The political economy of policy reform

The political economy of policy reform

Book Review/European Journal of Political Economy 11 (1995) 391-397 395 John Williamson (Ed.), The political economy of policy reform. Institute for...

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Book Review/European Journal of Political Economy 11 (1995) 391-397

395

John Williamson (Ed.), The political economy of policy reform. Institute for International Economics, Washington D.C. January 1994, 601 pp., ISBN 0 88132-195-8

Meanwhile far-reaching consensus exists under most economists as to the necessary elements of successful reforms in developing countries or for converting a former centrally planned economy into a potentially successful market economy. While most analyses focus on neoclassical aspects of policy reform, political economy considerations have often played a less important role. The conference volume addresses this gap and concentrates on the politics of reform processes. Some interesting insights are offered. The book consists of 12 chapters. After the introduction, a set of political economy questions is developed in a background paper by the editor (Chapter 2). This paper was intended to serve as a reference framework for the authors of the country studies in Chapter 3 to 7. The case studies, selected on a non-random basis, include 10 cases, where substantial reform efforts in liberalizing and stabilizing the economies appear mostly consolidated: Australia and New Zealand (Chapter 3); Spain, Portugal, Poland, and Turkey (Chapter 4), Chile, Mexico, and Columbia (Chapter 5) and Indonesia (Chapter 7). In two more cases considered Brazil and Peru - reform efforts had failed to take root (Chapter 6). Chapter 8 assesses the relevance of political economy aspects for economies in transition. After the panel discussion in Chapter 9, Chapter 10 and 11 are the after-lunch and after-dinner speeches of Enrique Iglesias and Jeffrey Sachs, respectively. Those readers interested in getting a brief, quick and fairly good overview of the content of this book should, however, start reading Chapter 12. In the synthesis paper a very useful unified summary Table (Table 1, p. 563) is presented, although the structure of the country studies, their depth, as well as the degree to which they follow the original guideline vary considerably. The findings focus around four main areas which might determine the success of reforms: the importance of the nature of the program itself, specific economic and political conditions as well as the position of the team. In the following, the main lessons of the various country studies will first be sketched. In a second step we will raise some critical points. Nearly all country studies of the reform programs reveal that reforms should generally be comprehensive in order to be successful. The only two exceptions are Indonesia and Turkey. While the former has still not fully liberalized trade, the latter never fixed the fiscal deficit. In contrast, the Brazilian and Peruvian reform efforts, which were both unsuccessful, were not based on a comprehensive program. This evidence may be further substantiated by a number of economic reforms and structural adjustment programs in developing countries that are not explicitly analyzed in the conference volume. Half-hearted reform efforts in many African countries such as Kenya (1980-84), Zambia (1985-87), C6te d'Ivoire (1981-83) or in Latin American countries including Argentina (1984-86) and

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Book Review/European Journal of Political Economy I1 (1995) 391-397

Ecuador (1985-89) provide further evidence for the hypothesis that reforms are more likely to fail if they are not broad based. The analysis of the economic conditions focuses on two issues: whether a pre-reform crisis is a necessary condition for successful reforms and whether strong external help is important. Although a crisis has often played an important role in stimulating reform, in a number of countries successful reforms were initiated in a more stable economic environment, as e.g. in Australia, Columbia, and Portugal. Foreign aid in the form of intellectual influence has been proven very helpful, while the evidence of financial aid hints at the importance of adequate conditionality. Under the heading "political conditions" a variety of issues and hypotheses are addressed including the appropriate type of government - authoritarian versus democratic, right-wing versus center-leftwing -, the honeymoon hypothesis, as well as the importance of a weak opposition, a large social consensus, and a visionary leader. Often very strong generalizations can not be obtained. Despite the problems with categorization of governments, the sample of success stories nearly involves all type of governments. The honeymoon hypothesis states that reforms should be initiated immediately after a new government has taken office. High adjustment costs in the beginning of the reform program may then still be attributed to policy failures of the outgoing government. A number of cases support this view. The Polish shock approach in the beginning of 1990 is among the most outstanding cases in point, the 1984 reforms in New Zealand provides another example. However, in a number of cases new governments did not start successful reforms immediately after taking office. The Hawke government in Australia, Felipe Gonzales in Spain as well as the Barco administration in Columbia only launched themselves into economic reforms in a later stage. Furthermore, a fragmented and demoralized opposition as well a solid base of legislative support may facilitate the implementation of reforms but they are not a necessary prerequisite. Except in New Zealand, in all successful cases a visionary leader contributed to the initiation and consolidation of economic reform. The position of the economic team concerns the importance of a coherent economic team as well as the role of "technopols" in government. Technopols are described as economists that have taken the risks of a high political function, with the responsibility it entails. This definition and hypothesis reflects the increasing number of finance ministers and economic ministers in developing countries that previously obtained an advanced degree in economics. The necessity of a coherent team is stressed by all case studies. However, a coherent team is not a sufficient condition for successful reforms as the analyses of the Brazilian and Peruvian reform reveal. Whether the coherent team should be led by a technopol remains ambiguous. One problem of the overall analysis is, as the editor notes himself, that the number of countries is still relatively small. The selection of countries mainly focuses on those that have already made some successful adjustment. Much or

Book Review/European Journal of Political Economy I1 (1995) 391-397

397

even more can also be learned from policy failures as the analysis of the Brazilian and Peruvian case demonstrate. To further substantiate the analysis the set of countries would have to be enlarged and concomitantly a deeper categorization of countries would be necessary. When talking about the politics of reform, ethnic, regional and intraregional differences might play an important role. The analysis of the implications for post-socialist economies is very brief and partly superficial (Chapter 8). In most advanced economies in transition the initial success in reducing or precautioning hyperinflation was accompanied by a collapse of output and a sharp decline of employment. These stylized facts contrast with most experiences in developing countries. It would have been interesting to further analyze the political economy consequences of these relatively unfavourable initial developments in economies in transition. In addition, credibility aspects are closely linked to political economy considerations. It depends to a large extent on the credibility of the reform whether private agents react in the intended way. An explicit integration of credibility aspects in the set of hypotheses would have been desirable. To sum up, often very strong generalizations as to the necessary political conditions for successful reforms can not be obtained. Nonetheless, the book identifies a number of political economy aspects that under many circumstances may support and may facilitate reforms. A larger set of countries has to be analyzed before we may hope to identify situation-specific implications. Norbert Funke Kiel Institute of World Economics Kiel Germany