Clinton risking his support

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The Independent Online
PRESIDENT Clinton should take note of a new genre of literature that stresses the politics of economic reform. Although the US is not exactly in the same boat as Chile, Poland or Mexico, it arguably faces reforms of equally dramatic proportions. Unlike some of his predecessors, Mr Clinton clearly understands the importance of widespread political support. However, now the dust has settled and the details of his programme have been thoroughly reviewed, the fear grows that he has cashed in his biggest political chips on what amounts to a missed opportunity.

Does Mr Clinton's deficit-reduction plan go far enough? Based on the experiences of other economies that undertook bold reforms in the 1980s, it seems he should have gone for much steeper deficit cuts in his first year in office. Independent studies released last week concluded there were serious savings shortfalls in Mr Clinton's programme that could undermine public and congressional support. Again, the experiences of other countries suggest he is unlikely to get a second chance if this effort fails.

Global economic reform has made great strides over the past two decades, despite some highly uneven results. Poland, Mexico and Spain are success stories in many respects, while Russia, Zaire and Brazil show how reform efforts can become bogged down, according to Stephen Haggard of the University of California. In virtually every case, however, the crucial but often overlooked role of political strategy has been a key to success.

Political strategy can have many faces. In some countries - Brazil, Indonesia, Argentina, Chile, Uruguay, Turkey and Ghana - new military governments exploited extraordinary powers to ram through economic reforms, Mr Haggard says. Success in Mexico, Singapore and Taiwan, he reports, resulted from dominant single parties that enacted widespread reforms. Some democracies have also been successful, most notably Spain, Portugal, Australia, New Zealand and Poland. What, if any, of these might be useful to Mr Clinton?

There is no definitive guidebook, only important 'pointers', according to the work of Mr Haggard, John Williamson of the Institute for International Economics, Jose Pinera of Chile, and others. One variable is a unified economic team with a popular mandate to pursue a coherent reform programme. In some countries - notably Poland, India, Chile and Russia - these teams have been led by a new breed of 'technopols' possessing both political and technical skills.

Without political backing, however, even well-trained, motivated teams will be unsuccessful.

The second important variable is timing. Should the strategy be go- fast, go-slow or somewhere in between? Again, there is no definitive answer, although a go-fast strategy seems to work in countries facing economic turmoil. Poland, for example, exploited both its crisis and its transition to democratic rule to enact a dramatic adjustment programme. This hit political trouble in 1989 but ultimately survived. By contrast, Argentina and Brazil squandered opportunities in the early days of reform and were forced to change strategy eventually because of economic deterioration.

Spain and Mexico prospered by moving slowly, working with key interest groups to enact reforms. Spain's Moncloa pacts, for example, provided labour wage restraint in return for a government commitment to investment in education, an effective social safety net and a restructuring of an outdated industrial relations system.

Like many successful countries, Mr Clinton has moved to limit the powers of special interests by selling his programme direct to the people. Opinion polls show he has widespread public support for deficit reduction.

However, the crucial factor of political support may be lacking. Republicans in Congress are already offering alternatives to Mr Clinton's tax increases and spending reductions. Even among his supporters, there are fears that the cuts do not go far enough. Democratic moderates say their constituents will accept higher taxes but only if the spending cuts are steep enough to ensure significant deficit reduction.

There are doubts here, particularly in the wake of last week's analysis from the Congressional Budget Office which estimated that Mr Clinton's plan will fall short by dollars 60bn ( pounds 41bn) in savings and receipts over the next five years.

Additionally, many on Wall Street believe he has not gone far enough in hitting the middle class for new revenues. The tax rises are largely aimed at a newly defined class of wealthy: those with incomes around dollars 250,000, or the top 2 per cent of the population. But to raise the revenues needed, the cream of Wall Street believes more taxes on the middle class are necessary. This may be true even with more consumption/'sin' taxes in future.

The big unknown is how to pay for healthcare. Without significant savings here, the whole package is doomed. In the final analysis, it is clear that Mr Clinton has got his message right but that his overall programme may be wrong. It would be tragic if this proves a missed opportunity.