Structural Reforms: New Recipes for Evolving Needs

Becoming a good cook is not easy. It takes burning more than one pan and, hopefully, learning from mistakes. As the needs and preferences of the diners evolve, the same old recipe may no longer work and the cookbook may have to be adapted. The availability of new ingredients, cooking techniques, and kitchen gadgets may also call for innovation in the kitchen, leading to the emergence of new recipes.

Implementing structural reforms in the economic realm is not all that different. It entails going through a similar process of learning from mistakes, revising old paradigms, and arriving at new solutions.

Structural reforms are policy actions that modify the institutional and regulatory framework in which businesses and households operate to promote growth and welfare (ECB, 2017). The original "cookbook" for Latin America and the Caribbean-commonly known as the Washington Consensus-dates back to the 1980s and was heavily influenced by the idea that economic efficiency could be achieved with limited government interference and a more active role for market forces. The "recipes" were reforms. They included reducing government interventions, decreasing restrictions on trade and financial transactions, removing state-imposed price controls, and abolishing state monopolies (Ostry et al., 2009).

Structural reforms in Latin America and the Caribbean took place through major waves of liberalization in a wide range of areas, including trade, domestic finance, telecommunications, electricity, and the labor market. Figure 1 shows that reformist efforts peaked in the 1980s and early 1990s. From the 2000s onwards, however, the push for liberalization has slowed, and reform episodes have become more sporadic.

Several factors explain this loss of appetite for market-oriented reforms. First, there was disenchantment with the reforms' results in terms of inequality. Ostry et al. (2021) find that financial and capital account liberalization and the liberalization of some current account transactions increase both growth and inequality. Success is also not easy to achieve. Reforms take time to prepare, adopt, and implement. They often require overcoming political and social resistance. And they involve the building of institutional capacity and the managing of external shocks. They may also come on the heels of earlier setbacks, which can discourage reformist zeal. Finally, after a major wave of liberalization reforms, there was probably less space in some countries to liberalize, reducing the scope for additional market-oriented reforms.

The interest in reform has not disappeared, however. Just as the term structural reforms has ceased to be a synonym for market liberalization, it has transitioned towards a new narrative with pro-growth reforms at its core. In our recent study entitled "From Discussion to Action: Characterizing Areas of Reform in Latin America and the Caribbean," we discuss how the new cookbook for growth includes recipes of a more varied nature to suit a wide range of changing palates. We explore the way significant liberalization reforms aimed at changing the countries' economic paradigms have been left behind. And we look at how they now include reforms permeated by an interest in social justice and inclusion with an array of more granular and sector-specific interventions.

Figure 1: Structural Market-Oriented

Source: Author's calculations based on Alesina et al (2023) index. Trade=trade reforms; Ext. Fin=external finance reforms; Dom. Fin=Domestic finance reforms. Pro Mkt=Product market reforms. Labor=labor reforms.

Our study employs a comprehensive textual analysis of the International Monetary Fund's policy discussions (Article IV Staff Reports) from 1978 to 2020 and characterizes reform ideas in the region. We find that the reform topics that were popular in the 1990s are still part of the dialogue. But they are now accompanied by a wide variety of sectoral reforms aiming at increasing transparency, promoting environmental sustainability, reducing crime, enhancing institutional quality, advancing education and healthcare systems, and strengthening safety nets, among others.

While the shift in reform topics is common in the region, the intensity of the discussion around specific topics varies significantly among countries. Identifying the forces underlying these differences goes beyond the scope of our study and is part of a broader research agenda for the future. However, a preliminary inspection indicates that when developing their reform cookbook countries select those recipes that best address their development needs. For example, countries with high crime levels might prioritize reforming the justice system. Those more exposed to frequent natural disasters might focus on reforms related to environmental sustainability. Reform recipes must also be feasible from a political economy perspective, having, for example, enough political support to ensure adoption and implementation. A reform, albeit necessary, may face pushback in countries with significant political polarization or without majorities in the legislature. This might also explain the shift from large macro reforms to smaller micro reforms as getting enough political support for the latter might be easier.

Development institutions should take note. They must follow what the different cooks of the region are doing in their kitchens, paying close attention to the wide range and changing nature of their reforms. For these institutions, a fundamental challenge lies in adapting to the new policies of individual countries, in seeking effective ways to support and accompany countries as they engage in the process of reform.

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