What went wrong with the recent reforms in the Southern Cone.

Summarizes the results of a World Bank research project that relied on analysis of financial statements of enterprises in the three countries, case studies of specific firms, and analysis of industrial census data. Argues that policy inconsistencies, frictions, and adjustment lags conspired to undermine the results of the liberalization attempts. The main inconsistencies involved the combination of the rate of devaluation with a large fiscal deficit in Argentina, the coexistence of a fixed nominal exchange rate with 100% wage indexation in Chile, and the conflict between real exchange rate appreciation and export promotion in all three countries. Also notes the differences in the composition of the policy packages implemented in the three countries, stressing the importance of the timing of commercial and financial liberalizations. Concludes that the combination of free capital movements with the use of the rate of devaluation led to severe macroeconomic imbalances that also went against microeconomic objectives included in the reform packages. Sustained appreciation of the currencies, in particular, strongly affected the development of nontraditional manufactured exports.-from Editors