Last post set the stage. Now let’s derive a broad set of actions.
To hell with long-term policies. That is the prevalent view of emerging market governments all around the world, with very few exceptions. Micromanaging every single new data point seems to be the rule – governing by reaction. The main reason for this short-termism is that the social contract in most countries accepts that a politicians’ job is simply to find new ways to stay in power. Yet stable political institutions matter for long-term planning, and instability is rampant around the world, even in large democracies like Brazil and Argentina.
One afternoon I was teaching MBA candidates from St. Gallen, on a visit to Fundação Dom Cabral to learn more about Brazil, and a student asked a simple but profound question. She asked: given all the many issues in the country, what is the government planning to do about it in the next few years? It is a simple question that most managers in the world deal with: if your organization faces important issues, what is your strategy to improve your chances of succeeding? When trying to come up with an answer the truth hit me – there is no strategy. Most governments in emerging markets work in a crisis-mode fashion, similar to the way small business owners operate – day-by-day, jumping from one crisis to another, meanwhile trying to maximize their own utility (political power in the case of politicians, or operating income in the case of small businesses). It is not only an emerging markets disease, since pundits in the US and Europe are prone to overanalyzing randomness as trends, while governments try to tackle the new issue of the day, be it unemployment, growth, or inflation.
We need to change that, towards a new consensus. Now, this is a loaded word, especially after the fallout from the Washington Consensus – a dirty expression in most of the underdeveloped world. Why has the Washington Consensus failed? It failed because of three reasons: 1 – most countries did not have the institutions to pull it off; 2 – some of the advice was unsound; 3 – countries botched the implementation of some of the policies they actually tried.
Moreover, the Consensus was written for a completely different time-period: some countries were transitioning from hyperinflation (in Latin America) or from socialist regimes (in East Europe). Much has changed since the early 1990s, and most emerging markets have achieved a modicum of macroeconomic stability. There is also an ideological bias that permeates emerging markets. Neoliberal policies represented by the Washington Consensus are not a part of their respective social contracts.
We need a compromise between competitiveness and efficiency, and poverty alleviation, social safety nets and income inequality. My initial proposal is based on measures to build better institutions while decreasing poverty and it is focused on microstructure measures, instead of macroeconomic grand policies. It also follows the axioms and corollaries in my last post. Finally, it builds on all the recent academic literature and takes a long-term view of institutional processes, acknowledging that changes will take a while to have an effect. In our new consensus, we need to:
- Take into account sustainability issues into any long-term planning.
- Radically improve opportunities for the disfranchised.
- Reduce many levels of bureaucracy, to improve the doing business environment.
- Enact a comprehensive tax reform, simplifying the tax system to establish an optimal level of progressiveness and tax income/GDP ratio.
- Reform national education systems, taking into account all the new evidence on how to improve education.
- Delineate adequate social safety nets, in which special interest groups are not favored.
- Improve regulation on different markets, especially the financial system, to increase access to finance and reduce its costs.
- Revise the pension system, because for some countries the demographic bonus is coming to an end.
- Strengthen the Rule of Law (including judicial system, fighting corruption, and increasing security).
- Break-up the hold of many special interest groups on their privileges, when unwarranted.
- Significantly increase infrastructure investments.
- Open up the economy to international competition through multilateral and bilateral trade deals.
Is there a catch? There is a big one, related to the political process. Specifically, we need to deal with the powerful institutional argument, in which the political process determines the institutions that influence economic and social development. Here I assume that a consensus will eventually be enacted by politicians that usually don’t have the proper incentives to achieve broad changes. We live in the era in which social pressure can change the political system from the bottom up.
Now it is time to expand on the details of each measure and get to action – onwards to long-term development.
 For those unfamiliar with the Washington Consensus, it postulated ten “commandments” for first stage reforms in emerging countries.
 Not you, Argentina and Venezuela.
 Why Nations Fail relates many examples of how political systems shape institutions and yield different economic and social outcomes.
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