Sound policies can free up natural forces of growth

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Page 213

The Wall Street Journal once called Arnold Harberger the "godfather of free market economics in Latin America." How did a boy from Irvington, New Jersey, assume this role? According to Harberger, it started with high-school Latin. When the time came to pick a foreign language, he chose Spanish, thinking it would save him the most work. "My later interest in Latin America arose partly from my knowledge of Spanish. Everything else followed."

What followed was a lifelong involvement in providing policy advice to Latin America, directly and through his numerous students. Currently a professor at UCLA, Harberger spent nearly 40 years at the University of Chicago making path-breaking research contributions in the fields of public finance, cost-benefit analysis, and international economics. Prakash Loungani speaks with Harberger about that long and illustrious career.

LOUNGANI: Are you worried about the future of free market economics in Latin America?

HARBERGER: No. Some people interpret recent events as antineoliberal or anti-Washington Consensus, but these are hiccups in the broad move from import substitution toward more liberal, market-oriented policies. Of course, countries have done so at different times, to differing degrees, and not always in a smooth manner.

Take Brazil. The Brazilian miracle of the 1970s was a story of liberalization. The seeds were sown in 1964 when Roberto Campos was the key minister. He was followed by Antonio Delfim Neto, another liberalizing minister.

If you look at everything that was happening-the opening of the internal capital market, the wide-Page 214spread use of monetary instruments, and so on-it was very much a story of freeing up the economy.

Trade barriers were lowered too, though progress was uneven. After a few years of transition, Brazil had clear sailing for a decade with liberal policies and good growth.

LOUNGANI: How do you assess Brazil's prospects now?

HARBERGER: From what I understand and have read, Mr. Lula has handled his presidency very well so far. He has certainly belied the worst fears that were being expressed before he took office. He could be on a track for which we have precedents from the region.

After all, [Chilean President] Ricardo Lagos is a socialist and yet one of the most liberalizing presidents we've had in Latin America in the past couple of decades.

LOUNGANI: You've had a long association with Chile.

HARBERGER: Yes, I first went there in 1955. At the time, I sent a letter to my colleagues noting my shock at the distortions they had in place-tariffs as high as 200 or 300 percent; price controls; a system of all kinds of approvals by government agencies for almost any action by the private sector. It was a pretty distorted, old-fashioned, and authoritarian economy. The course of policies was up and down for the next 10-15 years.

Then there was the big blow from Allende. Distortions went beyond all bounds. Just one example says it all: at one point there were 13 different official exchange rates, ranging from 25 escudos to the dollar to 1,325 escudos to the dollar. It boggles the mind.

There is nothing more homogeneous than a dollar. Each dollar, for every single purpose, is just as good as each other dollar.Why should there have been so many different prices?

LOUNGANI: Could we talk...