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Latin America after the Reform: Institutional Uncertainty and Economic Growth

José María Ghio

The relationship between institutional instability and economic growth is explored by studying the economies in the process of reform towards markets in Latin America, particularly the recent Argentinean experience. Based on this, some exceptions are made to the theoretical framework of "neo - institutional" literature, and future perspectives are discussed.

The traditional analysis of Latin American economic policy gives the subject of macro - economic instability a central place. At the present time, following the implementation of important adjustment programmes, institutional hindrances seem to restrict possible economic growth. The question is, therefore, how feasible is it to sustain growth in the context of representative democracies characterised by poor institutionalisation. In this regard, "neo - institutional" literature states that every programme intended to lay the foundations of sustained economic growth should first enhance trust in State institutions.

That in Latin America the prevailing way of thinking concerning economic liberalisation, is not necessarily linked with better political legitimacy, and institutional uncertainty is apparent when the Executive branch maintains a high discretionary level. In spite of this, in many cases, reforms have sparked significant economic growth. Therefore, it is time to compare these premises to the recent experience in the hemisphere, particularly the Argentinean case, to take some objections to the analytical framework presented by professor North and developed in the "New Institutional Economics."

For this purpose, the following is discussed: 1) economic growth in post reform Argentina was the result of a dramatic, rather than increasing, swift with high discretionary actions; 2) sustaining investment demanded more, rather than less, political discretionary actions; 3) economic growth came from a breach in the status quo. This resulted in institutionalisation of economic rules that did not find an answer in the political area; 4) two legal kinds of legitimacy live together: one which puts in order the economic game, with more rules and less uncertainty, and one which prevails in the political game, characterised by discretionary actions and patronage.

In the mid 90's, Latin America seems to have entered a new stage in the process, which is slower and faces difficulties in the creation and rehabilitation of it´s government institutions. Institutional reconstruction, no less painful than shock therapies to stabilise economy, is more complex and uncertain. In this new stage, governments should gather efforts to build the State organisation structure and dampen the negative effects of reform affecting the social sector. In this way, it is necessary to strengthen the administrative capacity of the public sector.

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