That Was a Good Idea

A couple of months ago I talked with my advisor about writing a paper examining policy volatility and its implications for growth. Somebody beat me to it:

Summary: This paper compares the pattern of macroeconomic volatility in 17 Latin American countries during episodes of high and low growth since 1970, examining in particular the role of policy volatility. Macroeconomic outcomes are distinguished from macroeconomic policies, structural reforms and reversals, shocks, and institutional constraints. Based on previous work, a composite measure of structural reforms is constructed for the 1970-2004 period. We find that outcomes and policies are more volatile in low growth episodes, while shocks (except U.S. interest rates) are similar across episodes. Fiscal policy volatility is associated with lower growth, but fiscal policy procyclicality is not. Low levels of market-oriented reforms and structural reform reversals are also associated with lower growth.
My idea stemmed from the fact that Latin American politics seems to take large swings from one extreme to another. For example, a liberal party gets elected to power and institutes reform economic growth ensues. The next election cycle a leftist wins power by running on a campaign of a more equitable distribution of income gains. The neoliberal policy reforms are reversed and slower rgwoth follows. I['m not saying this is how it definitely works, but how the idea popped into my head.

The challenge is then to sustain reforms in the long run without a reversion to failed policies of the past. One way is to avoid elections all together and have the country run by an authoritarian leader as in Chile. Another which people have argued is that the size of the coalition matters. The bigger the victory the more likely reforms can be carried out and sustained. Think along the lines of the ruling party in Singapore.

Latin America provides an interesting case because there are apparently large swings politically and this was where my focus would have been as well. The challenge of liberals south of the border is then how too sustain reforms beyond the current term.


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This page contains a single entry by Bob published on January 7, 2007 6:14 PM.

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