THE ASCENT OF FREE MARKET ECONOMICS

THE ASCENT OF FREE MARKET ECONOMICS: AN ECONOMIC REFORMATION WITH POPULAR SUPPORT?

F. Panizza (Chapter 3)

A Summary 

In a Nutshell

Panizza continues to try to understand how neo-liberal reforms became accepted in LA given that although in the long run they benefit everybody, in the short term there are painful transition costs that fall on specific groups. Lurking behind this analysis is the Olsonian idea that that as the winners from the reforms were diffuse they would not have been able to organize in support of the reforms, whereas as the costs fell on specific groups (often business elites and politicians) who would thus have been able to mobilize (overcome collective action problems) to defeat the reforms. 

  1. Electoral Mandate –Presidents of the time were elected with a broad mandate and so could use their authority in this regard to counter opponents and push through reform. Although he concludes there may be elements of truth in this idea, and empirical examples, it is over relied upon as an idea.
  2. Institutional settings – this is the executive isolation idea, essentially that Presidents used powers of decree to push through unpopular reform. Again, although there were elements of this again as an argument it is relied upon too much
  3. Distributional costs and benefits of the reforms – this is the key to Panizza’s argument. He states that broad support from politicians, elites and the population are needed (in democracies) to ensure firstly that reforms are initiated and secondly that they are persistent. He follows on from Schamis to show that coalitions were formed between politicians and elites that created winners from liberalization. Whereas 1 and 2 focus exclusively on how losers (opponents) were neutralized, this approach show how winners were created (supporters) by liberalization. He follows on from Weyland to show how popular support was won due to the “domain of losses” theory that any amount of pain would be preferable to hyperinflation.

And so the neoclassical model of political economy that puts collective action problems at its heart necessarily relies upon the ideas of executive isolation as it is an essentially negative doctrine (how to neutralize losers). Panizza’s method also looks at how winners were mobilized and so relies less on executive isolation, and more on preferences of key actors and the population. He continues with the theme that the IMF cannot be held (solely) responsible for the adoption of the reforms.

 Presidential Mandate

  • If governments are supposed to be broadly responsive to citizen’s preferences then radical reforms should require a clear mandate. Cardoso (Brazil), Zedillo (Mexico) second administrations of Menem (Arg) and Fujimori (Bolivia) are examples where broad mandate was granted.
  • However, there were instances where there was “shock reform” i.e. a volte face in favour of liberalization e.g. Fujimori first term. He had been heterodox and campaigned against liberal reforms, but then changed his mind after 10 days in office. This type of shock treatment was the exception rather than the rule according to Panizza.
  • Some argue that this type of Fujimori action is the product of a delegative democracy where power is delegated to a presidency and then they may act as they wish without the usual liberal democracy restraints. Panizza argues against this, saying that crisis was an extraordinary event, and once stability resumed relations settled down. The gravity of the crisis in some way demanded shock response. Additionally, he points out that the population did not revolt indicating that support was strong, there was no other option. In that regard it was desperation rather than acceptance of a new ideology, or a belief that the president can act at will. Importantly in Venezuela the shock reforms of Perez were greeted with violence as support was not strong in the populace, in part because the crisis was not nearly as bad.

 Institutional Underpinnings of Reform

  • Powerful domestic opponents could be overcome by a highly autonomous executive insulated from sectorial pressures. The tools here were presidential decrees.
  • Fujimori is the extreme case – he enacted 120 laws by decree and closed down congress for a time in 1992. It appears he had total control of policy process.
  • However, when polled it seems 85% of the population agreed with him suspending congress etc.
  • He argues that this underplays two important sources of support. Firstly, societal actors. They were much more central to reform than this statist approach recognizes. Tax, health reforms, pension’s reforms, and the remodeling of the bureaucracy elicited a wide response from various interest groups. Secondly, parliamentary coalition support is needed even when ruling by decree as that power has to be granted, and often, parliament has the power to rescind the law. He builds on Corrales study to say that the success of Menem’s reforms and the failure of Perez’s lay in the conflictive nature of the relationship between the executive and the parliament in the latter case.

 

  • The rest of the paper really has already been summarized elsewhere….

 For domestic support he cites: Weyland, end to hyperinflation/macro instability, better consumables for middle classes, falling poverty in early 90s etc.

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