Latin America’s Imperiled Progress The Politics of Second-Generation Reform

To hear the Washington-based multilaterals tell it, Latin America is on the verge of a “second generation” of market reforms. Although some may doubt whether the first-generation reforms launched roughly a decade ago have matured enough to withstand the aftershocks of the Asian and Russian crises, the idea of a second phase of reforms, maintaining today’s market orientation while finally tackling distributional and institutional concerns, has received support from across the political and policy spectrum. Michel Camdessus, director of the International Monetary Fund (IMF), has urged Latin American reformers to advance “second-generation” measures. Left-leaning opposition groups have discovered that they can win elections with this concept, embracing the market while promising to “clean up” the inequitable consequences of unbridled liberalization.

When a new idea becomes this widely touted, two possibilities come to mind. The first is that the emerging viewpoint is so compelling that it leaves little room for alternatives. Thus the virtually unanimous appeal of second-generation market reforms in Latin America may be seen as a result of the successful reorientation of the region’s economies to a market-based model and a political consensus that electoral democracy has fared reasonably well within the confines of a market economy. In other words, the time is simply ripe, economically and politically, to move on to the second-phase tasks of fine-tuning and institutionalizing reform.

The second possibility, when a concept receives such broad acceptance, especially among a highly diverse group of countries and constituencies, is that it is relatively vague. Many different meanings and priorities have been lumped together under the rubric of “second-generation” reform. While financial-sector consolidation ranks at the top of Mexico’s second-phase agenda, Argentina’s prime concern is the deregulation of the domestic labor market. Within each country, reform means different things to different people. In Argentina, for example, business leaders, some factions in the government, and the multilaterals believe that the recent changes in labor law have not done enough to reduce union power, lower labor costs, induce greater flexibility, or increase productivity and employment. Others, however, define second-generation labor-market reform not as the shredding of workers’ rights, but rather as the securing of human-capital commitments so that workers are better prepared to reap the benefits of a market economy. In short, despite strong agreement on the need for second-phase reforms, opinions often differ widely as to which specific policies ought to be implemented.

To understand the tensions, it is useful to disentangle three types of second-generation reform: 1) market-completing measures designed to bring liberalization initiatives started under the first reform phase to fuller fruition; 2) equity-oriented programs designed to ameliorate the region’s widening distributional gap; and 3) institution-building initiatives aimed at “good governance” and citizen input into the policy-making process. These different imperatives are sometimes contradictory. In Mexico, for example, a technically sound plan to repair the financial system unleashed fierce battles within a newly democratic Congress over how to distribute the adjustment burden fairly. In Argentina, a more thorough labor-law reform that would revitalize markets but probably worsen the distribution of income was derailed by the labor movement; to go beyond the current half-hearted approach, the executive would have to sidestep the Congress and (in keeping with the first-phase style of policy shocks) legislate by special decree.

Resolving these tensions will surely require new kinds of coalitions and policy makers with different skills and priorities. In Argentina and Mexico, the focus of our studies, frustration with the continuing inequities in the distribution of income—and the failure of first-phase technocrats to address this challenge effectively—have rejuvenated opposition groups. These resurgent center-left political forces have rejected Latin America’s traditional populist response to hard times, embracing instead a basic market vision that softens the hard edges of competition with better social targeting, enhanced educational opportunities, and greater emphasis on the proper pacing of reforms. While diehard market reformers continue to resist any change in strategy, the...