formulation—Latin America’s liberalization-oriented reforms were most aggressively
implemented. While the region had lagged considerably behind the global wave of financial
liberalization of the 1980s, it embraced it with vengeance during the 1990s. The financial
liberalization index developed by Kaminsky and Schmukler (2003) shows that it took only the
first half of the 1990s for the region to bring relatively closed and repressed financial systems to
a level of liberalization comparable to that of developed countries (Figure 6). Financial
liberalization was carried out on the domestic and external fronts. Direct credit controls were
abandoned and interest rates deregulated. Restrictions on foreign investment were lifted, and
other controls on foreign exchange and capital account transactions were dismantled. Foreign
banks were allowed and encouraged to establish local presences.
 11

Figure 3a. Latin American Inflation (1990-2000) Figure 4a. LAC Budget Balance, Selected Countries (1990-2000)
(Percent of GDP)
60 1000 5

Logarithmic Scale (%)

40 100 0
Inflation (%)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

20 10 ‐5

0 1
‐10
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Caribbean (LHS) Central America (LHS) South America (RHS) AR BR CL MX PE

Note: Weighted regional averages. Note: Central government budget.

Source: World Economic Outlook and IFS, IMF (2010). Source: Economist Intelligence Unit (2010).

Figure 3b. LAC Inflation, Selected Countries (1990-2000) Figure 4b. LAC Public Debt, Selected Countries (1990-2000)
(In Percentage) (Percent of GDP)
836% 1482% 1356% 2655% 75
75

50
50

25
25

0 0

Argentina Brazil Chile Colombia Mexico Peru Venezuela 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

1990‐1992 1993‐1995 1996‐1999 AR BR CL MX PE

Source: World Economic Outlook and International Financial Statistics, Note: Central government debt.
IMF (2010). Source: Economist Intelligence Unit (2010).
 12

Liberalization on the external front may have been attractive for many countries because
of the region’s low domestic savings, despite its potential effects on exchange rates and financial
systems. (Fukuyama and Birdsall, (eds.), forthcoming 2010). Private domestic savings were low
while public savings were constrained by high public debt service (see Figure 7, comparing Latin
American and East Asian savings). Perhaps this is why Williamson included taxing “flight
capital” as a priority in the medium term. The reliance on foreign capital inflows was in turn
associated with constant appreciation pressures on the exchange rates, which undermined
competitiveness in non-commodity exports. Again the comparison with East Asia is apt. And
while it is well known that the reform and modernization of the regulatory and supervisory
arrangements for financial markets lagged their liberalization—which, as noted later on,
constituted a source of systemic vulnerability—the 1990s did see important, if insufficient,
improvements in legal, regulatory, trading and informational infrastructures that are germane to
financial markets. These included the revamping or upgrading of banking and capital markets
legislation (Figure 8).

The 1990s also registered a wave of privatizations (of public banks and enterprises) and
significant, albeit one-dimensional, pension reforms. More than 800 public enterprises were
privatized between 1988 and 1997 (Birdsall, de la Torre and Menezes, 2001) and the cumulative
amount of funds raised through privatizations during the 1990s was on the order of US$200
billion (Figure 9).17 In pensions, Chile’s pioneering reform of 1981 had a major demonstration
effect throughout the region. Similar systems were adopted during the 1990s by Argentina,
Bolivia, Colombia, Costa Rica, El Salvador, Mexico, Peru and Uruguay.18 These reforms
consisted basically of a shift away from government-administered, pay-as-you-go, defined-
benefit pension systems for private sector employees to systems that rely mainly on a so-called
“second pillar” of mandatory, defined and privately-administered pension funds. The market
orientation herein is clear, as these pension reforms shifted from the state to the capital markets
the dominant role in administering retirement-related savings.

Lastly, structural reform intensity was more modest in tax reform and virtually non-
existent in labor markets (Figure 10). Lora’s index of labor market reforms barely rose during
the 1990s (progress was actually negative by 1994 and only slightly positive by 1999).
Williamson’s inclusion of “public expenditure reprioritization” has usually not been viewed by
students of the Consensus as a structural reform and is not even included in the reform indices—
which is itself a commentary on the tendency even in scholarly work to overlook aspects of the
Consensus that are not associated with market liberalization.19

17
The actual motives for privatization ranged from the search for efficiency gains to the need for fiscal revenues or
pure rent-seeking.
18
Brazil did not carry out a Chilean-style pension reform but pension funds account for a significant portion of
Brazil’s institutional investor base. At the end of 2004, Brazilian pension funds assets represented about 19 percent
of GDP.
19
There were also other important reforms implemented during the 1990s which lie outside the scope of the
Consensus but are of importance in assessing subsequent economic performance in the region. Several countries,
for instance, adopted new constitutions and moved decidedly towards fiscal decentralization.
 13

Figure 5. Latin American Import Tariff Liberalization (1985-1999)

(Average and Deviations in Percentages)

50

40

30

20

10

0
1986 1988 1990 1992 1994 1996 1998

Note: The solid line represents the simple average tariff rate for Argentina, Bolivia, Brazil, Chile,
Colombia, Costa Rica, Ecuador, Guatemala, Mexico, Peru, Uruguay and Venezuela. The area
represents the average deviation of the tariff rate across countries. Costa Rica and Guatemala are
excluded from the deviation calculations.
Source: Lora (2001).

Figure 6. International Financial Liberalization Index (1973-2002)

3 Full Liberalization

Developed
More liberalization

2.5 Countries East Asia

1.5
Latin America

Full Closure
1
1973 1977 1981 1985 1989 1993 1997 2001 2005

Note: The liberalization index is calculated as the simple average of three indices (liberalization
of the capital account, domestic financial sector and stock market) that range between 1 and 3,
where 1 means no liberalization and 3 means full liberalization. The regional averages are simple
country averages.
Source: De la Torre and Schmukler (2007).
 14

Figure 7. Latin America and East Asia: Gross Domestic Savings (1970-2008)
(Percent of GDP)

40

35

30

25

20

15
1970 1975 1980 1985 1990 1995 2000 2005

LAC East Asia

Note: East Asia is the un-weighted average of Hong Kong, Singapore, South Korea, Taiwan,
Indonesia, Thailand and Malaysia, while LAC covers the whole Latin American and Caribbean
region.
Source: World Development Indicators (2010).

Figure 8. Latin American Capital Markets Reform Implementation (1990-2002)

120%
100%
100% 94% 91% 92%
88%

80%
63% 64% 62%
56%
60%

40% 31% 33%

25% 27%

20% 15%

0%
0%
Supervisory Agency Establishment of Custody Trading Systems Clearing and
Creation Insider Trading Arrengements Settlement
Laws Processes

Before 1990 By 1995 By 2002

Note: Percentage of Latin American countries having implemented reforms.

Source: De la Torre and Schmukler (2007).
 15

Figure 9. Latin American Cumulative Amount Raised by Privatizations (1988-2003)

(In billion USD)

200
180

160

140

120

100

80

60

40

20

0
1988 1990 1992 1994 1996 1998 2000 2002

Source: De la Torre and Schmukler (2007).

Figure 10. Latin American Advance of Reforms (1989-1999)

80%

70%

60%

50%

40%

30%

20%

10%

0%
‐10% Total Trade Finance Tax Privatization Labor

Until 1989 Until 1994 Until 1999

Note: The advance of the reforms is measured as the margin for reform existing in 1985 that has
been utilized by 1989, 1995 and 1999.
Source: Lora (2001).