"Meant Well, Tried Little, Failed Much: Policy Reforms in Emerging Market Economies"

IMF News, March 23, 2004

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Bibliographic details

• Authors: Anne O. Krueger
• Published: March 23, 2004

Introduction and context

• Occasion: Roundtable Lecture at the Economic Honors Society, New York University, New York, March 23, 2004.
• Speaker: Anne O. Krueger, Acting Managing Director, International Monetary Fund.
• Central concern: why the record on economic policy reform has been mixed in emerging market economies and what can be done to improve performance; role of the IMF in fostering sound economic policies and preventing financial crises.
• Framing quotation: "Here lies one who meant well, tried a little, failed much: surely that may be his epitaph, of which he need not be ashamed." (Robert Louis Stevenson, "Across the plains".)

High-level diagnosis of reform outcomes

• Good intentions often not matched by substantive reforms: "Meant well" but commitments were sometimes "skin-deep" or made without full understanding of requirements.
• Common policy failure patterns: insufficiently ambitious reforms and lack of follow-through.
• Political economy factors undermining reforms:
  • Lack of underlying commitment; emphasis on short term; "reform fatigue".
  • Public opposition to painful policies weakens political resolve.
  • Uncertainty inherent in policymaking encourages minimal, risk-averse action by politicians.

Argentina (1990s): illustrative case of initial success then collapse

• 1980s background: Argentine economy contracted by about half a per cent a year; inflation peak in late 1980s exceeded 3,000 per cent (Latin America peak: just under 500%).
• 1991 Convertibility Plan:
  • Central element: peso convertibility with the dollar at parity; quasi-currency board backing monetary base with foreign exchange reserves.
  • Early outcomes: real annual GDP growth of over 10% in the first two years; more than 5% in 1993-94; inflation down to single digits by 1993; huge surge in capital inflows; growth rebound in 1996-97 after 1995 interruptions.
• Structural weaknesses that were not confronted:
  • Fiscal deterioration: estimated structural fiscal position from rough balance in 1992-93 to a deficit of about 2.75% of GDP in 1998.
  • Off-budget spending and arrears: raised average new borrowing requirements to more than 3% of GDP a year; in 1996, including off-budget spending, total deficit was 4% of GDP.
  • Overoptimistic growth potential assessments; limited fiscal cushion.
  • Decentralized fiscal structure: provincial incentives weak, fiscal relations between central and provincial governments untreated.
  • External vulnerability: debt to export ratio 455% in 1998; jumped to 530% in 1999.
  • Financial sector risks: under-developed system relative to peers; low bank profitability and dollarization of assets increased credit risk in event of devaluation.
  • Labor market rigidity and weak reforms: modest 1991 and 1995 measures insufficient; congressional dilution of further reforms leading to more centralized collective bargaining; unemployment rose to 12% in 1994; productivity growth fell to zero in second half of 1990s.
  • Fixed exchange rate regime: required stronger fiscal control than delivered; debate on long-term appropriateness of the peg.
• Krueger's assessment: a more ambitious and fully implemented program—serious labor market reform, resolution of fiscal federal relations, and sustained fiscal discipline—could have mitigated the crisis and avoided the extreme collapse (economy contracted by more than 20%; more than 50% of population now lives below the poverty line).

Turkey (1980s): partial reform gains but incomplete follow-through

• Turning point: January 26, 1980 initiated serious economic reform after failures of 1978–79 IMF standby arrangements.
• Pre-reform facts: in 1955 Turkey's per capita income roughly double Korea's; by 1980 Turkey had fallen behind; inflation reached 100% in 1980; power shortages common.
• Reform measures: lira devaluation; more flexible exchange rate; relaxed price controls on State Economic Enterprises; financial sector structural reforms; trade liberalization; improved revenue collection and fiscal deficit reduction efforts.
• Early successes:
  • Inflation reduced to around 30% by 1983.
  • Exports rose from about 5% of GDP in late 1970s to 20% of GDP by 1987.
  • GDP growth around 5% a year from 1984 onwards.
  • Fiscal deficit initially reduced.
• Failure to sustain outcomes:
  • Inflation resurged when fiscal control loosened; real exchange rate appreciation reduced export competitiveness.
  • Fiscal deficit: 1.7% of GDP in 1981; rose to 5.3% of GDP in 1984; was 3.4% of GDP in 1988.
  • Inflation up to 70% by 1989.
  • Conclusion: failure to maintain sustained fiscal discipline and to address fiscal slippages stored up later troubles and required renewed corrective efforts around the turn of the century.

Broader lessons on what works and what doesn't

• Rich vs. emerging markets: industrial countries have more room for maneuver; emerging markets face urgent reform needs to raise growth and reduce poverty.
• Expanded notion of stability: beyond fiscal and debt sustainability to include:
  • Sound governance at national and corporate levels.
  • Effective and respected institutions and legal systems.
  • Recognition and protection of property rights.
  • Well-functioning financial sector.
• Microeconomic reforms are crucial for macro success: labor market flexibility is central to ensuring growth translates into employment and poverty reduction.
• Implementation matters: rhetoric alone is insufficient; responsibility rests primarily with national governments, though the IMF and international community have roles.
• Role of the IMF:
  • Balance between public warnings and effective private persuasion; avoid actions motivated chiefly by institutional self-protection.
  • Emphasis on consensus and co-operation: supports programs countries themselves endorse.
  • The IMF and international community have learned from experience; fewer financial crises despite global turbulence seen as indicative of improved crisis prevention.

Uncertainty, timing, and strategy for improving reform outcomes

• Uncertainty in policymaking affects both economists' prescriptions and politicians' choices; economists favor policies most likely to deliver preferred outcomes; politicians prefer least painful measures consistent with objectives.
• Trade-offs: modest reforms may be preferable politically but raise risks; too-rapid reforms could provoke unrest undermining reform prospects.
• Optimal timing:
  • Reforms are best undertaken when the outlook is benign; growth provides cushion for fiscal and structural reforms.
  • Current (as of speech) favorable conditions cited: American economy growing robustly; Japan experiencing growth; emerging market Asia fastest-growing region—this is a propitious moment to press reforms.
• Reform as continuous process: reform fatigue arises from seeing reform as discrete; economies constantly change and policies must adapt continuously.

Policy recommendations and practical implications

• Aim for sufficiently ambitious reform packages from the outset, especially on labor markets and fiscal federal relations.
• Ensure strong follow-through and implementation to avoid partial measures that sow future instability.
• Build fiscal cushions during good times to withstand shocks; avoid overreliance on private capital inflows for financing public borrowing.
• Strengthen fiscal governance across levels of government (central and provincial).
• Address structural weaknesses in financial sectors to reduce vulnerability to currency and credit shocks.
• Use favorable economic windows to advance politically difficult reforms; resist the temptation to postpone when conditions improve.
• International institutions should:
  • Use private persuasion where effective; judiciously deploy public warnings when warranted.
  • Support member countries in crafting and implementing reforms they themselves endorse.
  • Recognize and promote the broader institutional, legal, and governance reforms that underpin macroeconomic stability and growth.

Conclusion

• Many countries perform below potential; sound, sustainable policies are essential for faster growth, higher living standards, and poverty reduction.
• Policymaking is inherently uncertain; no absolute guarantees, but experience indicates what works and what does not.
• Current benign outlook should be seized to implement reforms; the IMF stands ready to assist, but national policymakers must take the lead.

Remarks by Anne O. Krueger, "Meant Well, Tried Little, Failed Much: Policy Reforms in Emerging Market Economies", Roundtable Lecture, Economic Honors Society, New York University, New York, March 23, 2004.

References

• Argentina and the IMF
• Mexico and the IMF
• Republic of Türkiye and the IMF
• United States and the IMF
• Speeches
• PRESS CENTER
• https://www.imf.org/en/home