Schweickert, Rainer

English

Research Papers in Economics

econstor
www.econstor.eu
Der Open-Access-Publikationsserver der ZBW – Leibniz-Informationszentrum Wirtschaft
The Open Access Publication Server of the ZBW – Leibniz Information Centre for Economics
Nutzungsbedingungen:
Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche,
räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts
beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen
der unter
→  http://www.econstor.eu/dspace/Nutzungsbedingungen
nachzulesenden vollständigen Nutzungsbedingungen zu
vervielfältigen, mit denen die Nutzerin/der Nutzer sich durch die
erste Nutzung einverstanden erklärt.
Terms of use:
The ZBW grants you, the user, the non-exclusive right to use
the selected work free of charge, territorially unrestricted and
within the time limit of the term of the property rights according
to the terms specified at
→  http://www.econstor.eu/dspace/Nutzungsbedingungen
By the first use of the selected work the user agrees and
declares to comply with these terms of use.
zbw
Leibniz-Informationszentrum Wirtschaft
Leibniz Information Centre for Economics
Schweickert, Rainer
Book Review
[Book Review of] Stabilization and reforms in Latin
America : where do we stand? / Hermann Sautter ...
(eds.) : Frankfurt am Main, Vervuert, 1996
Weltwirtschaftliches Archiv
Provided in cooperation with:
Institut für Weltwirtschaft (IfW)
Suggested citation: Schweickert, Rainer (1997) : [Book Review of] Stabilization and reforms in
Latin America : where do we stand? / Hermann Sautter ... (eds.) : Frankfurt am Main, Vervuert,
1996, Weltwirtschaftliches Archiv, ISSN 0043-2636, Vol. 133, Iss. 2, pp. 375-377, http://
hdl.handle.net/10419/2220Rezensionen - Book Reviews 375
Sautter, Hermann, and Rolf Schinke (eds.), Stabi Ii z a t ion a n d R e f 0 r m s i n
Latin Am e r ica: WhereD 0 WeSt a nd? Frankfurt am Main 1996.
Verouert. 262 pp.
The bookis the third volume oftheIbero-America Institute's Göttinger study series
andcontinues the discussion ofrecent economicproblemsin LatinAmerica. Thepapers
published in this volume have been presented at the symposium "Post-Stabilization
Problems and Ongoing Reforms in Latin America" organized by the Ibero-America
Institute in November 1995.
Apart from the introduction, the volume has two papers which attempt to give an
overview over relevant issues. At the beginning ofthe volume, Eduardo Lizano (Wine
and Bottles, Old or New? Rethinking Economic Policy in Latin America Once More)
gives a list ofissues with the goal to "... articulate what the consensus should be ..."
rather than to "... work out what the consensus is at present, based on accumulated
experiences and lessons learned with economic development and economic policies in
many Latin American and non-Latin American countries ..." (p. 18). This is a rather
ambitious program. In detail, he presents arguments on the following issues: macroeco-
nomic instability, market size and economic opening, greatersupply ofexports, the role
ofmarkets and prices, the role ofthe state, profits and wages, the trickle-down theory,
profits and domestic savings, human resource development, and economic policy
change. It turns out that the program is too ambitious. On the one hand, the author
summarizes the relevant issues and provides an overview over papers and books on
Latin American economic policies in general and onspecific issues, e.g., onagricultural
price policies and macroeconomic policies. On the other hand, given the broad spec-
trum ofissues, he cannot avoid to mix up areport on the debate with own thoughts,
e.g. with respect to exchange rate policies (pp. 20f.). Own conclusions are also some-
times not based on the arguments presented before, e.g. with respect to the relationship
between growth and income distribution (p. 31) and his final comments (pp. 39-42).
Furthermore, there are some problems with the consistency ofthe arguments, e.g. with
respect to the pace and sequencing ofreforms (pp. 37-38). However, these are minor
shortcomings given the fact that he is able to provide arguments on the most important
issues and to catch the spirit of the policy change in Latin America towards more
reliance on market forces than on government intervention.
At the end ofthe volume, lohn Wil/iamson (Are Latin American Reforms Sustain-
able?) adopts a less ambitious approach. He profits from the advantage of having
formulated a consensus which is more or less generally accepted - the Washington
consensus. He also saves some space when not summarizing this consensus but rather
focusing on the general spirit ofthe policy change and on discussing possible alterna-
tives - import substitution, socialism, Asian interventionism, and greenery. Ofcourse,
all ofthese alternatives are shown to be inferior to the Washington consensus. Finally,
he recommends five actions needed for establishing a breakthrough from "hiccup"
success stories and "watershed" reforms to a breakthrough into "catch-up growth":
stimulating savings, keeping out excessive capital inflows, strengthening public sector
institutions, resisting to imitate East Asian success stories when lacking institutional
capacity, and addressing Latin America's social debt (p. 254). All of these issues are
discussed in the remaining contributions, at least to some extent.
The first two important issues, private savings and capital flows, refer to macroeco-
nomic management. The paper by Helmut Hesse and Antje Heitkamp (Problems of
Monetary Policy in Latin America) focus on the relationship between savings and
macroeconomic management on a rather abstract level. The main argument is that an
important ingredient for a policy to increase domestic savings is long-run price stability
which should be the prior target for monetary policy. The authors compare Argentina376 Weltwirtschaftliches Archiv 1997, Vol.133 (2)
(fixed exchange rate) and Chile (flexible exchange rate) and conclude that a flexible
exchange rate is more adequate to providelong-run stability while a fixed exchange rate
can, at best, help in the first phase of stabilization. The contribution of Roque B.
Fernandez (Regulation for a Stable Financial System: Prudent Supervision and Liquid-
ity Management in Argentina) on monetary management in Argentina during 1995,
when the country sustained the fixed exchange rate notwithstanding substantial capital
outflows in the aftermath of the tequila crisis, qualifies the conclusion of Hesse and
Heitkamp. The paper shows that even with limited flexibility, the Central Bank is able
to maintainfinancial stability duringaperiodofcapitaloutflows given the institutional
setup of a modified currency board supplemented by a full substitutability of the
domestic and the anchor currency.
Sebastian Edwards, Roberto Steiner, and Fernando Losada (Capital Inflows, the
Real Exchange Rate and the Mexican Crisis of 1994) give an excellent outline ofthe
relevant transmission mechanisms when discussing the pros and cons of fixed and
flexible exchange rate systems. One may ask whether or not it makes sense to provide
another paper on the tequila crisis? The answer is no - generally, everything has been
said - and yes because in this case it is said again in a very convincing way. This is
because the authors concentrate on the main issues, Le. the dependence of inflation
inertia on the exchange rate regime, the long-run sustainability of current account
deficits, and the reasonable size ofshort-run appreciations ofthe real exchange rate. In
each case, only a few equations are needed to identify the most important parameters
in a small (partial equilibrium) model. Estimations and simulations then yield plausible
results which are very telling for explaining the Mexican experience. First, it is demon-
strated that the fixing ofthe exchange rate actually decreased inflation inertia signifi-
cantly without being able to eliminate it. This, however, was only the case in the early
phase ofexchange rate-based stabilization. In the following years, inertia retumed to
the initial level. Second, the steady-state equilibrium for the current account deficit,
assuming no change in the reserve position, is characterized by the extent to which
foreigners are willing to hold domestic assets and by the growth rate. A currentaccount
deficit of7percentofGDPwould then require arealgrowth of7percentandforeigners
willing to hold domestic assets up to the level given by the GDP. Therefore, Mexico's
current account deficits - more than 7 percent of GDP in 1993 and 1994 - clearly
exceeded the sustainable level. Third, the short-run dynamics ofthe real exchange rate
are determined by supply and demand elasticities. Assuming parameters which are
consistentwith the actualcurrent account deficit in Mexico, the authors calculate areal
appreciation of less than 10 percent. Again, the figures for Mexico have been out of
range. The paper also contains a set ofconclusions for other countries and conclude
that "... some ofthese lessons are, in fact, nothing more than the reformulation ofold
truisms that had been forgotten with the emerging markets euphoria ..." (p. 106). One
of these lessons is that a successful stabilization program needs to keep the current
account deficit under contro! which, in turn, requires high public savings and the
stabilization ofprivate savings.
The remaining papers address the strengthening of public sector institutions, the
design ofown trade strategies, and Latin America's social debt. Leonardo Auernheimer
(Good Govemance after Stabilization: Avoiding a Negative-Sum Game) outlines a
model of a rent-seeking society which is not driven by the median voter but by the
competition between two productive sectors for subsidies. The model is able to mirror
the development ofactual economic policies in Latin America because it explains the
increase ofgovernmentintervention up to a pointwhere subsidies to be distributedhave
decreased significantly and the consequent decline ofdemand for govemmentinterven-
tion. This suggests that Latin America needs not only a smaller state but astate
strengthened in its capabilities to establish reliable property rights, to correct marketRezensionen - Book Reviews 377
failures, to provide public goods, and, most importantly, to resist pressures to restart
the "intervention game" after areform period.
Patricio Meller (Regional Free Trade Agreements as an Alternative to Unilateral
Liberalization: The Case of Chile) discusses the problem of defining a foreign trade
strategy given the fact that export growth is still unsatisfactory in many cases and given
a general trend to create trade blocs and to discriminate against non-member countries.
In this situation, the relevant question is whether to establish own trade blocs and
refrain from further unilateral liberalizations in order to maintain some bargaining
power. Meller uses the example ofChile to demonstrate the appeal ofunilateralliber-
alizations for a small country. However, he acknowledges that gaining market access
is ofutmost priority in maintaining a strong growth in exports. He rightly argues that
going for regional trade blocs makes sense as long as this leads to a greater market
access, i.e. that regional integration in the form offree trade arrangements supports a
strategy ofoutward orientation.
Hermann Sautter and RolfSchinke (The Social Dimension ofthe Latin American
Reform Process) discuss policies to reduce poverty. Contrary to the macroeconomic
management, the rent-seeking, and the trade issue, this is an issue which regained
attention only recently. As Sautter and Schinke remark, an improvement of income
distribution is of utmost importance in the Latin American context because of the
highly unequal distribution of incomes on the continent. During the reform process
in the 1980s, income distribution even deteriorated which led to problems with the
sustainability ofreforms. The paper has two main contributions. First, it differentiates
between the problems of temporary poverty and the problems of chronic poverty.
Second, it outlines the two complementary solutions to the problem, i.e. economic
growth and the improvement of insurance schemes. In summary, they conclude that
"... Latin American health services, sickness insurances, and pension systems neither
help the already poor to overcome their poverty nor can these programs efficiently
prevent the non-poor from becoming impoverished. The systems are administratively
inefficient and they produce high financial deficits ... (The) need ... (for) ... reforms
has been debated for a long time. What is new in this debate, is the stress on deregula-
tion and privatization which corresponds to the ideological dimension ofthe ongoing
reform process ..." (p. 224). The paper contains also an overview over reform efforts
and shows that Latin American countries adopt different reform strategies. While
Costa Rica is cited as an example for an improvement of the public system, Chile
represents an example for a partial oreven full substitution ofthe public by a privately
funded system. Clearly, social security is one of the most interesting topics for future
discussion.
All in all, the volume is a valuable contribution to the discussion of economic
reforms in Latin America. It is most appropriate for readers who try to gain an
overview over the issues currently discussed. They will find the main arguments and
they will benefit from the literature cited in the papers. The main shortcoming of the
volume is that it deals with one of the main issues in future discussions, i.,e. social
security, while only implicitly treating others, e.g. domestic savings and labor market
policies. Future volumes may discuss these issues in more detail.
Rainer Schweickert

[Book Review of] Stabilization and reforms in Latin America : where do we stand? / Hermann Sautter ... (eds.) : Frankfurt am Main, Vervuert, 1996.

http://www.econstor.eu/bitstream/10419/2220/3/262284936.pdf

[Book Review of] Stabilization and reforms in Latin America : where do we stand? / Hermann Sautter ... (eds.) : Frankfurt am Main, Vervuert, 1996.

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics