ECON-2220 Lecture Notes - Lecture 3: Debt Crisis, Washington Consensus, Consumption Tax
15 May 2018
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The New Role of the State After ISI
● ISI: state had active, strong role in the economy
○ Debt crisis
■ Government spending previous and during debt crisis is a source of
instability
■ Lost decade 1980-1990s: economic recession and inflation cried out:
“The government is NOT efficient administrator”
● After SI
○ New strategy of development needed to define a new role for the state (this was
the Washington consensus)
○ After ISI: LAC moved to market based, export-led growth model
● Core activities of the new state
○ To establish foundation of the law, encouraging democratic institutions, enforcing
the rule of law
○ Macroeconomic stability (program used in Bolivia)
■ Modernize and downsize public sector
■ Privatization of SOEs
■ One of the main components to restore and resolve the debt crisis
○ Protection and security of citizens
○ Protect vulnerable: invest in human capital and provide basic social services
○ Protect the environment
● New paradigm of public sector
○ The state should interfere only when there were market inefficiencies and market
failures, to strengthen the role of non-state actors
○ Requirements
■ New state should modernize: raising the productivity of public
management
■ Fiscal activity transparent: deterring corruption
● How to finance the state’s new role
○ During ISI, sources of income were taxing imports and exports (import tariffs)
○ During market and export led, main sources of revenue were taxing internal
consumption and privatization of SOEs (selling them)
■ Privatization brought huge amounts of money that they needed to pay the
debt
○ Argentina government revenues from international trade taxes
■ 1980: made 45.8 percent of total revenue
■ 1990: went down to 5.6 percent of total tax revenue
● New state: sources of government revenue
○ Consumption tax: indirect tax known as value added tax (VAT)
■ Percent that consumers pay on top of the price
■ Main advantages
● Easier to monitor (improved tax compliance)
● It is domestic, doesn’t distort exports
find more resources at oneclass.com
find more resources at oneclass.com
● Easier to adjust
○ Privatization: selling SOEs to bring foreign direct investment (FDI) into the region.
Privatization became the symbol of LAC’s commitment to the market-based
model
■ This would generate the “how to” via managerial experience from abroad
■ Definition: the process of selling SOEs or converting them into private
enterprises
● Main objectives of SOEs during ISI
○ Promote industrialization model
○ Provide goods and services at lower prices to the private firms and population at
large
○ To serve the public interest and advance social objectives, counterbalancing the
elite power
○ SOEs became part of national patrimony: sense that these firms belonged to the
people
● Who opposed privatization?
○ Basically everyone
○ Managers and workers of SOEs: fear of losing their jobs
○ Nationalist sentiment against foreign investors
■ Idea that the markets were evil
○ Government didn’t want to give up their political power
● Why to privatize?
○ Privatization is a crucial part of macroeconomic stabilization
■ 1. Reduce fiscal burden: downsizing public sector and reducing public
deficit
● This is part of the Washington Consensus
■ 2. Increase foreign investment
■ 3. Improve production and efficiency
■ 4. Increase profitability
● Not about providing subsidies, but maximizing profits
● Extent of privatization
○ In 1980, SOEs accounted for around 12 percent of GDP
○ 1990-2003: 120 developing countries (much more than just Latin America)
■ 7,680 privatizations
■ $410 billion=.5% of GDP
■ Washington Consensus at work during the ‘90s, LAC begin walking away
at the turn of the century
■ Latin America was the biggest contributor: 1,300 transactions, raising
$195 billion (47 percent of total privatization proceeds)
● Between 2003 and 2008
○ Latin America declines privatization activity
○ Argentina and Mexico declined stock of enterprises and/or political will
○ Only Brazil continued
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The new role of the state after isi. Isi: state had active, strong role in the economy. Government spending previous and during debt crisis is a source of instability. Lost decade 1980-1990s: economic recession and inflation cried out: New strategy of development needed to define a new role for the state (this was the washington consensus) After isi: lac moved to market based, export-led growth model. To establish foundation of the law, encouraging democratic institutions, enforcing the rule of law. One of the main components to restore and resolve the debt crisis. Protect vulnerable: invest in human capital and provide basic social services. The state should interfere only when there were market inefficiencies and market failures, to strengthen the role of non-state actors. New state should modernize: raising the productivity of public management. How to finance the state"s new role. During isi, sources of income were taxing imports and exports (import tariffs)
