The 1980s and 1990s saw a market-led policy revolution in developing countries. This was the heyday of the “Washington Consensus”. But the climate for policy reform has worsened over the past decade. Strong economic growth in the last five years has bred reform complacency; and there is scepticism about the Washington Consensus. Reform fatigue has set in.
The sceptics are wrong. Especially in Asia, as countries that have liberalized and globalized strongly have grown faster and seen bigger increases in living standards for the broad majority than countries that have liberalized less or remained closed. Liberalization is far from complete: there remains much unfinished business in terms of taking down anti-competitive barriers. Tariffs in developing countries, averaging around 11%, are more than double of what they are in developed countries. Non-tariff trade barriers, and restrictions on foreign direct investment (FDI) and competition in services remain relatively high. Not least, domestic regulatory barriers that cramp domestic as well as foreign business are very high.
Such unfinished business leaves a very substantial reform agenda. But how to reform in conditions different from those of the 1980s and 1990s? What are the lessons of the past to guide future reforms?
First, comprehensive reforms have taken place mostly in response to a political or economic crisis. As Samuel Johnson said, “When a man knows he will be hanged in a fortnight, it concentrates the mind wonderfully.” Examples include Latin American countries in the late 1980s and early 1990s, eastern Europe and the ex-Soviet Union in the early 1990s, and India in 1991.
A crisis, however, does not guarantee sustainable market reforms. Complacency and fatigue tend to set in post-crisis. The problem is to roll out further reforms without a crisis to concentrate minds—as the Indian experience shows.
Second, organized minority interests always block reforms to protect their rents. Radical reforms, if they are sustained, usher in deep-seated changes to the economy, not least by expanding internationally tradable activities. Traditional protectionist interests are weakened. Countervailing interests—exporters, users of imported inputs, multinationals with global production networks, and cities and regions seeking to be magnets for trade and FDI—emerge. They have strong stakes in open trade. This reflects the Indian experience post-1991. The challenge is to harness these interests effectively to launch new reforms.