Source: Carnegie

Preface

The Carnegie Economic Reform Network (CERN) convened on February 27-28, 1998, in Miami to discuss "The Political Challenges to Advancing Economic Reforms in Latin America." CERN is a distinguished group of former ministers and other senior policy-makers who have played key roles in advancing market-oriented economic reforms in developing and transitional economies. The meeting discussed the broad political challenges to economic reforms in Latin America and two specific issues—strengthening banking systems and advancing education reform—that are especially important in many countries of the region.

This Report, written by Daniel Morrow, Resident Associate at the Carnegie Endowment, synthesizes and elaborates on the ideas and insights that emerged during the meeting. The diagnosis and recommendations presented here are largely derived from and inspired by the discussion at the meeting but do not necessarily represent the consensus view of participants.

Participants in the meeting (listed in Annex 1) included CERN members, several current policy-makers from the region who are actively engaged in reforms in banking and education, officials from the multilateral development institutions, and scholars.

The Carnegie Endowment gratefully acknowledges support and assistance provided for this CERN meeting by the Economic Development Institute of the World Bank, the Inter-American Development Bank, the Tinker Foundation, and the Ford Foundation. This report is published in cooperation with the Economic Development Institute.  

Summary

Political support for market-oriented economic reforms in Latin America has been, on balance, encouraging. Nonetheless, the risk of a slowdown—or even a reversal—of reforms should not be underestimated. The most important danger is that many people in the region feel increasingly insecure—about their own jobs in a more competitive, volatile, and globalized economy and about prospects for their children. To consolidate support for market-oriented economic policies, the near-term political priority in most countries of the region should not be "more of the same." Instead, policy-makers should focus on reforms designed to decrease potential macroeconomic volatility and to reduce prevailing insecurities. Two important means to pursue these broad objectives are strengthening domestic banking systems and advancing education reform.

Many banking systems in Latin America remain vulnerable to economic shocks. This increases the risk of macroeconomic volatility, which undermines political support for market-oriented policies. The region's banking systems would be strengthened by further progress in opening the sector to foreign bank participation, building competent and independent superintendencies of banks, complementing public supervision by market mechanisms to penalize bad bank performance, developing clear laws and transparent processes for exit of insolvent banks and for bankruptcy of firms, and establishing limits on insurance for depositors and enforcing bank shareholder losses. To overcome potential political opposition to such measures, reformers should consider the following lessons of experience:

• A banking crisis is itself the moment of greatest opportunity for introducing reforms.

• Policy-makers should make use of the competitive pressure from foreign banks to win support for stronger domestic regulation and supervision.

• Policy-makers should take advantage of international institutions and their associated norms as allies for reform and for the enforcement of good policies.

• In this policy area, coalition-building within the relatively limited set of political and economic elites can be sufficient to achieve change.

• The basic elements of the system should be embedded in law—not only in regulation.

Improving education is crucially important in both economic and political terms. The sustainability of political support for market-oriented policies depends in part on whether or not the middle classes feel hopeful about the future of their children, and this depends to a significant degree on the availability of quality education. There are now reasons for optimism about reforming education in Latin America, but the process will be long and uneven, and political leadership will be essential. A political strategy should emphasize the following principles:

• Empowering the "consumers," i.e., the parents and local community groups.

• Increasing the autonomy of schools and of community-level authorities.

• Ensuring long-term political leadership for the reform by retaining a good minister of education.

• Building support for education reform within the business community and within the economic policy-making team by stressing its contribution to competitiveness and growth.

• Spending political capital to overcome resistance to reform from the teachers' union leadership.

• Keeping the middle classes in public schools by investing resources in quality enhancements.

• Finding additional resources for public primary and secondary education from outside of the sector, not from public higher education.

• Building on local successes instead of striving for an all-at-once,nationwide reform.