Growth, employment and equity. The Impact of Economic Reforms in Latin America and the Caribbean

Foreword

The impact of the economic reforms undertaken by Latin American and Caribbean countries in the last two decades is at the core of the economic policy debate in the region as we enter the new decade. Trade opening, financial liberalization, and privatizations have radically changed the rules of the game under which I business and labor operate. Changes in macroeconomic policy, which accompanied or preceded the reforms, sometimes reinforced their effects on special targets of structural reforms ?particularly export growth? but sometimes ran in the opposite direction. The combined result was new market structures and changes in microeconomic behavior.

The evaluation of the effects of the reforms on economic growth, employment, and income distribution goes well beyond the interests of academic economists. Governments, political parties, and social actors are all demanding more in-depth evaluations of the results in order to design or propose policies that complement the reforms or correct their undesired effects. The Economic Commission for Latin America and the Caribbean (ECLAC) is actively participating in this process.

This book is the most important and comprehensive effort that ECLAC has undertaken to study the impact of the reforms. Although in recent

years we have published several works that address this issue, their scope was much more limited, focusing on specific macroeconomic variables, such as growth or employment, or on specific productive sectors. The current endeavor constitutes a major effort to integrate analytical approaches and knowledge developed across ECLAC divisions, subregional headquarters, and country offices.

The evaluation of the impact of the reforms has been a difficult task. Data are poor, particularly for smaller economies. Even for larger countries, disaggregated information is seldom available. A three-year research project was necessary to produce new data and to analyze those data for nine countries in Latin America and the Caribbean. All large and most medium-size countries in the region were studied in the project, and small countries from all subregions (Central America, the Caribbean, and South America) were also included. We believe that the resulting analysis will provide important inputs for the policy debate.

The authors show that the reforms had a surprisingly small effect on growth and equity at the aggregate level. Although there are clear signs of

recovery with respect to the 1980s, the changes in economic policy have not boosted performance in the ways that their proponents had

predicted. While most countries have been successful in lowering inflation rates, the reforms may have made problems worse in other areas,

especially employment. At the country level, substantial heterogeneity was found. One group of countries with especially problematic initial

conditions became aggressive reformers, while others with a better record in the past were more cautious about embarking on profound changes. The fact that, on average, the former group has seen GDP expand more rapidly in the 1990s owes in large part to a catch-up process, once gross macroeconomic imbalances were corrected.

Unlike most other studies, this one did not stop at the aggregate or country levels. Indeed, one of the most important parts of the book is the

sectoral and microeconomic analysis. These levels show evidence of more significant impacts of the reforms. Trade liberalization and

privatization were instrumental in fostering market restructuring, which led to the entry of new actors and to new investment, particularly of foreign origin. Stronger competition from imports and from new actors in the domestic market led to widespread modernization, particularly in sectors undergoing rapid technological change, such as telecommunications. In other activities such as agriculture or manufacturing, the reforms fostered specialization and thus increased efficiency, but they also led to greater heterogeneity or even polarization between modern and traditional producers. Large firms, especially subsidiaries of transnational corporations, were the leaders in both investment and the incorporation of new technologies. Small domestic firms presented a very heterogeneous performance, but continued to produce mainly for the

domestic markets. Consequently, they performed better when macroeconomic conditions were favorable.

The international economy has played an important, but contradictory, role in the reform process. Renewed access to international financial markets enabled countries of the region to break out of the foreign ex- change constraint they faced during the 1980s. At the same time, the new flows have proved extremely volatile, causing substantial damage when they reversed course in 1994-95 and 1998-99. Latin American and Caribbean economies remain vulnerable to the trends in financial flows since exports have not grown as fast as imports, producing a widening trade gap that needs to be financed.

The book concludes that the reforms had favorable effects in several areas, but they were not sufficient to foster dynamic, stable economic growth in the region. Moreover, the region's problems in the areas of unemployment and inequality will not be resolved unless the reforms are complemented with policies to foster competitiveness, job creation, and a better income distribution. The final chapter of the book presents a set of policy proposals that are well integrated into current ECLAC efforts to develop a comprehensive policy strategy on growth, equity, and citizenship.

ECLAC could not have developed such a large project without the cooperation of an extensive network of researchers in each of the nine countries, who undertook field research, the production of new data, and country analyses. The creation of this network is another positive spillover of the project that resulted in this book. The coordination of a large number of consultants was handled through a two-tier organization of the project. Under the general guidelines of the project director, Dr. Barbara Stallings, four module coordinators and nine country coordinators supervised consultant work and undertook a significant part of the analysis included in this book. Four other books, including the detailed analysis and results developed in the modules on investment, technological progress, employment, and income distribution, will be published in both Spanish and English during the coming months. In addition, volumes are being published in the nine countries to present the analyses of each of the national reform processes. The basic working papers that provided much of the raw material for the project are available on the ECLAC website (www.eclac.cl).

External financing came from a number of international donors. First of all, we would like to acknowledge the central role of the Ministry of Development Cooperation of the Government of the Netherlands, which provided the basic grant for the project. The International Development Research Centre of Canada (IDRC) also provided substantial funding, which enabled us to expand the scope of the project in important ways. These two sources were complemented by funds from the Ford Foundation and the Swedish International Development Agency. We are extremely grateful to all of these donors, without whose support the project could not have been undertaken.



José Antonio Ocampo

Executive Secretary

U.N. Economic Commission for Latin America and the Caribbean