Anne O. Krueger
Anne O. Krueger


Argentina and the IMF

Mexico and the IMF

Turkey and the IMF

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

Anne O. Krueger
Acting Managing Director
International Monetary Fund
Roundtable Lecture
Economic Honors Society, New York University
New York, March 23, 2004


I'm delighted to be here tonight. You have some distinguished speakers lined up, so I'm honored to be included in this program of roundtable talks. I congratulate you on your initiative, both in forming the society and in the energetic program you have put together.

As you know, the IMF operates in a rapidly changing world—constantly adapting to new challenges in the world economy. I'll be saying something more about that later. But as you also know, for us at the Fund, change is currently very close to home. I accepted this invitation in somewhat different circumstances, so I'm pleased that I was able to make it here.

I was anxious to come not least because I want to discuss issues of great importance both for the Fund's work and for the emerging market and low income countries with whom we do much of our work. The timing is important, too—partly because the challenges I want to outline need urgent action, and partly because there may never be a better opportunity to take up those challenges and confront them successfully.

I'm sure many of you are curious about the quotation in the title of my talk: or perhaps you have all been busy tracking it down! For those of you who haven't tried, or haven't succeeded, let me enlighten you. It is from one of Robert Louis Stevenson's more obscure works, "Across the plains." Let me read the full 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.

Perhaps unfortunately for economic policymakers, Robert Louis Stevenson is no longer around to defend them. Failed reforms tend to be judged more harshly—by economists, of course, but above all by those who suffer as a result—the poor, the jobless and the hungry.

In a country like the United States, of course, policy failure might knock one or two per cent off GDP growth, or even lead to a temporary contraction of the economy. For some people that will mean the loss of a job, default on a mortgage and repossession of their home, or perhaps no access to health insurance. For those directly affected, the pain is acute of course: for the person who loses his job, the unemployment rate is 100%. But in macro terms, the impact is marginal—we're talking about a relatively small number of people. Bear in mind, too, that the U.S., in common with other industrial economies, has a social safety net which makes temporary hardship easier to bear.

In emerging market economies, by contrast, policy failures can be catastrophic. Argentina is the most obvious recent example: in one of Latin America's richest economies, tens of millions of people have been affected, the poverty rate has soared, the economy contracted by more than 20%. More than 50% of the population now lives below the poverty line, in a country with a much less well-developed social safety net.

But there are many other examples besides Argentina—the sharp contractions suffered by some countries after the Asian crises of 1997-98 spring to mind.

So I want to look this evening at why the record on economic policy reform has been so mixed in emerging market economies, and what can be done to improve performance in the future. And—of course—I want to do so in the context of the IMF's work: what is it that we can and should do to help foster sound economies policies and prevent financial crises.

High hopes

They say politics always ends in tears. So, in all too many cases, does economic reform. The idea of fresh start is always an appealing one for policymakers. Postwar history is littered with examples of governments seeking to put the past behind them, of policymakers determined to prove that they have found the holy grail. Alas, this is hardly ever true—well, let's be clear—it is never true.

One big hindrance is that benefiting from experience of others not a natural human trait. We all like to make our own mistakes. In the economic sphere, fresh starts have, all too often, come to sudden stops. Sometimes that is because of external shocks. But reform efforts have on many occasions petered out for internal reasons. These include a lack of enthusiasm or underlying commitment; too great an emphasis on the short term; and with worrying frequency, the explanation that "reform fatigue" has set in.

Another important factor, though, is one that often gets overlooked: the issue of uncertainty that affects all economic policymaking to one degree or another. This can critically complicate what are already difficult decisions, and can reinforce the natural inclination of policymakers to do the minimum they judge necessary in terms of reforms. I want to come back to this point, since I believe the tension between what economists want to do, and what political leaders are prepared to try, can have a crucial impact on the outcome.

"Meant well"

But first, let's go back to the three stages implied in the title of my talk. There can be no doubt about the good intentions of many economic policymakers. Even the most cynical analysis would recognize that no one wants to be responsible for economic decline. In the past 20 years, most emerging market governments have embraced some reforms aimed at developing more market-oriented policies. Most have given the impression that they were, and are, wholeheartedly committed to genuine reform.

But appearances can be deceptive. In some cases, tough commitments were made without a full understanding of what was involved. In other cases, the commitment was only skin-deep: rhetoric seen as alternative to real reform, or at least as a way of buying time. Public opposition to policies that have painful implications for some sections of the population can also weaken political resolve.

"Tried little, failed much"

The gap between rhetoric and reality starts to become clearer if we look more closely at what those would-be reformers actually did. Francisco Gil Diaz, the Mexican Minister of Finance, put it bluntly in an analysis last year: "The policies that have been undertaken are not even a pale imitation of what market economics ought to be, if we understand market economics as the necessary institutional framework for a sound economy to operate and flourish. What has been implemented throughout our continent is a grotesque caricature of market economics."

Countries like Mexico and Chile have been exceptional in their efforts to promote sustainable macroeconomic reform. But in most parts of Latin America—and elsewhere in the world—there have been two main problems. One was insufficiently ambitious reform—especially with regard to labor markets. Not aiming high enough at the outset is almost certain to mean that the outcome will be seriously disappointing.

The second problem was lack of follow-through for those reforms that were adopted. It is hardly surprising that policymakers prefer to avoid politically difficult decisions—and prefer to do the minimum necessary by way of unpopular reform. But this inevitably damages the prospects for success.

Argentina in the 1990s

Let's look more closely at a couple of examples. I am sure I would disappoint you if I didn't mention Argentina. Now is not the time to rehearse the aftermath of the crisis in 2001. More relevant for our purposes is what happened before the crisis erupted. In my view, Argentina's experience in the 1990s neatly encapsulates what we're discussing here: a reluctance to follow-through, to confront the structural changes that would have been an essential element of successful sustainable macroeconomic reform.

In the 1980s, the Argentine economy had contracted by about half a per cent a year, while inflation had soared. At its peak in the late 1980s, Argentine inflation exceeded 3,000 per cent—compared with a peak in Latin America as a whole of just under 500%.

The 1991 Convertibility Plan was seen as new dawn: the aim was to deliver high growth and low inflation, based on disciplined macroeconomic policies and market-oriented structural reform. Argentina wanted to escape from past inflationary failures: and it showed every sign, initially, of a readiness to take the difficult steps needed to deliver macroeconomic stability.

Central to the plan was its guarantee of peso convertibility with the dollar at parity. Having a fixed exchange rate system was seen as crucial for building up the anti-inflationary credibility that the government needed. A quasi-currency board was established in order to underpin the system and so reinforce the government's commitment. As you know, a currency board requires the central bank to back the monetary base with foreign exchange reserves—in other words, it prevents the government, or the central bank, from printing money to finance public deficits. Almost at a stroke this eliminated one of the principal sources of government-induced inflation.

And the early results were promising.

In the first two years of the plan, Argentina experienced real annual GDP growth of over 10%, and more than 5% in 1993-94. Inflation was down to single digits by 1993. There was a huge surge in capital inflows. The loss of confidence in emerging markets that followed Mexico's so-called Tequila crisis of 1995 seemed to do little more than interrupt performance improvements temporarily. Argentine growth rebounded in 1996-97.

But this apparently impressive performance masked structural weaknesses that weren't confronted:

Fiscal control was undermined by off-budget expenditures; and it was too weak to prevent growing reliance on private capital flows to finance government borrowing. The estimated structural fiscal position went from rough balance in 1992-93 to a deficit of about 2.75% of GDP in 1998. But there was persistent off-budget spending, mainly as a result of court-ordered compensation payments after the social security reforms of the 1990s, and arrears to suppliers. This raised the government's average new borrowing requirements to more than 3% of GDP a year over this period. In 1996, for example, when off-budget spending is included, the total deficit was 4% of GDP.

These figures show how vulnerable the public finances were to slow growth: because no fiscal cushion had been created when growth performance was strong.

The problem was made worse by overoptimistic assessments of the economy's growth potential. There were more temporary factors at play than were realized at the time. This, of course, meant that the authorities had less room for maneuver on the fiscal front than they believed.

The decentralized system of government in Argentina made fiscal control particularly difficult. The provinces, for example, had little incentive to improve revenue performance or constrain expenditure growth: and this important weakness in the fiscal structure was not tackled.

Exports grew, but nowhere near as fast as imports. By the late 1990s, there was an uncomfortably high debt to export ratio: it was 455% in 1998, and jumped, unexpectedly, to 530% in 1999.

In spite of some financial deepening during 1990s, Argentina's financial system was relatively under-developed compared with many other countries. In spite of significant strengthening of the banking system, Argentine banks remained exposed to risks that eventually materialized: their low profitability and the dollarization of many financial assets ensured that there was a serious credit risk in the event of a devaluation. Yet before the crisis broke, Argentine banks had been regarded by most economists as the soundest in Latin America.

Added to all this was the fact that the pace of structural reforms lost momentum in the mid-90s; indeed, some reforms were reversed. Perhaps the biggest weakness here was the labor market which has tended to be heavily regulated in Argentina. Individual workers have long enjoyed considerable protection, with high barriers to dismissal and the guarantee of generous fringe benefits.

Some reforms were introduced in the 1990s. In 1991, for example, there was some modest improvement in flexibility. In 1995 came equally modest steps that made it easier to hire temporary workers and introduced more flexible working hours. But these improvements did not go far, and reform in this area quickly lost momentum. To make matters worse, Congress diluted a further government attempt to increase labor market flexibility—so much so, in fact, that the final outcome promoted further centralization of collective bargaining. The result of all these lukewarm changes was predictable: unemployment rose, to 12% in 1994; and productivity growth fell to zero in second half of 1990s.

Last but not least, of course, was the fixed exchange rate regime. It became increasingly clear during the 1990s that successful operation of the quasi-currency board required much better fiscal control than the government was able to deliver. Since the collapse, of course, there has been much debate about whether the pegged exchange rate regime was ever appropriate as a long-term policy instrument.

The arguments over the exchange rate regime have ensured a plethora of different explanations of the eventual crisis. But it is clear that the impact of the crisis would at least have been mitigated if the original reform program had been more ambitious—specifically if it had included serious reform of the labor market and if it had tackled the problem of fiscal relations between central and provincial governments; and if this more ambitious program had been fulfilled. Effective implementation of fiscal, labor market and structural reforms could have ensured that the economy was robust and flexible enough to cope with the shock of a devaluation without the complete economic collapse that we saw.

Turkey in the 1980s

Argentina might be at the forefront of many minds at present: but it is by no means the only example of what we might call the failure to follow-through. And this is not a problem confined to Latin America. Turkey in the 1980s is another example of hopes that were subsequently disappointed.

For Turkey, the big date was January 26, 1980. This marked the start of serious economic reform efforts after years of false starts. IMF standby arrangements in 1978 and 1979 had been failures. In 1955 Turkey's per capita income had been estimated to be roughly double that of Korea; by 1980, Turkey had fallen significantly behind Korea. Inflation reached 100% in 1980. Power shortages were common in Istanbul and elsewhere.

A big shake-up in both policymaking and policy was intended to signal a completely fresh approach—remember what I said earlier about politicians' fondness for clearing the decks and starting afresh. The reforms had two main aims: economic stabilization, including a reduction in the rate of inflation; and a deliberate shift away from import substitution and towards an export- and market-oriented economy.

The lira was devalued, and a more flexible exchange rate regime was established. Price controls on State Economic Enterprises were relaxed. Structural reforms were introduced in the financial sector. The trade regime was liberalized. And there were efforts to improve revenue collection and reduce the fiscal deficit.

It is important to remember that in many respects these reforms enjoyed considerable success. Inflation came down to around 30% by 1983. Exports rose from about 5% of GDP in the late 1970s to 20% of GDP by 1987. The economy had been contracting in the late 1970s. GDP growth was slow in the early 1980s, but from 1984 onwards, the economy started to grow at around 5% a year. At first, the government succeeded in reducing the fiscal deficit. In some respects, the reforms introduced succeeded in shifting Turkey permanently towards a more export-oriented economy.

Nor did the reforms peter out quickly. They had continued after the military had seized power in September 1980 and only lost momentum briefly ahead of democratic elections in 1983. New structural measures were introduced in what is regarded as the second phase of reform, from 1983 onwards.

The real disappointment in Turkey's case is that, ultimately, the government failed to follow-through on its attempt permanently to bring inflation under control. Once inflation started to pick up significantly in 1987, the real exchange rate was allowed to appreciate. But this made exports less competitive and ducked the real cause of the resurgence in inflation—our old friend lax fiscal control. Efforts to reduce the fiscal deficit were only partially successful and short-lived. In 1981, it had been brought down to 1.7% of GDP; by 1984 it had risen to 5.3% and even by 1988 it stood at 3.4% of GDP. Inflation meanwhile, had started to climb once more—up to 70% by 1989.

Sound fiscal policies are, of course, difficult enough for politicians to maintain, let alone work towards from a position of weakness. They involve unpopular decisions which governments would prefer not to have to take. But the consequences of postponement are, in reality, equally painful, as Turkey's experience over the past decade or more has shown. By 1989 it was clear that the appreciation of the exchange rate, and accelerating inflation (fuelled by government spending ahead of elections, as well as rising government borrowing) were storing up trouble for Turkish economy. The fact that a different Turkish government was once again struggling to deal with these problems at the turn of the century underlines the extent of the shortcomings of the 1980s reform program.

Lessons to be learned

What can we learn from these examples, and the many others that come to mind? If we look at shortcomings in the economic policies of industrial countries we can see how difficult it can be to pursue the tough and controversial reforms that are really necessary. The persistent failure to tackle chronic problems in Japan's banking and corporate sectors; continuing weak demand in many European economies, the growing fiscal deficit here in the United States: these have all highlighted the reluctance of policymakers everywhere to tackle awkward structural problems.

Structural reforms are needed in many parts of the industrial world. There is always room for improvement, everywhere. But comparing industrial and emerging market countries misses the key point. Rich countries have more room for maneuver. Emerging market economies have far more pressing needs—reform for them is vital and urgent if they are to raise their growth rates and reduce poverty.

It is important to understand the full scope of the reforms that are needed in many cases. The IMF has had a lot to learn about this. In the past decade or so, we have come to realize that economic stability has to encompass a much wider range of factors than had previously recognized. There has to be fiscal and debt sustainability, of course. But sound governance—at the national and corporate level; effective and respected institutions; a well-established legal system; recognition of, and protection for, property rights; a well-functioning financial sector: these are all vital ingredients for lasting economic success.

Some areas of policy that economists have traditionally thought of as micro are, in fact, crucial for successful macroeconomic reform—given the number of references I've made to them already, you will not be surprised to learn that I include labor markets in this list. To reduce poverty, faster growth in poor countries has to bring employment growth: but rigid markets often prevent that.

Implementation is also vital—simply talking about reforms will not deliver them. This is primarily the responsibility of governments themselves: but the Fund and the international financial community have a part to play. How we can most effectively play that part is not always clear.

There is, for example, much talk, these days, about the need for whistle-blowing—for the IMF to issue public warnings when governments are failing to deliver on their reform commitments, especially when these are linked to a program involving financial support from the IMF. There are times when some bluff-calling is in order.

But we in the Fund need to guard against making public criticism or warnings that are principally motivated by a desire to cover our own back, in case things go wrong. Private pressure can in many cases be far more effective in persuading a reluctant government to follow through on its promises. After all, the Fund and its 184 member countries set much store by the fact that we are an institution that operates by consensus and co-operation. The Fund seeks to support countries undertaking economic programs that they themselves have endorsed. That is true whether or not the Fund's financial resources are involved. Economic reform programs cannot have much chance of success if the country involved—and by that I mean both the government and what we might call broader civil society—has not endorsed those reforms, or is not convinced of their desirability.

I mentioned the problem of reform fatigue. I think this a characteristic that many economic policymakers tend to share, regardless of whether they are in industrial, emerging market or low income economies. It is unfortunate because it display an attitude of mind based on a false premise—that reform is a discrete process. In reality, reform has to be ongoing—economies are in a state of constant flux, and policies need similarly to adapt to continuing change in the world around us.


This brings me back to the point I mentioned earlier—the uncertainty inherent in the reform process. It is easy to spot mistakes with hindsight. It is sometimes possible to see at the time that policymakers are storing up trouble for themselves. But in many cases the degree of uncertainty involved is such that the outcome of any one policy option is uncertain. This uncertainty sometimes leads us to deliver harsher judgments on policy failures than might be altogether fair.

The problem is that economic policymaking always involves trying to measure the probability of one outcome as opposed to another, given the uncertainties in the world economy. From the economist's perspective, the best way to proceed is to adopt those policies that seem most likely to deliver the preferred outcome. So, for example, the policy prescription for Country A might include a sharp devaluation, and a large budget surplus.

The politician, understandably, has a different perspective. He shares the same long-term objective: sustained, rapid economic growth. But he wants to take the least painful policy measures consistent with achieving that objective. Will the reform program fail if the devaluation is smaller, and something is shaved off the target for the fiscal surplus? In all honesty, the economist cannot say no, the program will no longer deliver: only that the chances of success have been reduced, and the risks of being blown off-course by unforeseen events have increased.

Why increase the risks of failure, the economist might reasonably ask. After all, much is at stake. The politician can, equally reasonably, point out that a more modest reform program might be better than none at all: too radical a program could, in an extreme case, lead to the sort of popular unrest that undermines the prospect of even modest reform.

How to improve the record?

Such arguments are not easily resolved, since both positions involve judgments about probability as well as different, but often equally valid, perspectives. One way of narrowing the differences, is to look back at what has worked elsewhere—and what hasn't.

Another is to seize the opportunity for reform when the tension between the two perspectives is narrowed. There are times when economic crisis can offer the best hope of pressing ahead with difficult reforms. But this is sometimes used as an excuse to postpone reform when the timing is most auspicious.

In most cases, reforms are best undertaken when the outlook is benign. Economic growth provides the best environment to press ahead with fiscal and structural reforms. A buoyant economy can cushion the pain for those groups likely to be most affected by economic adjustment.

Now is just such a moment. The American economy continues to grow at a robust rate, in spite of concerns about jobs growth. Japan is once again experiencing growth, and emerging market Asia is the fastest-growing region. Many parts of the world are enjoying more buoyant conditions than for some time.

This is precisely when reforms have the best chance of success. Governments must overcome the temptation to sit back when the economic outlook brightens. Instead they should see—and seize—the opportunity to confront difficult issues, and try to overcome what is often entrenched opposition to structural reform.


I said at the outset that we humans aren't best known for our ability to learn from the experience of others. That does not mean we shouldn't try. When we seek to improve the track record of economic policy reform, it is essential to understand what worked in the past, what didn't—and why.

Some lessons are obvious, as I have indicated. And the international community—including the IMF—has learned much from experience. The fact that, in spite of the global economic turbulence of recent years, there have been so few financial crises is, I believe, an illustration of that. Governments, along with the international financial institutions, have got better at crisis prevention.

Reducing the risk and incidence of crises, though, is only part of the battle. Too many countries around the world are performing below potential. The ability to deliver faster growth, raise living standards and reduce poverty depends on sound economic policies. In too many places such policies are still proving elusive. In too many places, sound, sustainable policies are seen as an alternative to growth and poverty reduction. Yet experience has shown over and over again that the opposite is true: sound policies offer the best hope of rapid growth.

Economic policymaking is, by its nature, uncertain. There can be no absolute guarantees, in the sense that policy X will produce a growth rate of Y%.

But we do know what works, and what doesn't. We also know that reform is more easily embraced in good times rather than bad. That is when the tension I spoke of, between economists and politicians, is at its lowest point. And that is why we at the Fund are convinced that policymakers need to make the most of the currently benign outlook. The Fund is there to help, and to provide support in whatever way we can. But ultimately, it is national policymakers who have to seize this propitious moment.

Thank you very much.


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