Sunday, February 2, 2014

If only the reforms were even more radical...

The neoliberal belief that the failure of the Washington Consensus was caused by its insufficient application is alive and well.  In yesterday's NYT, Juan Carlos Hidalgo from the Cato Institute maintains that Costa Rica's problems are caused by excessive protection, incentives to selected sectors like tourism and a weak exchange rate. He concludes that "what Costa Rica needs are genuine market reforms that eliminate the government’s power to pick winners and losers."  At the same time, he repeats the unproven claim that Frente Amplio wants to replicate Chavez's policies.  

This is rather surprising: together with Mexico and Chile, Costa Rica has been an avid participant in free trade agreements.  Openness has radically transformed the agricultural sector and has reduced the opportunities to survive through subsistence agriculture for the domestic market.  Most of the manufacturing sector has suffered due to liberalization and not despite of it.  The tax system has not helped to raise enough taxes and any attempt to reform it and make it more efficient has failed because of political pressures (including those from the Libertarian party that is closest to Hidalgo's ideas). The problem of Costa Rica is that the current model has failed to support domestic producers and has built few linkages between the dynamic sectors (which receive incentives) and the rest.

At the same time, Hidalgo's criticism of the incentives some sectors like tourism have received should be taken seriously by proponents of industrial policy.  The fact is that many of us believe that it is important to develop new sectors and that attracting companies like Intel was probably a good thing.  Yet contrary to what Hidalgo says, the problem has been insufficient state intervention to promote linkages and to use the reduction of external bottlenecks created by higher exports to support other sectors.  This is something Eva Paus in her book on Ireland and Costa Rica and my paper in World Development showed.

Regarding the Frente Amplio, it is just better not to say anything.  The "politics of fear" should be clearly named for what they are: not only unhelpful but also undemocratic!

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