Understanding Economic Policy Reform

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Journal of Economic Literature, Vol. XXXIV (March 1996), pp. 9–41 Rodrik: Understanding ofEconomic Policy Reform Journal Economic Literature, Vol. XXXIV (March 1996)

Understanding Economic Policy Reform
By DANI RODRIK Columbia University
This paper has benefited from the comments of Herschel Grossman, Anne Krueger, Gustav Ranis, Jeffrey Sachs, John Williamson, and three referees.

I. Introduction
HIS GOVERNMENT will be austere, uncompromising, and unpopular if that is what is required to achieve economic recovery,” declared Mario Soares in 1983 upon taking office as prime minister of Portugal.1 This kind of talk is music to the ears of economists. Reform requires austere policies which respect budget constraints. It also precludes compromising with the narrow, special interest groups that have been the beneficiaries of the deleterious policies of the past. Policy makers who have courageously taken on such interest groups and pursued market-oriented policies are the heroes of the economics profession (see Arnold C. Harberger 1993). That such policies should also be unpopular (as Soares feared they would), however, requires a lot more explaining. What is the point of loudly proclaiming reforms if these are not aimed at improving the well-being of a large majority of the population? And if that is their goal, why should reforms be unpopular? In many areas of policy, there may ex1 Quoted by José Maria Maravall in Luiz Carlos Bresser Pereira, Maravall, and Adam Przeworski (1993).



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ist “technical” uncertainty as to what the appropriate solution is to the problems at hand. Think of President Clinton’s health care plan, for example, or of global warming. Consequently, reforms will arouse opposition if they are viewed as applying the wrong fix or if they are perceived as being primarily redistributive (that is, zero-sum). What is remarkable about current fashions in economic development policy (as applied to both developing and transitional economies), however, is the extent of convergence that has developed on the broad outlines of what constitutes an appropriate economic strategy. This strategy emphasizes fiscal rectitude, competitive exchange rates, free trade, privatization, undistorted market prices, and limited intervention (save for encouraging exports, education, and infrastructure). Faith in the desirability and efficacy of these policies unites the vast majority of professional economists in the developed world who are concerned with issues of development.2 2 The convergence is not complete of course. But compared to two decades ago, the various sides have moved substantially closer to each other. One indicator of this is the recent book by Bresser Pereira, Maravall, and Przeworski (1993), which advocates a “social democratic” approach. The views expressed in this book concede an inor-

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Journal of Economic Literature, Vol. XXXIV (March 1996)
we observe such instances of collective irrationality. The events of the last decade have underscored the need to understand the political-economy of policy making. One of the eventual consequences of the global debt crisis that erupted in 1982 was a wave of market-oriented economic reforms, the likes of which have never been seen. The reforms were strongest and most sustained in Latin America, where countries like Bolivia, Mexico, Argentina, Peru, Colombia, and Brazil joined Chile in orthodoxy. But this was very much a global phenomenon. “Stabilization” and “structural adjustment” became the primary preoccupation of government leaders in Asia and Africa as well, even though the commitment to economic orthodoxy varied across countries and over time. These countries were in turn soon joined by the previously socialist economies of Eastern Europe and the former Soviet Union. Economists who had cut their teeth in Latin America’s economic quagmires became the advisors and analysts of these transitional economies. Even India, the giant archetype of a...
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