During the past decade, many countries in Latin America and the Carib-bean that previously were plagued by high inflation, a large debt burden, and low growth have transformed themselves into stable, capital-receiv-ing, and growing economies. They achieved this by implementing high-quality policies that not only brought economic stability but also allowed the private sector to begin to be the principal source of growth. In effect, the private sector in the region has been unshackled, and it is this process that is outlined here. This study examines evidence from a number of recent reports of the private sector in Latin America and the Caribbean and finds that the economic transformation that has taken place is not a simple story but the product of complex interactions among macroeconomic stabilization, in-centive reforms, and institutional adaptation. No one element would have produced the results that have been achieved. For example, fiscal stability and better incentive structures give the correct signals for a shift of re-sources to more productive uses, but they do not address the barriers that hinder resource movement. Likewise, the traditional package of adjust-ment measures may be necessary to lay the foundation for rapid growth, but it is not sufficient to elicit a strong response from the private sector. Moreover, if the benefits of adjustment are perceived to be inadequate, public pressure mounts for reversal of both fiscally responsible policies and improved incentive structures. There is a “second generation” of issues that strongly influence development of the private sector. Among these are the need to reduce the amount of discretion in policy regimes; the burden of regulation on busi-nesses; the need for incentive reforms in new areas such as competition policy; the inability of the financial system to secure collateral; the cost of uncertainty of contracts under current legal systems; and issues related to the security of property rights. Specifically, a number of factors raise the risk and cost of business transactions and weaken the response to new incentives and macroeconomic reform. In addition to reviewing a number of recent studies of the private sector in Latin America, this study also reports on the results of interviews with officials of a large number of firms in five countries. It was written with the objective of making lessons from the work being done in the World Bank available to a wider audience, including policymakers, aca-demics, journalists, and all who are interested in developing countries in general and in Latin America and the Caribbean in particular.
