A Decade of Structural Reform in Latin America: Measurement and Growth Effects

The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. The Research Department (RES) publishes the Latin American Economic Policies Newsletter, as well as working papers and books, on diverse economic issues. To obtain a complete list of RES publications and read or download them please visit our web site at: Executive Summary Whether structural reforms have paid off–or not–is the question haunting politicians and the public all over Latin America. This study finds that, without the structural reforms of the last decade, per capita income in Latin America would be 12% lower and the average growth potential of GDP in the countries of the region would be only 1.9% per annum. If the reforms had not been implemented, the overall productivity of labor and capital would have continued falling as it did in the 1970s, and average investment rates would have stagnated below 17% of GDP. From this perspective, the answer is " better. " But the reforms pursued to date have not proved equal to the task of restoring the 5% growth rates that were common in the past, much less matching East Asia's usual levels of 7% and more. With its current policies, the region can look forward to an annual growth rate of only 3.8%. From this second perspective, today's situation is worse. To achieve higher rates, reform processes must be carried to completion and the educational level of the work force must be raised significantly. These conclusions come from a systematic analysis of the effects of the structural reforms adopted in 19 countries of the region between 1985 and 1995. Assessments of this sort have been impossible until now, owing to the lack of direct indicators for the main structural policy variables. This study presents a quantitative index that reflects the status of trade, financial, tax, privatization, and labor policies. The deepest reforms have occurred in the realm of trade and finance policies. Average tariffs throughout the region have fallen from 44.6% in the pre-reform years to 13.1% currently, interest rates and targeted credit systems have been dismantled and reserve requirement ratios have been reduced to under 20% in most countries. In the tax area, the reforms have been less widespread. Value-added taxes have replaced other, more distortionary taxes and marginal income tax rates have …