THE TURN TO AUTHORITARIANISM IN LATIN AMERICA

THE TURN TO AUTHORITARIANISM IN LATIN AMERICA AND THE SEARCH FOR ITS ECONOMIC DETERMINANTS

A. O. Hirschman

In D. Collier (ed.) The New Authoritarianism

A Summary

 

In a Nutshell

This is a very strange article indeed. Its basic function is to criticize the O’Donnell thesis and provide alternatives. The strange thing is he seems to provide three alternative theses.

  1. The need for orthodoxy – given the state of ISI, a move to orthodox policy was needed and this was achieved by BA regimes. He then dismantles this thesis by showing that Chile and Colombia managed the transition without recourse to authoritarianism.
  2. Ideological stretching – rather a bizarre argument and one which I will not further summarize below. The general idea being that LA was called to industrialize, then to plan the economy, then to integrate regionally, then to redistribute, and finally to break its dependency. This ideological explosion of demands from academics gave a general feeling that the predicament that LA was in was very serious indeed. This in some way contributed to the instability upon which the BA regimes preyed.
  3. Growth functions – growth is based on two functions, firstly entrepreneurial which is the unbalancing function, and secondly redistributive which is the balancing function. For growth to be sustainable both need to be present but their interaction determines the quality of that growth and also the social stability it produces. In the case of LA the redistributive function emerged too soon as much capital was foreign owned making the entrepreneurial function much weaker. Ideological support moved from the entrepreneurs to the reformists. If the reform drive appears too early it will paralyze the entrepreneurial forces and lead to stagnation and discontent and the attempt to accumulate capital by dint of an authoritarian government.

Economic Arguments

  • He runs through the O’Donnell thesis about deepening which I summarized in the J. Serra piece also in this week’s reading. He concludes that only in Argentina did problems of deepening occur before the first attempt to implant an authoritarian regime.
  • Nevertheless the thesis maybe should not be abandoned but broadened. Of course the great fear of Communism, the use of force by the Left, Cuba, and the wish of the US to prevent spread of the left contributed to the regimes that were installed. However, a link between this politic and economics is still relevant.

The alternative candidate would be the need for more orthodox policy. As ISI stage one ground down due to traditional exports losing ground, inflation etc. Policy makers found an ingenious cure for the structural problems associated with the early post war economy but then applied to excess the magic formula. During this period of decline of ISI there were a number of important developments:

  1. The world economy went into rapid expansion, bringing back the possibility of export led growth which were hidden from view due to the overvalued exchange rate pursued as part of the ISI policies.
  2. Industrial investment could now be financed out of profits, so the intersectoral transfers that originally performed this function (i.e. from traditional exports to manufactures) were dispensable.
  3. Industrialization and the expansion of the domestic market meant that income taxation and capital market borrowing by the government was now possible.
  • As a result it seemed that it would be profitable to dispense with the declining ISI system to ensure a non-overvalued ex-rate (which would reverse the situation whereby capital imports were cheaper to import than produce domestically, thus sending most of the backward linkages from growth abroad), realistic public service prices and capital market rather than inflationary borrowing. In other words, more orthodox, market-oriented policies.
  • This transition was by no means easy due to vested interests.
  • This is different from the O’Donnell thesis – exports is about widening not deepening. Tax, capital market reform, nothing to do with deepening.
  • The extent to which these policies motivated the coup makers is disputable. They were primarily concerned with inflation and the balance of payments problems and based on an anti-ECLA backlash. The international economic debate of the time was not focussed on deepening but on market reform.
  • Nevertheless, many of the regimes did implement these market reforms, and as such they moved toward orthodoxy and this has given the impression that it takes an authoritarian government to make these transitions. However
    • Colombia – export subsidies and several mini devaluations have promoted agricultural and industrial exports as average levels of protection were lowered. Interest rates rose and there was income tax reform, and this occurred without an authoritarian government.
    • Chile (pre-Allende) saw similar transitions policies particularly with respect to the exchange rate.

Inequality

  • Hirschman deals briefly with the idea that when countries with income distributions such as LA move into the industrial phase whereby consumer durables are relied upon as the engine of growth, the natural result is authoritarianism. This is because of the need to bolster the incomes of the middle classes who are the natural consumers of these products, and this means both a transfer of wealth to them, and a compression of the wages of the lower classes. In order to achieve this type of consumption profile political repression and authoritarianism are needed. [This is different from the Shliefer hypothesis that in order to expand the market for durables you need to raise the incomes of the agricultural sector such that they can enter the durables markets….]
  • This is intriguing, but none of the regimes were established with this motive. Additionally, there have been boom of durables sector before the BA regimes came to power.
  • This pattern does describe quite well what happened in Brazil: wages were compressed and they gave lots of credit to consumers to buy durables. However, this is not an economic explanation of authoritarianism, but a political explanation of Brazilian economic policy.

The Entrepreneurial and Reform Functions

Growth creates inequalities, sectoral, geographic, and social and income. In time pressures arise to correct these imbalances. Indeed the continuation of growth requires they be corrected in part because they bring with them social and political tensions, protest and action.

  1. Entrepreneurial Function: domestic enterprise, foreign capital, and the state. After this function has run its course there will be attempts by the sectors/regions/groups that lag behind to catch up. Those performing this function are often unaware and opposed to the reform function being performed.
  2. Reform Function: the drive by the lagged groups to improve their welfare via social programmes and redistribution in particular. This function is essential for growth to be sustained after a powerful by disequlibrating drive by the entrepreneurs. It is likely that these groups will be hostile to the entrepreneurs.
  • It is the interaction of these functions that determines both economic and political outcomes of the growth process.
  • The strength of the entrepreneurial function depends both upon the opportunities for profitable investment and the pull of ideological forces. The force of ideology was far weaker in LA than it had been in Europe during its industrialization. There was 10 years of support for industrialization, but then there was a dramatic shift, and those same intellectuals who had called for industrialization now called for reform. This may have had something to do with the leadership assumed by foreign capital in the industrialization process. The shift in thinking was particularly evident in Chile, Argentina and Brazil.
  • The weakness of the entrepreneurial function allowed demands for reforms and redistribution to be heard sooner, than had the economy been in the hands of domestic producers. E.g. foreign ownership of mines in Chile led to early calls for tax on foreign investors.
  • Other weaknesses came from the closed nature of those benefiting from the ISI system. If development was broad based there would have been more tolerance for the inequalities produced. This tolerance was short lived when much of the economy was either in foreign hands, or in the hands of a very small elite such as was the case with land owners in Uruguay, and mine owners in Chile.
  • A common dialogue or history such as war can often extent the tolerance for inequality. E.g. Mexico where Cardenas was associated with the revolution, meaning unequal development could be pursued with relative stability.
  • The breakdown of pluralist forms may be related to the degree and nature of the hostility between the two functions [this is very similar to the Huntington hypothesis which I have included in the readings for this week].
  • In Colombia the success of pluralism could be attributed to the elite being able to assume both functions, as reformers and entrepreneurs. The individual identities were different, but the class structure was the same, meaning that plurality rule could be maintained.
  • In Venezuela because of the oil wealth, the state could play both roles, as entrepreneur, but at the same time improving social services, education and instituting agrarian reform.
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