sign up

News Releases

Latin America Needs to Modify, Not Reverse, the Washington Consensus

May 12, 2003

Washington, DC—To restart economic growth in Latin America, the countries of the region must complete and complement the reforms that were initially introduced in the late 1980s and early 1990s. They especially need to reduce their vulnerability to crises, complete the liberalization of their economies, adopt complementary institutional reforms, and include income distribution concerns in their policy packages. Specifically:

• Fiscal policy needs to become countercyclical, using boom years to create debt levels low enough to make deficits feasible in bad times;
• Exchange rates need to be flexible enough to allow currencies to depreciate to counter the threat of crisis;
• National savings need to be strengthened, to prevent countries remaining dependent on capital inflows;
• The "first-generation reforms," those embodied in the original Washington Consensus covering stabilization and liberalization, must be completed; for example, much progress has been made in privatization but many companies remain in the public sector whose presence is difficult to rationalize;
• Labor markets, where standards have often been set so high that half the workers are forced into the informal sector and thus live without the social basics, must be reformed;
• Countries must install a modern civil service and modernize the judiciary; and
• The financial sector needs institutional changes to enhance the rights of minority shareholders, improve bank supervision, establish credit registries, and enhance the ability of lenders to recover collateral.

These are the central conclusions of a new book on Latin American economic policy by a group of predominantly Latin American economists invited by the Institute for International Economics to analyze how to revive growth in the region. The book is co-edited by Pedro-Pablo Kuczynski, former minister of economy and finance in Peru from 2001 to 2002, and John Williamson, senior fellow at the Institute and creator of the term "Washington Consensus" to describe the reform agenda as widely understood in 1989. The title After the Washington Consensus reflects the need to debate the substance of economic reform instead of continuing polemical diatribes against, or in favor of, the Washington Consensus—a term that has come to mean very different things to different people.

The first half of the 1990s witnessed a return to growth and a renewed fall in poverty in Latin America, even though the results were not as good as before the lost decade of the 1980s. At best, income distribution stopped getting worse. Growth in employment in the formal sector was agonizingly slow. Investment remained much below the level prior to 1980. But for the past half-decade the results have been even more disappointing: growth has stalled, and due to the crises that have afflicted the region, poverty has increased again.

Policy reform in Latin America thus needs to get growth going again but should also focus on income distribution, which until now has been the most unequal in the world. This will require progressive taxation of the rich and spending the proceeds on pro-poor social programs to be supplemented by giving poor people access to assets that will allow them to work their way out of poverty. The book proposes enhanced commitment to education, new efforts to title informal enterprises (as long urged by Hernando de Soto), land reform where needed, and expanded access to microcredit (which is currently accessible to only 1 percent of the poor in Latin America as against 50 percent in Bangladesh).

About the Editors

Pedro-Pablo Kuczynski, former minister of economy and finance (2001-02) in Peru and former minister of energy and mines (1980-82), has been president and chief executive officer of the Latin America Enterprise Fund LP since its inception in 1994. From 1992 to 1994, he was vice chairman of CAP SA, a steel and forest products company in Chile. From 1982 to 1992, he was chairman of First Boston International and managing director of First Boston Corporation. He was also a partner at Kuhn, Loeb & Company International (1973-75), deputy director of the Peruvian Central Bank (1967-69), and president and chief executive officer of Halco Mining (1977-80). He began his career at the World Bank in 1961 and held senior positions there and at the International Finance Corporation. He is the author of several books on the economics of Latin America.

John Williamson, senior fellow at the Institute for International Economics since 1981, was project director for the UN High-Level Panel on Financing for Development (the Zedillo Report) in 2001; on leave as chief economist for South Asia at the World Bank during 1996-99; economics professor at Pontificia Universidade Católica do Rio de Janeiro (1978-81), University of Warwick (1970-77), Massachusetts Institute of Technology (1967, 1980), University of York (1963-68), and Princeton University (1962-63); adviser to the International Monetary Fund (1972-74); and economic consultant to the UK Treasury (1968-70). He is author, coauthor, editor, or coeditor of numerous studies on international monetary and developing-world debt issues, including Dollar Overvaluation and the World Economy (2003), Delivering on Debt Relief: From IMF Gold to a New Aid Architecture (2002), and Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option (2000).

About the Institute

The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. Its staff of about 50 focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regions—especially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site.