Category Archives: Latin America

POPULISM IN THE AGE OF NEOLIBERALISM

POPULISM IN THE AGE OF NEOLIBERALISM

K. Weyland

Chapter 10 of Coniff (ed.) Populism in Latin America

 

In a Nutshell

Weyland wants to show how populism re-emerged in the age of neo-liberalism. I don’t find the argument particularly compelling. Whilst the term neo-populist seems apt for regimes such as Garcia (Peru), Alfonsin (Argentina) and Sarney (Brazil) it does not seem to fir for Menem (Argentina) Collor (Brazil) nor Fujimori (Peru). Whilst all of these leaders came to power using populist rhetoric, personality leadership styles etc. only the former tried to “re-activate” (to use O’Donell’s phrasing) the popular sector using heterodox stabilization plans that essentially attempted to further the policies of the classical populists (domestic expansion via protectionism). These were regimes of inclusion and were initially highly successful, although the heterodox plans eventually aggravated inflation and did little to solve the problems facing the region at that time. The later regimes were not concerned with activation of the popular sector, and although their support was conditional on support from the popular sector, this was not sufficient to support the neo-liberal reforms they eventually implemented. For this a much broader coalition of interests had to be built. Benefits were not available for distribution in the same way as under classical populism, and whereas union building had been an important element of classical populism, under these leaders unions had to be pacified in order to push through the reforms. I would argue that whilst there may have been much similarity in the style of the politics of these regimes with those of the classical populists, the core of the programme was very different. The masses gave support to those leaders not because they were direct beneficiaries of policy, but because the neo-liberal policies were the only means of reorganizing the economy as a whole under which conditions the urban masses would benefit concurrently with many other sectors. This is closer to a general definition of democracy although perhaps the term delegative democracy is more apt.

Populist Revival in the 1980s.

  • Populism is based on a quasi-direct relationship between a personalistic leader and masses of devoted followers. The BA regimes had sought to eradicate it as they identified it with turmoil. In the restored democracies such as Chile and Uruguay where there were historic parties with considerable strength personalistic leaders found it harder to build support.
  • The BA regimes actually inadvertently allowed for a populist revival. The modernization they encouraged disrupted social order and the lives of the poor, thus making them available for political mobilization. The economic growth of the 60s and 70s continued the process of urbanization, a growing informal sector etc. Additionally, as the BA regimes sought to dismantle the process of representation by intermediary organizations, this mass of people was disorganized and thus ripe for mobilization by a personalistic leader.
  • E.g. Garcia (Peru) – appealed to unorganized poor. His policies resembled classical populism (extending ISI). He stimulated growth by expansion and financed this by capping debt repayments and this deviation from IFI proscriptions was very popular. Problems arose as Peru was cut off from loans especially when the banking system was nationalized. Inflation rose dramatically and the crisis resumed.
  • Argentina and Brazil (Cruzado Plan) were similarly heterodox and ended in similar failure.
  • It became obvious that the classical populist policies were no longer viable.

 


 

Neoliberal Neopopulism

  • Menem, Collor, Fujimori used populism to impose liberal economic policies. They won office in typical populist fashion. “Saviours” of the nation”. Upon taking office however, all three went neo-liberal and tried to break inflation by suppressing demand and slashing public spending, and trade opening. They thus reversed the policies of the classical populists.
  • Although they adjusted their policies to the inevitable, Weyland argues that they used their remaining margin of choice to ensure their neoliberal policies did not lose them popular support.

 

  • Mass support – both neopopulists (NP) and neoliberals (NL) agreed the unorganized poor of the informal sectors needed to be won over.
  • Distance from Intermediary Organizations – NP parties tried to subordinate interest groups to their own ambitions, and NL attacked these same groups as trying to undermine competition through rent seeking.
  • Attacks on political class – NP attacked established politicians as corrupt and privileged. NL were similarly suspicious.
  • Strong State – NP centralized power to bolster personal authority. NL wanted a concentration of power to break opposition to the reforms.
  • Targeted benefits programs – this is perhaps the only affinity with which I would say NP resembled classical populism. NP leaders later enacted spending programs to benefit the poor, especially the informal sector. Menem and Fujimori distributed much in a highly visible fashion insisting that control of the funds remain in the office of the president. They used these payments to exact political payoffs from the poor masses. NLs also advocated such spending as the World Bank changed its focus from stabilization to development and poverty eradication, and also as a means of making the reforms politically viable.
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THE LATIN AMERICAN ECONOMIES 1950-1990

THE LATIN AMERICAN ECONOMIES 1950-1990

Ffrench-Davies, Munoz, Palmer

Cambridge History of Latin America

A Summary 

In A Nutshell

The most important post war development in the Latin American economies was the increasing integration between external and domestic economic structures. This happened in a time when protectionism was at the heart of the ISI policy. Traditionally LA had been intertwined with the word economy through demand for the raw materials it supplied. Despite the policy initiatives to develop in a way free of external dependence, LA became dependent on the core countries in new ways. Principally:

  • Technology – the ISI model was not generating indigenous technologies except in the largest economies, thus complex technology was increasingly imported as industrialization increased.
  • Imports – The import substituting sector was heavily dependent on input imports. As these products were mostly for the domestic market, the consequence was negligible savings of forex.
  • Debt-led growth – in oil shocks of the 70s led net oil importers in the region to borrow heavily in order to maintain growth rates. Even oil rich states borrowed heavily as the $s generated by the oil shocks paid to less developed middle eastern states were not capable of absorption so they were invested in LA. The region became heavily dependent on continuing finance, and extremely sensitive to rate changes etc. in the core countries.

 The World Economy

  • 25 years post WWII was a “Golden Age” of prosperity in EU/US/Japan (EJU). GDP increased threefold. Huge increase in manufactures. Increased stability. US was outperformed by the others. This came to a halt in the 1970s due to slower productivity growth and continued real-wage increases, as well as the oil shocks.
  • Less developed countries (LDCs) performed even better than the EJU. LA produced the best outcomes (unless the NICs are taken as a sub-group of Asia). Exports increased 6% p.a.
  • The boom in the LDCs driven by exceptional demand from the EJU for manufactures, which for the first time surpassed primary commodity imports. Indeed growth in manufactures imports outstripped imports of commodities way beyond the 1973 shocks.
  • LA did well in exporting new manufactured products, but their share of world trade fell as they neglected the commodity market due to the ISI policies which meant most resources were absorbed domestically. Thus the export sector and particularly agricultural production were the victims of the ISI policies. This was reflected in a significant shift from agricultural labour to industry and services.
  • In the 1973-81 period the region was able to continue growing whilst the core was experiencing a significant slowdown. They seemed to be immune from the problems of the shock period. However, this was largely due to the increasingly easy access to foreign capital post oil-shocks.
  • After 1981, LA diverged from the other more successful LDCs (Asia in particular) when the long period of sustained growth (3 decades at 5.5% per year) came to a halt. Real incomes declined and there was stagnation. Hyperinflation and huge negative capital transfers occurred.

 Latin America and the World Economy

1950s

  • Pessimism with prospects for primary export led growth and optimism for ISI. Thus there was progressive delinking from world economy, and ambitious industrialization programmes.
  • Depression led to collapse in demand for primary products from the core along with a halt in new lending. This caused severe hardship. During the war, trading was much more restrictive meaning that domestic manufacturing had to fill the gap left by core products absent due to war. In the post war period, although supply side returned to normal LA found it difficult to diversify its exports. This was because LA could not break into the developed markets, and the debt defaults of the 30s cast a shadow meaning that international finance was not available for investment. And so it was against this economic backdrop that the ideological and political system of ISI came to be seen as a means of getting LA to diversify away from its traditional output structures i.e. by switching the engine of growth from commodity to manufacturing.
  • However the pessimistic view of commodity led growth meant that when demand did pick up at the end of the 1950s, LA was no in a good position to capitalize on the opportunity. This stagnation in export volume and the concurrent declining terms of trade meant that although output was increasing on PPP terms the exports were diminishing. The trade surplus vanished and became a deficit, only of 2% GDP, but this was enough to make credit constraints even tougher, and this further obstructed growth, investment etc.
  • Many countries (Arg, Braz, Chile) tried deficit spending to get around the credit constraint financing infrastructure programmes. This generated inflationary pressures and in the end led to IMF sponsored stabilizations plans that focused on monetarist policies without addressing the structural sources of inflation. These policies would necessarily slow the process of industrialization, investment and education.
  • ISI in the 50s struggled due to the inefficient controls it imposed – obstacles to commodity exports, quantitative import restrictions (rather than ad. Valorem). By the end of the 50s states were experiencing problems with the model, and unemployment/poverty persisted.
  • One of the main criticisms was that domestic markets were not big enough for firms to benefit from scale. The answer to this “watertight compartment” problem was regional integration which began to be talked about toward the end of the decade, perhaps influenced by the increasing integration in the core countries – GATT etc.
  • Growth was good in the decade: manufacture grew at 6.6%; investment at 7.9% and GDP at 5.1%. HOWEVER, too many resources dedicated to ISI meant a neglect of traditional export sectors particularly agriculture (for which the region had strong comparative advantage). Governments were overly optimistic about ISI – overreliance on the economic dynamism of one particular economic activity led to unbalanced structures. Nb the same thing would happen in the 80s.

 1960-1973

  • Reciprocal trade liberalization in the developed world was a key feature of this period.
  • The influence of the NICs as well as the problems noted above (anti-export bias and slow growth in primaries) meant that export promotion came on the agenda in LA. The old model was no longer useful in 1960. LA used export promotion, regional integration, export processing zones etc. but exports were still not seen at the primary engine for growth in the manufacturing sector.
  • The “crawling peg” ex rate policy in Chile, Colombia and Brazil was a major step (see below).
  • The oil shocks corrected terms of trade problems as price of other commodities increased with oil. The increased world demand for manufactures meant big growth in the states with a good industrial base. Manufactures exported rose 11% p.a. but commodities only at 3% despite increased demand of 7% in the core countries. But commodities still accounted for 80% of total trade by LA so the slow growth had a –ve effect on the trade balance, which meant a return to deficit by 1971.
  • Overall however, this was a period of dynamic growth. GDP grew at 5.9%

 1973-81

  • Four-fold increase in oil price. Came at a time the Golden Age was winding down.
  • Oil exporters in LA were the main beneficiaries (Venezuela, Ecuador and Mex). Incomes increased in those countries but most significantly in Mexico as it did not restrict output in line with OPEC attempts to maintain a high price for oil.
  • Debt increased hugely in the region as oil producers became more credit worthy, and petrodollars were free to be invested by the banks.
  • Brazil initiated debt-led growth as though the price hikes were temporary. Chile went for more orthodox economic activity restricting policies at home. Eventually after the 1979 shock Brazil was too compelled to reduce economic activity.
  • Most countries in the period were faced with a glut of cheap overseas funds. At the same time certain neo-conservative experiments were occurring (Arg and Chile) which saw some liberalization of trade, and this together with the cheap funds meant a large increase in imports and a concurrent increase in the current account deficit. Thus a strong and unstable financial link was forged between LA and the core, where traditionally the link had been through commodity trade-flows.
  • This left LA open to three big shocks:
  1. Rise in IRs associated with second oil shock
  2. 14% deterioration of terms of trade between 1980-82
  3. Sudden cessation of lending.
  • The core was passing on some of its adjustment costs to LA through increasing nominal IRs, contracting imports etc.
  • Growth in the period was still competent. However toward the end it became clear that mounting deficits and debt could not be serviced with foreign debt forever. The halt to lending meant LA now had to service debt from export revenues. The Debt-led model was no longer feasible and a period of harsh adjustment was needed.

 The 1980s

  • Bad external environment +huge debt +increase in LIBOR (from 2.5% to 22%) + stagnation of demand for primaries + 23% drop in terms of trade.
  • Manufactures performed better – and rose to 40% total trade.
  • Imports had to be reduced from $127bn to $78bn and this was done through devaluation and demand reduction. Inflation driven by public sector deficits reached epic proportions.
  • Welcome to stagflation.

 ISI-Led Growth and Structural Change

  • Although different policies, all LA states had same feature of relying on manufacturing sector as main engine of growth 1950-80. Policy instruments and successes vary. E.g. Mexico grew much faster than Arg, as did Brazil.
  • Rapid growth driven by investment of 7% p.a. Countries with the best performance were those with the most capital accumulation (Braz, Mex). There was additional divergence when some states went neo-con in the 70s (Chile). In 50s the investment financed by domestic savings as no access to financial markets. This changed toward the end of the period.
  • Capital goods were largely imported indicating that growth was not endogenous (the multiplier effect is much larger when capital goods produced at home). Increased in investments caused imports to rise. The larger economies were able to develop capital goods industries. The % of investments that were imports rose after first oil shock as credit became available, there was more capital in the system, and some countries were liberalizing trade.
  • The productive structure was altered. I.e. significant fall in importance of agriculture as part of GDP. More marked in the faster growing countries. From the point of view of comparative advantage this was hard to justify. Some states (Chile, Ecuador, Peru) undertook land reforms. However, much of the peasant population did not live on the large estates so they did not benefit from the expropriation. Also success was also based on access to credit, technological assistance etc. so reforms were only as successful as initiatives to form cooperatives, and the ability of the state to adapt public institutions at a time when the focus was on manufacturing.
  • Agri production rose, but mostly due to increased land under cultivation not productivity increases. As domestic incomes rose, imports of food rose, especially as trade was liberalized, and there were cheap subsidized imports available from EU etc.

 Industrialization

  • Started early in the three big economies (late C19th). Disruption of trade by WWI and II gave further stimulus to manufacturing sectors.
  • ISI started with production of light consumer goods, moving to consumer durables and then capital goods. Technology got more complex throughout the process. The earlier ISIers (Arg, Chile) ran into difficulty as they could not exploit scale due to lack of exporting capability. Braz/Mex achieved 10 x increases. Arg only 3x. By the end of the 70s the large economies has 22-32% GDP from manufactures.
  • Some Southern Cone countries de-industrialized with neo-con experiments.
  • It is argued that no “endogenous core” of manufacturing activities was created to stimulate other sectors of the economy. Why? Extreme protectionism, overvalued ex rates, instability of domestic politics (meaning short-term investments only) and high propensity to consume based on premature diversification of consumption patterns.
  • The 1980s revealed these weaknesses.
  • ISI reversed trade deficit in manufactures etc.
  • ISI increased dependence of local production on import of intermediate/capital goods. This was a new supply side connection, and meant that volatility in the core would be transmitted to LA. “Import-Intensive ISI” brought about a new rigidity in demand for imports. This outcome was reinforced by almost negative protection for intermediate goods meaning there was no domestic production incentives.
  • ISI showed an anti-export bias. Little appreciation that exports (primaries) could be a good engine for dynamic growth (based on pessimism from depression etc.). Exports often had negative protection, discouraging investments and export diversification which remained dependent on primary products. This meant a trend toward trade deficits.
  • During 60s there was an awareness that ISI was not reducing volatility, nor improving credit constraints. A greater trade balance was needed. This was planned to be done by regional integration. The trade boom 60s and the rise of the NICs was another reason to diversify exports as quickly as possible.
  • “Crawling peg” ex-rates helped too. There were tariff reforms attempting to end anti-export bias. Public investments in infrastructure etc. Results: exports of manufactures grew at a new rate of 11%p.a. as opposed to 3% in the 50s. Brazil diversified the most. The most successful countries were those that had a supportive industrial base. This export growth occurred against a backdrop of increasing protectionism in EJU.
  • Trade liberalization in the 70s increased exports but made LA more sensitive to world economy changes. The stronger liberalizing countries (Chile, Arg, Uru) were more linked to external instability (in 1982 Chile had sharpest recession in the region but as external environment improved in late 80s it was best grower). Mixed policy countries were more stable
  • In general large countries most successful. Diversification, liberalization etc. were less effective in smaller countries perhaps as lack of domestic market meant little ability to profit from scale.

 Economic Integration

  • A tool for reinforcing ISI. Development from within LA as whole (Prebisch). By expanding the markets industry would benefit from bigger markets, and competition with regional peers to bring back market discipline to the project.
  • LAFTA, Andean pact, etc. all projects spawned in the 60s. There were significant achievements. Intra-LA trade increased substantially. However, conflicts of interest, short-sighted pressure groups, and economic policy instability meant that it did not provide an effective test for ISI. There was stagnation of the integration project, and intra-LA trade declined sharply during the 80s. This was partly driven by the domestic demand contraction of adjustment. Intra-LA trade should have been fostered in this adjustment period at the expense of external imports as this would have meant higher capacity utilization.
  • The larger countries were unwilling to play a leadership role and did not do enough to ensure that benefits were distributed evenly throughout the economies of varying sizes. Producers were unwilling to surrender monopoly power to foreign firms. There was an overemphasis on tariff reduction when the NTBs were actually more important.
  • Some successes were had, and there was some specialization as a result. In the end it was instability, abrupt changes in politics/economics, debt etc. that led to a less than impressive record.

POPULISM

POPULISM: AUTHORITAIN AND DEMOCRATIC

Robert H. Dix

  Latin American Research Review, Vol. 20, No. 2 (1985), pp. 29-52

 A Summary

  • Dix wants to support DiTella’s classical definition of populism “a political movement which enjoys the support of the mass of the working class and/or the peasantry, but which does not result from the autonomous organizational power of either of these two sectors. It is also supported by non-working class sectors upholding an anti-status quo ideology.” And yet he wants to present a more nuanced view of what populism is and shows the regional variation using 6 case studies, three versions of democratic populism and three of authoritarian populism.
  • In some ways given the universal suffrage now prevalent the discussion is rather academic as most parties must try and command popular support rather than just appealing to one party. Thus the term becomes rather meaningless and in need of distinction. – Democratic/Authoritarian
  • Authoritarian: Peronismo in Argentina (Juan Domingo Peron – coup in 1943, elected 1946 and 1951, overthrown in 1955). Ibanismo in Chile (dictator in 1927-31 and elected in 1952). ANAPO in Colombia (lead by Rojas who ruled from 1953-57)
  • Democratic: AD in Venezuela (Romulo Betancourt – elected in 1958and has since alternated regularly for the presidency [this article is from the mid 80s]. APRA in Peru (Victor Haya de la Torre – has supported governments but never been the outright winner. Said to be the most important party in Peru). MRN in Bolivia (formed by Estenssoro – shared power in 1943-46)

 Leadership

  • DiTella – lead by “incongruent elites”. Disaffected from status quo or margin from existing elites. Strong or charismatic leaders.
  • Common ground: university educated most as lawyers or professionals.
  • Authoritarians: military connections. All three were high ranking career army men. Officers also represented Peron in congress as with ANAPO less so with Ibanismo. Few intellectuals (Peron was anti-intellectual). Peron included labour leaders as his ties to the unions were strong. This was not the case for Ibanismo nor ANAPO (which had virtually none). Landowners and businessmen formed a big part of all three.
  • Democratics: usually intellectuals (professors/students/writers/journalists). They included labour leaders in the top ranks of the party.
  • Conclusion: generally true that leaders were from middle class backgrounds but the authoritarian strain looked more to the military, the democratic to the intelligentsia.

 Support

  • Common: in all cases to a high degree support was urban and lower/working class in composition.
  • In general however all parties sought support in the rural areas, but the democratic populists much more so. For them campesino support was critical, less so for the authoritarians.
  • Authoritarians: Colombia/Arg/Chile all experienced strong showing in rural areas (Rojas won 40% of rural areas). Thus rural dimensions even of authoritarian populism can be considerable. The non-working class support was generally from other groups of military officers and some clergy.
  • Democratics: even more pronounced. All three were predominant force among organized peasantry. Ven votes by campesinos have gone largely to AD. This refutes claim that populism is largely targeted at the urban “disposable masses”. APRA has never actually done well in Lima and AD not so well in Caracas. The reason for this may not be popularity but the existence of other competitive populist platforms in those cities. The non-working class support came from other intellectuals.
    • We need to distinguish further between populist platforms that draw support from the urban employed (organized labour) as opposed to the urban unemployed (shanty town dwellers/informal labour market). The support of Rojas was from the latter. Ibanez got both. Peron’s base is debated. Thus there was internal diversity in populism’s “disposable mass”.
    • In general however the democratic populism tended to rely more on the organized work force rather than the dispossessed.

 Ideology and Program

  • DiTella looked for “an ideology or a widespread emotional state” to link the masses and the elites. This proves to be generally the case with much variation.
  • Authoritarian: ideology vague and amorphous, like their policy. E.g. Ibanez – no overarching ideology, just an emotional state. The Peronistas were the same so they constructed an ideology called justicalismo, which is widely thought to have been opportunism rather than genuine theory. Rhetoric against oligarchy, politics itself, Marxists etc. was more prevalent than policies of structural change or modernization. Little was done by all three to change social structures (other than: blue collar min wage [Ibanez], nationalization of foreign owned property in first years [Peron]).
  • Nationalism and Authoritarianism: Central to Peronism (nationalization of British utilities). Rojas thought foreign investment in oil was crucial + never ended military pact with US. Ibanez was not particularly anti-imperialist. All three were not strong modernizing forces – they stressed traditional roots.
  • Democratic: AD and APRA showed early Marxist influences which were later dropped. The leaders of all three were passionate speakers about policy. Programs were more positive than the authoritarian denouncements of oligarchs etc. i.e. the program was based on a rationale of development and economic/social growth. Structural reforms took precedence over promises of immediate distress relief.
  • Nationalism and Democratic populism: Nationalism was central to all three parties. Nationalization of tin mines in Bolivia and better deal of oil companies in Venezuela. They were generally less traditionalist than the authoritarians.
  • Summary: authoritarians tended to eschew elaborated ideologies whereas democratics paid much more attention. –ve vs +ve (more structural reforms). Authoritarians less nationalistic.

  Organization and Leadership Style

  • Common: strong leader (charismatic or paternalistic), normally one of the founders. Intellect was more important for democrats than authoritarians.
  • Authoritarians: not very highly institutionalized. They relied on coalitions and other public figures to generate support for them. Peron is the exception; he had strong ties with Argentine workers and unions/leaders.
  • Democratics: highly institutionalized with a leadership structure therefore less dependent on the leader. Both AD and APRA have continued beyond the death of the founder

 Conclusion

  • “Populism is clearly a product of an increasingly mass society” [is this his thesis?]
  • The classical definition stands up well but there are many variants. The authoritarians are closer to the classical portrayal.
  • The two types are no internally consistent. E.g. Peron and MNR. “This kind of deviation suggests that it may be preferable ultimately to speak of tendencies within the larger rubric of populism rather than of rigidly defined types.
  • Democratic is more durable: institutional structure, structural reform, ideology, more modernization.

 How to account for the two different strains?:

  • Stages of development? DiTella argued it was about where the country was in its industrial development i.e. how developed the industrial class was. This may help to explain some of the emergence of populism, but not the authoritarian/democratic variation.
  • Others argue that populism emerges with ISI and outlives its usefulness when this process is over. This is due to coalitions between ISI industrialists and workers who both want to promote ISI. When the later stages of ISI contradictions emerge the coalitions fall apart. But Arg and Bolivia were at polar ends of the development scale and both had bouts of populism.

 Dix’s Hypothesis

Populism of any type is comprised of two strains:

  1. The first is located in cities amongst those with a “modern” outlook who feel themselves victims of modernization.
  2. The second is in the countryside, the “traditional” elements. They feel they have been left behind by modernization.
  • 1 wants to increase their stake in modernization. 2 react against manifestations of change.
  • The fact that these are tendencies rather than rules explains how they can co-exist in one movement, but also why the movements are often incoherent and ill-defined.
  • Authoritarians are more likely to attract 1. Democrats 2.
  • In either case the nature of a given movement derives as much from political causes as from social causes.

TOWARD AN ALTERNATIVE CONCEPTUALIZATION OF SOUTH AMERICAN POLITICS

TOWARD AN ALTERNATIVE CONCEPTUALIZATION OF SOUTH AMERICAN POLITICS

G. O’Donell

Chapter 2 Modernization and Bureaucratic-Authoritarianism: Studies in South American Politics

A Summary 

In a Nutshell

It seems that most of the criticism leveled this thesis is based on a reading of it that defines BA regimes as a necessary tool for achieving industrial deepening (vertical) at the end of the “easy” phase of ISI. Serra etc. note that attempts at deepening had occurred before the BA regimes were implanted. Whilst it may be the case that deepening is an integral part of the thesis, I would suggest it is broader than this. The argument seems to be as follows: Populism in its promotion of horizontal industrialization meant that the societies of LA, particularly Argentina and Brazil, were modernized, and following on from the “gap” thesis proposed by Huntington, it was the inability of the populist regimes to moderate between the increased demands by the urban popular sector as against the industrialized and landed classes that lead to a coalition that sought to exclude the urban classes from politics. The external bottlenecks of development created by populism, the forex problems, and the continued dependency upon foreign firms meant that a continuation of the populist agenda as it stood was not economically feasible. However, the popular sectors’ demands were ever increasing beyond possibility of satisfaction, and the only way to solve the political deadlock that was caused by too many competing demands being made of the state, was to exclude those actors in favour of a strong coercive regime.

 Thus whilst the main goal of BA may have been industrial deepening, such deepening was not possible under populism because of the strong urban classes that benefitted from populism and were sure to lose under stabilization and BA. The need to deepen the industrial base was the core economic policy desired by supporters of the BA regimes, but the reason that such deepening had to occur under BA as opposed to democracy was the gaps between demands and realities that were caused by the period of popular demand expansion and modernization that preceded BA.

 The key feature of these regimes is that they were “excluding political systems”, meaning that they sought to exclude from politics an already activated urban popular sector. This meant denying power to leaders of the urban sector, and refusing to meet their political demands. This policy could be achieved both by coercion and the shutting of channels of political access. This feature is contrasted with the “incorporating political systems” of populism which sought to explicitly activate the urban classes.

 Argentina and Brazil: From Incorporation to Exclusion

Expansion

  • Prior to ISI the politically powerful sectors were the agrarian and resource sectors producing exportable goods through largely foreign owned export intermediaries. The crisis of the 30s started domestic industrialization and the emergence of an urban working class. This change in class structure changed the basis of political power and allowed for the formation of populist alliances.
  • These populist alliances stood against the traditional oligarchies, foreign owned firms, and free trade. They stood for industrialization and the expansion of the domestic market. Industrialization would insulate the states from international crises and end the political dependence that was must maligned.
  • Peron in Arg, and Vargas in Brazil were successful in benefitting urban workers, raising consumption and employment etc. However, the oligarchies were not fully de-politicized as they continued to be the sole owners of forex and were as such key for carrying out the populist expansion policies.
  • The type of industrialization that occurred was “horizontal” i.e. in import substitution finished consumer goods. This means a heavy dependence upon importing capital and intermediate goods and technology without which the domestic industry could not function. Horizontal industrialization had progressed much further in Arg and Braz due to large internal markets.
  • Vargas and Peron encouraged unionization to provide alliances and as it fostered government control over new industries. So whilst labour was denied an autonomous base, it did develop strong organizational networks.
  • The process was generally exulted.

 The End of Expansion

  • The “easy” phase of ISI was exhausted. Horizontal diversification could not proceed any further. Poor productivity in exporting sectors combined with declining terms of trade meant poor earnings in the forex earning sectors that had to pay for populist policies. Together with intense importing of capital goods etc. led to a severe forex crisis.
  • ISI left a consumption pattern overly reliant on luxuries and small producers, whilst horizontal industrialization could not be effected. Costs were high; there was much inefficiency and a poor result in terms of income distribution.
  • It became clear that painful policy innovations were needed.
  • Vertical industrialization is a very different beast from horizontal. The populist ideal of decreasing outside dependence proved to be fallacy and the urban masses now had consumption expectations modeled after highly developed countries. The persistent technology transfers from abroad meant an increasing penetration of technocratic roles.
  • The forex problem combined with big consumption demands caused severe inflation.
  • It was clear that stabilization was needed. However this meant restrained monetary policy, demand suppression and the elimination of marginal producers which were unfortunately political impractical due to the enormous social tensions they created (as the marginal producers were labour intensive, and the beneficiaries of a freer economy were sure to be the large companies many of which were US owned). It came to be thought that such policies could only be enacted given a postponement of power participation demands.
  • Other problems were that due to the technology intense industrialization that purchased overseas technology where the factor mix was very different, the new industries could not absorb much labour. Growth stagnated in the years period to the Braz and Arg Coup (1964, 1966)

Political Actors after Populism

  • Demands of urban sector hard to satisfy in the eyes of the other sectors, but the demands were institutionalized into well-organized unions created under populism. Plus the urban sector was using threats and strike action to disrupt in order to achieve their political goals. Political activism grew markedly.
  • This activation was achieved by high modernization. The activation caused a tension between the urban classes and other sectors that saw a threat to the survival of the social arrangements particularly the class structure, the power distribution and the international alignment of countries. This was particularly the case given the climate of fear in the post Cuban revolutionary period. The US was making policy based on fighting socialism in the South, and the technocratic links that were formed under technology importing in ISI meant that there were significant linkages with the USA.
  • The threat of social unrest led to a redefinition of the role of the military as national security now encompasses the achievement of socio-economic development, and the suppression of internal enemies.
  • The salaried middle classes saw their incomes decline as growth stalled, and the agrarian sector reasserted their dislike for mass politics as populism had specifically excluded development of the agricultural sector. This meant that the urban classes were politically isolated. They lacked their previous populist allies, direct political access and so they opted for increased political activism.

 

  • Populism generated a “gap” between the demands of the urban sectors and the performance of the economy. This gap led to increased activism, increased demands on the government and an inability to accept the solutions to the development bottlenecks that had developed. More demands brought forth more actors and eventually formal political behaviour gave way to naked power strategies. The conflicting demands on the state lead to a stalemate whereby unrestrained conflict and differences in demands prevented the governments from implementing any policies other than short term placation of the most threatening actors with no concern for long-term problem solving.
  • Coalitions were formed with the goal of ending this stalemate by implanting regimes that were effective decision makers. As Huntington suggests after a period of “praetorian” government [see Huntington] the tendency is to define the situation as requiring the placement of severe restraints on the political activities of those who are outside of the winning coalition i.e. authoritarianism.
  • This conceptual moment was reached in Brazil and Arg first and foremost as the level of modernization was much greater than that seen elsewhere in LA.

 Technocratic Roles

  • Advances in modernization are evidenced by increased technocratic roles at all levels of decision making and industry. The complexity of society creates management needs in which technology plays an important part. Thus technocrats further penetrate society as modernization increases. [Thus technocracy is a logical and essential component of the authoritarianism post expansionary modernization.]
  • These technocrats become frustrated from a failure of the context to match their expectations. They desire to reshape society in line with their learning experience, and their reward aspirations. They are convinced that they can remodel the social context to both better suit them, and improve society, and this is how they rationalize their actions.
  • In Brazil and Arg business and military academies became meeting places for incumbents at the top of large businesses and the military thus creating strong linkages between the technocrats and those in power.
  • They have a technical problem solving approach focused on efficiency and rationality. Thus they are far more likely to be interested in indicators such as GDP, growth etc. rather than “noisy” social indicators such as poverty, income distribution, lack of political institutions etc. 

Bureaucratic-Authoritarianism

  • Given the demand performance gap, excessive demands had to be blocked. This meant the elimination of parties and elections, the cooption of the leaders of the unions (by coercion). Bargaining and interest representation would be limited to those at the top of large organizations.
  • The proponents of the system saw that the exclusion of the popular sector and a conversion of the socio-economic structure would stimulate growth, increase efficiency etc. and then political democracy and a wider wealth distribution could be initiated.
  • BA lacked mobilizational force and an ideology which separates it from European fascism for example. There is no interest in indoctrinating the population – in fact they prefer political apathy.
  • “Bureaucratic” suggests organizational strength of certain sectors, government control over career patterns and power-bases of technocratic roles, and the pivotal role played by large bureaucracies.
  • As growth and wages had been declining in the previous period there were few economic benefits to be distributed to the losers and this led to unrest and a reversion to coercion.
  • Once in power there were certain strains: the military was to a certain degree nationalist, as were the populations of Brazil and Argentina. This led to a conflict between efficiency and nationalism, as many of the “margin” producers to be eliminated were domestic entrepreneurs, with the majority of the efficient technology holding firms being foreign owned. To try to solve the problem there were attempts to increase the size of the public sector as alternative means of employment etc. but this too met with calls from big business for further liberalization and reduction in state intervention.
  • As a result many of the initial middle class supporters found themselves outside the winning coalition as domestic industry declined, and the public sector growth was insufficient to absorb their expectations.
  • Economic performance was at best mixed.
  • As the indicators preferred by the technocracy as hard in terms of facts, consolidation of such a regime is only possible if those indicators show progress, otherwise rationalization of rule cannot take place. This perhaps indicated why Argentina was allowed to move back to democracy earlier than Brazil as the failure of the regime in Argentina was blatant whereas in Brazil performance was satisfactory for a while.

 

Coercion

  • Different levels of coercion based upon labour supply – Brazil was able to totally deactivate its popular sector by using coercion whereas the sector retained some power in Argentina. O’Donell hypothesizes that this is because the peripheral states of Brazil always supplied a huge amount of excess labour which was destabilizing to the union activity. In Argentina there was often full employment so the unions were much stronger. Thus a much greater amount of force would have been needed to deactivate that sector in the same way.
  • Different levels of coercion based upon “levels” of popular activation – Brazilian popular activation was at a lower level than Argentina, but it was increasing at a much greater pace, thus the threat appeared more serious and required a more coercive response.

INTERNAL INCONSISTENCIES: LINKING THE WASHINGTON CONSENSUS AND POVERTY IN LATIN AMERICA

INTERNAL INCONSISTENCIES: LINKING THE WASHINGTON CONSENSUS AND POVERTY IN LATIN AMERICA

 

Rory Creedon LSE MPA (ID)

GV444

 Follow this link for the full essay: POVERTY AND THE WASHINGTON CONSENSUS

In what way did the Washington Consensus affect poverty in Latin America?

 There is a wealth of qualitative evidence that links the increase in poverty seen in Latin America between 1980 and 2002 to the free-market reforms undertaken in that period. There is a particularly strong association between poverty and the negative effects on employment of sudden exposure to external competition.[1] Empirically however, the causal underpinning of this correlation is somewhat more controversial. Characteristic of the debate is the differing stance taken by Huber & Solt as against Walton. The former conclude that there is a clear statistical link between poverty and the reforms[2]  whereas the latter maintains that once other macro level variables are controlled for there is no statistically significant relationship.[3] These contradictory stances are evidence of the chronic endogeneity and omitted variable problems that plague macro level empirical analysis of this sort, and whilst it is prudent to be sensitive to these different debates, this paper starts from the non-controversial assumption that the policies of the Washington Consensus at best did very little to address the problem of poverty in Latin America, and at worst failed to prevent a large scale increase in the number of people living in poverty. This essay argues that this failure sprung from an internal inconsistency between the initial concept of the Washington Consensus as a short term plan for macroeconomic stabilization, and the policy tools recommended. Whilst certain of the policy tools were pertinent for addressing the severe hyperinflation and balance of payments problems faced by Latin American economies (particularly reducing fiscal deficits, and ensuring a competitive exchange rate), others (particularly trade liberalization) should have been part of a more comprehensive development strategy. This conceptual confusion led to implementation of long-term development strategy policies as though they were short-term macroeconomic policy programmes and this kept poverty extremely high in Latin America.


[1] SAPRIN The Policy Roots of Economic Crisis and Poverty (2002)

[2] E. Huber and F. Solt Successes and Failures of Neoliberalism  Latin American Research Review, Vol. 39, No. 3 (2004) pg.156

[3] M Walton Neoliberalism in Latin America: Good, Bad, or Incomplete? Latin American Research Review, Vol. 39, No. 3 (2004) pg. 174

INFORMALITY AND DISTRIBUTIVE POLITICS

INFORMALITY AND DISTRIBUTIVE POLITICS

Follow this link for full essay: INFORMALITY AND DISTRIBUTIVE POLITICS(final)

Rory Creedon London School of Economics (MPA ID)

 Introduction

An individual’s preferences regarding taxation may be derived from a number of sources such as the distance between his income and the average income[1] or notions of social justice. A further particularly salient source is that presented by Alesina and Rodrik [2]. Individuals, they argue, are endowed with labour, capital, or most likely a mixture of the two, whilst governments make productive investments financed by a tax on capital. The basic result of their model is that an individual who derives all of his income from capital will prefer the tax rate that maximizes the economy’s growth rate, whereas anyone who earns even part of his income by selling his labour will prefer a lower tax rate and a correspondingly lower growth rate.[3] To this insight I would like to add another: that the presence of a large informal economy will affect the preferences for taxation of both capitalists and wage earners.

The directional influence that a large informal economy will have on preferences for taxation is not discernable a priori. This is because the true nature of the key mechanism by which the informal economy affects preferences for taxation, namely the interaction between the informal and formal economy, is disputed. This essay analyses two major lines of thought on how the informal economy interacts with the formal economy. Dualists argue that the informal economy is a separate marginal sector not linked to the formal sector in any significant way. Structuralists on the other hand maintain that both the informal and formal economy are part of the same capitalist spectrum.[4] This essay does not assert the primacy of either of these views. Rather, within the stylized model presented by Alesina and Rodrik with the additional assumption of a large informal economy, I seek to emphasize that preferences over taxation will vary according to whether the true nature of the informal sector is closest to the dualist or structuralist tradition, thus reaffirming the importance of the debate. Arguments and examples are drawn largely from the literature surrounding the informal economy of Latin America as the extent of the informal economy in that region is such that it is impossible to ignore in terms of policy making and preferences over policy[5]. Additionally a particularly rich vein of scholarship has emerged in relation to the Latin American informal economy.


[1] A.H. Meltzer & S.F. Richard, A Rational Theory of the Size of Government The Journal of Political Economy, Vol. 89, No. 5, (Oct., 1981)  pp.916

[2] A. Alesina & D. Rodrik, Distributive Politics and Economic Growth The Quarterly Journal of Economics, Vol. 109, No. 2, (May 1994) pp. 465-90.

[3] Ibid. pg. 466

[4] M. Carr & M.A. Chen, Globalization and the Informal Economy: How Global Trade and Investment Impact on the Working Poor, ILO Employment Sector Working Paper on the Informal Economy, No. 1, Geneva, ILO pg. 5

[5] J.R. Franks Macroeconomic Policy and the Informal Sector in C. Rakowski (ed.) Contrapunto: The Informal Sector Debate in Latin America, New York: State University of New York Press (1994)

REVERSAL OF FORTUNE

REVERSAL OF FORTUNE: GEOGRAPHY AND INSTITUTIONS IN THE MAKING OF THE MODERN WORLD INCOME DISTRIBUTION

D. Acemoglu, S. Johnson & J.A. Robinson

The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov., 20020 pg. 1231-1294

This is a very short summary taken from an essay I wrote. It is not intended to be a full exposition but rather a study aide.

AJR take a similar approach [to Engerman and Sokoloff] albeit they illustrate their thesis with statistical findings. They show there is a negative relationship between countries that were relatively rich in 1500 and economic prosperity today; the “reversal of fortune”.[1] They use population density and extent of urbanization as proxies for economic wealth in 1500 and argue that it was the relatively poor areas in which the “institutions of private property” were established whereas the norm in relatively richer areas was “extractive institutions” where power is concentrated in an elite and expropriation risks for the population in general are large. This is because “relative prosperity made extractive institutions more profitable for the colonizers; for example, the native population could be forced to work in mines and plantations”.[2] They posit that societies with good institutions are more able to take advantage of the opportunity to industrialize as private property institutions are “essential for investment incentives and successful economic performance.”[3] For example, they show that the regression analysis of current income against urbanization in 1500 predicts that Uruguay which had no urbanization in 1500 should have a current income 105% greater than Guatemala which in 1500 had an urbanization rate of 9.2%, and this turns out to be pretty close to the truth.[4] In order to prove the effectiveness of their instrument, and to thus prove that institutions cause growth and not vice versa, they have to show that the urbanization/population density in 1500 has no direct effect on current GPD levels other than through the effect it had on early institutions. Once they include the variable in their regression and control for the effect of institutions they cannot reject the null hypothesis that the coefficient of the instrumental variable is equal to 0, in other words that it does not explain any of the variation in GDP other than through its effect on institutions.[5]

Although similar to the ES hypothesis in that AJR are supporting what has come to be known as the “institutional hypothesis”, the instrument they employ is pointedly different to that of factor endowments. Indeed they specifically control for geographic variables including soil type and climate and do not find them statistically significant in explaining variation in GDP today.  They also engage much more directly with other hypotheses such as the “geography hypothesis” as well as the “colonial identity hypothesis”, the “latitude hypothesis” and the “religious hypothesis” and conclude that once they have controlled for geographic variants, the identity of the colonizers, the position of the colony relative to the equator and the religious makeup of the colonial society, all of those variables do not significantly explain variation in current GDP across ex-colonies.


[1] Acemoglu, Johnson and Robinson Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov 2002) pp. 1231-1294

[2] Ibid.

[3] Ibid.

[4] Ibid

[5] Ibid. 

THE POLITICAL ECONOMY OF INDUSTRIALISATION

THE POLITICAL ECONOMY OF INDUSTRIALISATION

From WWI to the Great Depression

S. Haber

  • War did not produce a huge disruption in LA industrialization. Foreign goods disappeared from the market thus giving domestic production effective protection.
  • LA was hurt by war in two senses: 1. Financing had largely been coming from GB and thus capital inflows dried up. 2. Inputs became very hard to obtain e.g. coal, chemicals, capital and intermediate goods.
  • Therefore growth slowed during the war years but did not cease.
  • E.g. Brazil’s textile industry doubled in size between 1907-1914 and then did not grow at all until 1921. There was a large contraction of new investment.
  • E.g. Argentina – output stagnated 1914-18. Only industries that relied on home grown raw materials benefitted e.g. woolen textiles. Unemployment rose in urban centres by 10%.
  • e.g. Mexico – growth stalled due to lack of raw materials, machines and spare parts. Haber argues this would have occurred despite the revolution of 1910-.
  • When the war ended GB no longer the primary consumer of goods from LA, nor the source of capital, nor machinery/equipment. In all respects BG was overtaken by the USA.

POST WAR

  • After the war there was a huge increase in industrial investment such as manufacturing, textiles, beverages and began to include intermediate and capital goods too e.g. iron, steel, chems, tobacco etc.
  • Growth came from small workshops that converted to factories during the war, but also from multinationals setting up subsidiaries in LA e.g. GE, Ford, General Motors etc.
  • As investments climbed so did output.

THE GREAT DEPRESSION

  • The depression hit LA hard and before the worst of it hit the US – export prices had been falling for some time. The large scale contractions of 31/32 sent prices to rock bottom. E.g. Mexico output declined 31% between 1929-32.
  • The industries that had seen large scale investment were particularly hurt e.g. BAT was running at only 37% capacity.
  • Medium term things were not so bad – the move away from the gold standard meant large scale currency devaluation in LA and thus export products were priced very competitively in the world markets. There was rapid growth in manufacturing output. By 1939 manufacturing accounted for 16.5% of LA total GDP.
  • The increased output of the 30s was thanks to capacity that had been installed in previous decades. E.g. Brazilian steel companies showed lots of growth in 30s but all the companies had been established and equipped in the 20s.
  • e.g. Mexico – capital machinery inflows were half of their previous levels and yet recovery was in full swing, indicating they were already equipped to pursue growth opportunities in the 30s.
  • Haber does not totally discount the idea that there were new firms in the market, but he contradicts the thesis that LA’s industrial development can be dated from the 30s. The basic model and capacity of LA industry was inherited from earlier decades.
  • Once the effects of the currency devaluation had been reversed (thus ending the de facto protection) there were calls for protection by way of tariffs.
  • Tariff protection increased hugely in the 30s. Yet they were not conceived as permanent, rather they were ad hoc responses to short-term crises. Aside from protectionism they made a good deal of economic sense as the collapse of export revenues meant governments faced BOP problems. The inflow of foreign capital had stopped so a means of preventing a huge forex loss and pay for imports was needed and tariffs allowed for this.

REAL WAGES, INEQUALITY AND GLOBALISATION IN LATIN AMERICA BEFORE 1940

REAL WAGES, INEQUALITY AND GLOBALISATION IN LATIN AMERICA BEFORE 1940

Jeffrey Williamson

 A Summary

  • By 1914 there was great amount of regional variation in the wage levels within LA. How and when did these gaps appear?
  • 19th Century saw a big divergence of living standards across the centre/periphery. This was caused by the industrialization of Britain and others which left many countries way behind.
  • Pre-1914 there was a globalization boom led by commodity trade. This led to a convergence in living standards across the Atlantic nations. LA in this period (1820-70) was in a state of independence and war and was [“lost decades!”] thus an “economic and political basket case”. Many countries actually saw negative growth in this period. The poorest countries were growing slowest and the richest were growing fastest.

The Tyranny of Distance

  • Economic isolation explains underdevelopment (landlocked, no access to coasts, far from trade routes etc). Does this explain LA history? Andean countries, Mexican interior etc. were cut off in the pre railway days (1870).
  • Geographic isolation helps to explain the rankings of countries i.e. most isolated were poorest. Many other factors though – slavery, bad luck in commodity markets, but it is still accepted today that poor economic performance is associated with being land locked
  • Those countries with navigable rivers and long coast lines (Arg, braz, Carib, Central Am) have a comparative trade advantage but may have failed for other reasons.
  • Around 1850 large leaps in transport capabilities drastically reduced the cost of freight and began to thus incorportate LA economies into the world market. (sail to steam).
  • Refrigeration was also a radical development and introduced in a big was in the 1870s. Now LA meat was being exported in large quantities.
  • The impact of the transport innovations was a trade boom!By 1912 exports accounted fro 25% GDP (12% in 1850).
  • However, the globalization that took place in the late 19th Century was not due to an embrace of liberal trade policy (tariffs did not in fact fall). In fact tariffs were used as a defense to competition spurred on by lowered transport costs.
  • The period was actually one of retreat from free trade but this was overwhelmed by transport benefits.
  • The boom led to a commodity price convergence between LA and EU in commodity prices e.g. wheat (58 to 18 % transatlantic price difference reduction). Meat was delayed due to slower development process for refrigeration units.

 

 

Real Wages

  • Williamson wants measure growth by real wages not GDP as wages offer distributional information (when looking at urban workers esp) and living standards are btter captured by wages than GDP as people really earn wages not GDP.
  • He looks at unskilled wages in LA vs. the same in Britain using purchase power parity rather than exchange rates. At turn of the century Arg/Uraguay are close to Britain, mexico at 58% and northeast Brazil at a mere 5% of the wages earned in Britain (they had only just freed the slaves and exports were performing badly).
  • Some effort has been made to compare these regional gaps to other areas in the world, but Williamson argues the gaps were actually much wider in LA.
  • The 20th Century was a time of convergence of wealth within LA. The close in the gap between richest and poorest closed dramatically in the 80 years from  WWI, although the hierarchy of wealth remained the same (expcept Brazil) indicating that there is a strong historical perseverance of the “wealth of nations”. E.g. if Chile, Cuba, Arg are 100 the 1910 figures for wage rates in Braz, Ecuador and Ven were 26.3. 33.4 and 34.3% respectively. By 1990 this was 80.7 53.2 and 127.7%
  • There are two main periods of convergence: 1910-1930 and 1970-1990.
  • There is no evidence for any real convergence prior to the turn of the centrury.
  • In spite of convergence within, there was divergence without. Until the war only Argentina seemed to be catching up with Britain in terms of real wages. Cuba and mex were nto performing badly but there was no progress toward the UK level.
  • In the 20th Century the gap widened significatntly. Why?

Real Wages and Migration

  • Immigrants from Spain and Portugal were poor by EU standards and went to LA to exploit higher relative wages. The wage gaps determined the spread of immigrants – i.e. better rents in labour scare parts of the continent.
  • As wages fell relative to EU in the 20th Century immigration also slowed.
  • Economic failure in Portugal and Spain created the mass migrations.

Wage Rental Ratios

  • The wage/rental ratio fell drastically until WWI. Exports of land intensive products lead to an increase in land value whilst the increased imports of labout intensive manufactured products caused the demand for labour to fall. i.e. inequality was on the rise. Other explanations are that there was a process of labour intensification with the arrival of immigrants and this increased supply suppressed prices.
  • Exactly the opposite trend was occurring in Eu. Inequality was falling.
  • In LA the wage rate growth was falling way behind the GDP p.c. growth (pre war) and the opposite is true post war.

LATIN AMERICA AND THE INTERNATIONAL ECONOMY 1870-1914

LATIN AMERICA AND THE INTERNATIONAL ECONOMY 1870-1914

W.P. Glade

 A Summary

In A Nutshell

Whilst this article is dense with information, it is useful to show that institutions are not the only thing worth accounting for when thinking about growth in LA. The structure of dependence upon core countries is also really important as well as technological changes.

  • Post colonial mix of capitalist and non-capitalist relations of production.
  • Began to integrate into world economy exporting wool, minerals and coffee but ease of borrowing in this time meant there were no home grown technological developments
  • Post independence left a politically unstable region – coups uprisings etc. and this led to inefficiency, indiscipline and corruption.
  • Last 25 years of 19th century stability began to be exhibited. Government authority increased especially in Brazil, Chile, Arg and mexico – and this meant policy could be directed toward securing material prosperity.
  • This stability lead to a more reliable and thus hospitable investment environment for foreign investors and for local private investment/capital accumulation.
  • Foreign investors were investing not just in businesses but in the government bonds so substantial infrastructure improvement could also take place. The money was better used as stability means less wastage and pilfering associated with constant regime change.
  • During the 19th century growth in world trade in primary products outstripped that of manufactured goods and this was so until the 1st quarter of the 20th century. Thus the growth seen in Latin America during this time of “high capitalism” was driven by industrialization in the economic centre.
  • The reliance on this demand driven by the economies of the North lead to unsteady growth due to shocks or political instability in those countries. Nevertheless during this period expansion was “export led” and therefore induced by the pull of demand in industrial countries.

Export Markets

  • The integration into the world economy changed the pattern and geography of production in LA
  • e.g. Argentina – Wool, hides, meat (with advent of frozen shipping capabilities) and most significantly (and recently to 1870) wheat and maize. The pampa and areas to the west of BA had been converted for farming cereals, and wool production shifted form the pampa to Patagonia.
  • e.g. Chile – Wheat, Copper and nitrates (more acquired after war of the pacific – a radical example of the changing geography of the region! [ Chile acquired mineral deposits in land from Peru and Bolivia])
  • e.g. Mexico was favoured with good geography i.e. close to shipping routes to Europe but also the northern border with the US – silver, gold, copper and under Diaz, Petroleum (was 3rd in world petrol producing nations). The diversity of exports (rubber, hides, cattle, lead chick peas) meant that there was more stability in external sector. Since the exporting regions were not close to each other many different regions were touched by flourish international trade. Thus we would expect to see regional subnational economies (such as the coffee economies around Rio in Brazil) but there was little of this and the average Mexican was not benefitted by growth even if the exports were coming from his locale.
  • Elsewhere a monocultural pattern of development e.g. Colombia 46% exports were coffee leading to basic instability of export economy.

Domestic Markets

  • Large changes in consumer habits in all countries of LA. Imports largely from Britain (although some artisan industries never entirely died out).
  • Industrialisation was patchy but nevertheless it was the dawn of the factory age inspired by a change in tastes that favoured factory goods over traditional goods.

New Characteristics of the Market

  • Doubly joined to the world market: firstly the organization for export expansion provided central resource allocation dynamic. Foregin, not domestic demand called the tune. Secondly changes in domestic demand reveal that consumption was heavily commited to participation in foreign trade.
  • Not everyone accepted the liberal economic model, some variation to laissez-faire was introduced in the region.
  • All product innovation originated abroad so all monopoloy profits accrued to foreign entities.

Factor Markets

Land

Land was fundamental to the nature of the export economies (the good exported were land intensive”) and it also conditioned the social and political arrangements of the period.

The large increase in the supply of land needed to grow exports came from three sources:

  1. Private appropriations of the public domain – coffee pushed cattle/farming to ever further outlying parts of the region. Huge amounts of land that once belonged to the state then fell into private hands, either a family or company (in the case of mining land). Small/medium mines would be family run until they presented significant attractiveness at which point they would be bought by international companies – “denationalistion” was most significant for mining than rural properties (although banana plantations of central America etc.)
  2. Conversion of land held by haciendas to commercial use – triggered by railway lines as they moved into new areas. Previously unused estate land would be converted to producing export goods. Some estates were subdivided, but others were concentrated into larger production units.
  3. Corporate holdings in the more traditional areas – e.g. church land e.g. mexico – 1850s legal reform put church land in the hands of private owners. Market purchase and simple seizure were both used.
  • Generally large land owners had the upper hand as concessions for mining etc. were given to those who could influence politicians. Where export products were demanded the demand for land went up and so did prices pushing those peasant farmers etc. to the furthest periphery as they had no access to credit etc.

STRUCTURES, ENDOWMNENTS AND INSTITUTIONS

STRUCTURES, ENDOWMNENTS AND INSTITUTIONS IN THE ECONOMIC HISTORY Of LATIN AMERICA

J. Coatsworth

Latin American Research Review, Vol.40 No. 3 (2005) pg. 126-144

In a Nutshell

This is a wide ranging look at theories of long run growth in Latin America. The parts that a relevant for me are the specific criticisms made against the Engerman and Sokoloff thesis, and as such this summary will focus on those criticisms.

The main takeaway is that although there was extreme concentration of wealth and land in LA this cannot be attributed to factor endowments as the inequalities did not arise until much later than E&S imply and for very different reasons including technological change, north-south relations, violence etc.

Examples

Although totally reliable data are not available on growth and GDP in the early years of colonialism Angus Maddison provides data upon which there is much agreement which indicates that the areas of LA under Spanish/Portuguese control probably enjoyed per capita incomes on a par with Western Europe and at least equal to those in the USA (at that time  British colony). Additionally it appears that there was very little economic growth in the 50 years post 1810 and independence in the region. This poses problems for the institutions thesis: if growth is determined by institutional settings, and the institutional setting in LA highly unequal in its provision of access to infrastructure, education and government thus harming growth potential, it would seem that convergence of incomes up until the early 18th century followed by divergence should not be a possible outcome as factor endowments were presumably constant throughout this period. Particularly problematic is the convergence with the USA, as this northern colony is the example in the E&S thesis of a good institutional setting.

AJR argue that the divergence occurred during the period of industrialization in the mid-19th century up to the beginning of the 20th century; the age of industry created a considerable advantage for societies with institutions of private property, advantages which many Latin American countries were thus unable to capitalize upon. Whilst perhaps more coherent in the  face of the data, this interpretation seems to gloss over the possibility that the inability to industrialize and capitalise on new technologies and thus the origin of the enormous divergence in growth that occurred as between Latin America and USA/Western Europe, may have been in some way related to the decades of violence and civil war that followed independence earlier in the 19th Century. The period of industrialization coincided with the “lost decades” of insurgency (Bates, Coatsworth and Williamson) , political instability and economic stagnation in Latin America and this left the region an “economic and political basket case.” (Williamson). However, factor endowments were surely constant across independence including soil types and climate, as was the population density in 1500. Even if those causal mechanisms are longer important, as operating only through the institutions they inspired, it is surely implausible to assert that growth in the 19th century was not linked to the conditions that created the independence movement, and the subsequent internal violence (factors exogenous to both the ES and AJR model), but rather to failings in the institutions of private property. After all, economic agents behave differently when they fear for their life, family’s welfare and source of living (North, Weignast)

The institutional thesis can no more explain the divergence from 1810 than it can the resumption of growth from 1870 until WWII when LA grew faster than most of the industrialized world.

Furthermore although the institutions that governed LA from colonization were very similar there was a wild divergence of early GDP. Indeed those societies that were most unequal seem to had the highest GDP e.g. Cuba. At this time inequality therefore seems to be positively correlated with economic development.

Coatsworth argues that the concentration of land ownership was actually a much later phenomenon than suggested by E&S. Until the late 18th century and the arrival of the railroads, and increased shipping capabilities, much of Latin America was unused with land values extremely low. It was only exogenous technological change in transportation that brought value to the land.

Additionally, whilst inequality has always been a feature of LA society it was this early globalizing period that greatly entrenched inequality, and then the subsequent ISI period reinforced this with wage increased for protected sectors and government jobs to the exclusion of particularly the agricultural sector which was a great proportion of society. This inequality was driven by policy models, external dependence and ideology of decision makers, not by factor endowments. Thus it may be that institutions are important for growth (as they surely are) but that the long run causes of these institutions are not as dependent upon the spent historical determinants of factor endowments, as upon concurrent contexts.

COLONIALISM, INEQUALITY AND LONG-RUN PATHS OF DEVELOPMENT

COLONIALISM, INEQUALITY AND LONG-RUN PATHS OF DEVELOPMENT

S.L. Engerman & K.L Sokoloff

NBER Working Paper 11057

A Summary

[The following is summarized within an essay written in the MT. It is not intended to be a complete summary, but rather an aide for future essay writing.]

ES suggest that institutions are a fundamental determinant of growth, and the quality of the institutions in Latin America explain why the colonies “that were the choices of the first Europeans to settle in the Americas, were those that fell behind” relative to those North American colonies of the today’s USA and Canada.[1] In reviewing the history of these colonies they claim the systematic factor that explains the diversity of quality in institutions across the “New World” is “extreme inequality in the distribution of wealth, human capital and political influence” in the early settlements. This led to the development of institutions primarily devised by elites to ensure the persistence of such inequalities and it is this poor institutional base that explains long-run economic underdevelopment. The degree of inequality was itself determined by the “factor endowments” that the colonists faced upon arrival in the New World.

The rich soils and warm climates prevalent in much of the Caribbean Latin America but particularly Brazil, leant itself to agricultural practices such as the cultivation of sugar, that exhibited large economies of scale and were thus most effectively produced on large estates using slave labour imported from Africa.[2] Elsewhere in Spanish America, where land was not so fertile, the primary export products were metals extracted particularly in Mexico, Bolivia and Peru. These territories were characterized by a large native population that survived contact with the European settlers. Land was distributed to a similarly small elite in similarly large quantities, and thus the estate owners had control over a large workforce which despite having better social standing than the slaves of Brazil, were nevertheless coerced into service in the mines.[3]

The slave economy of Brazil and the similarly coercive economies found in Spanish America obviously imply that inequality in political power, human capital and wealth was extremely high. Power was concentrated in the hands of a small European elite, and particularly in Spanish America this situation was maintained externally by “restrictive immigration policies”.[4]

Conversely, the soil and climate coupled with the relative dispersion of the native population (and thus the unavailability of coerced labour), meant that the factor endowments that the colonizers of the Northern American territories faced were “more hospitable to the cultivation of grains” which were most effectively produced on small farm holdings. The absence of economies of scale in agriculture meant that production was based on labourers of European descent so there was drastically less human capital inequality relative to rest of the New World. Furthermore “large landholding unravelled because even men of rather ordinary means could set up independent farms when land was cheap and scale economies were absent.”[5] What ES show is that the factor endowments of the Northern colonies meant land, wealth and thus political power was spread much more evenly over a relatively homogenous European population. In short, extreme inequality was absent.

ES argue that this equality in the Northern colonies set in motion a path of institutional development that focused on democracy, state investment in public goods and infrastructure and equality of opportunities both economic and political. Conversely, “where there was extreme inequality, political institutions were less democratic, investments in public goods were far more limited and the institutions that evolved tended to provide highly imbalanced…access to property rights and economic opportunities.”[6] They explain that in the highly unequal societies the elites were concerned that democratic institutions would place too much power in the hands of the poor majority who would use that power to redistribute land and redress the societal imbalances as regards opportunities. In such societies anti-democratic processes are essential for the elite to maintain their hegemony. Conversely in societies where wealth and human capital are more evenly distributed the demand for and merits of (in the eyes of those with political power) a more broadly participatory system are greater because “institutions are established in a society that has some power relations and they must reflect the distribution of this power”[7]. Furthermore, even had the elites in the Northern colonies perceived an advantage in anti-democratic institutions, they could not have instituted them as they were reliant on attracting European migrant labour which would not have been forthcoming had political and economic inequalities been great. In the Spanish colonies elites were able to act on exactly such perceptions as they were at the same time trying to restrict immigration due to the already extensive cheap labour.[8]  This explains why at the beginning of the 20th century none of the Latin American states had the secret ballot nor “more than a miniscule fraction of the population casting votes”[9] whereas the US and Canada had extended the franchise to a much greater extent, removing restrictions based on wealth and literacy.

Similarly education provision by the state in unequal societies is far less likely to develop in unequal societies as small elites are able to command private education for their offspring. There are be significant collective action problems associated with public school provision in such societies tiny elites are the major source of tax revenue (a cost to them) but the major beneficiaries of such schooling provisions are the poor majority. Therefore the benefits and the costs to the elite are hugely misaligned. In more equal societies where a larger proportion of the population makes up the taxable base, those costs and benefits are more equal vis-à-vis the individual taxpayer so public education provision becomes more feasible. As above, education may also have been used to lure migrant workers from Europe. Thus we see why “the rest of the hemisphere trailed far behind the United States and Canada in primary schooling and literacy”.[10]

The two examples above illustrate the method that ES employ. Although not strictly empirical (there is no data analysis in their work on this topic), the method is consistent with the search for the instrumental variable. The thesis would be testable under statistical conditions, and although perhaps more historical in approach, ES are trying to show that causality moves from institutions to growth as the instrument of “factor endowments” through its effect in inequality in early colonial economies in the New World varied the quality of the institutions but cannot be thought of as affecting current growth trajectories. The method is thus decidedly economic in style.


[1] Engerman and Sokoloff Colonialism, Inequality, and Long-Run Paths of Development National Bureau of Economic Research Working Paper 11057 (2005)

[2] Engerman and Sokoloff Factor Endowments, Inequality, and Paths of Development Among New World Economies National Bureau of Economic Research Working Paper  9259 (2001)

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Engerman and Sokoloff Colonialism, Inequality, and Long-Run Paths of Development National Bureau of Economic Research Working Paper 11057 (2005)

[7] A. Przeworksi Institutions Matter? Government and Opposition Vol. 49 No. 4 (2004) pp.  527-540

[8] Coatsworth  Structures, Endowments and Institutions in the Economic History of Latin America Latin American Research Review, Vol. 40, No. 3 (2005) pp.126-144

[9] Engerman and Sokoloff Colonialism, Inequality, and Long-Run Paths of Development National Bureau of Economic Research Working Paper 11057 (2005)

[10] Ibid.

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.

DELEGATIVE DEMOCRACY

DELEGATIVE DEMOCRACY

G.A. O’Donell

Journal of Democracy, Vol. 5 No. 1, (Jan., 1994) pp. 55-69

A Summary 

In a Nutshell

Although democracies in the then recently transitioned Latin American states was representative (based on popular elections) they were “delegative” rather than truly democratic. This was largely because of crisis both social and economic that they inherited from the authoritarian governments before them which gave rise to certain practices and conceptions about the proper exercise of power.

 The transition to democracy opens up the possibility of a second transition from government to democratic regime. Nothing guarantees that this will happen, but in order for it to do so a set of institutions needs to be built which enable the social and economic problems inherited to be dealt with in a regularized way. Delegative democracies lack these institutions and governmental effectiveness.

 [This argument is very much related to the executive isolation argument examined by Schamis as well as Armijo & Faucher in as much as it posits a policy/reform process characterised by a lack of horizontal accountability, a large electoral mandate and subsequent belief by the president that he has the authority to rule the country by decree at whim.]

 The Importance of Institutions

Institutions are regularized patterns of interaction that are known and accepted by social actors who consider that they will continue to act in the same way for an indefinite time period. The characteristics of a functioning institutional setting include:

  1. Institutions that incorporate and exclude – they determine the basis upon which resources, claims etc. are accepted as valid participants in the decision-making and implementation process.
  2. Institutions shape the probabilities of outcomes – certain rules fix the range of feasible outcomes and their likelihood within that range e.g. democracy precludes the use of force.
  3. Institutions aggregate – the rules lead individuals to make decisions about which level of aggregation of preferences is optimal for them.
  4. Institutions induce representation – following on from 3 the aggregation of preferences leads to the transformation of the potentially many voices into only a few that speak for many.
  5. Institutions stabilize expectations – leaders and representatives expect a narrow range of possibilities from interactions, and expect that deviations are likely to be counterproductive. It is at this point that an institution is in equilibrium.
  6. Institutions lengthen the time-horizons of actors – stabilization of behaviours implies that interactions are set to continue. This together with high levels of representation is the foundation for the “competitive cooperation” that characterises democracy. Thus one shot prisoners dilemmas are overcome by bargaining. The alternative to institutions is a colossal prisoner’s dilemma. 

Characteristics of Delegative Democracy

  • Rest on the premise that whoever wins the election may govern as he sees fit as they are the embodiment of the nation. The promises of his campaign need not be met (Menem, Fujimori). They are above organized interests.
  • A large majority must be won to sustain such claims, and as such often run-offs are used. The majority is used to sustain the myth of legitimate delegation.
  • [This is largely related to neo-populism: presidents campaign on personal charisma, they can restore the health of the nation etc. They and their technical advisers are initially infallible. In terms of policy however they behave in a delegative rather than populist fashion.]
  • The president isolates himself political institutions and interests. And this is main difference between DD and representative democracy: in representative there is vertical accountability (between the president and the people) but also horizontal accountability (president accountable across a network of relatively autonomous powers that can call into question and punish if necessary, improper ways of discharging the responsibilities of office. In DDs only the former type of accountability exists. Indeed horizontal accountability is a headache to be avoided for DD presidents. 

Examples

  • First democratic government of Uruguay (Sanguinetti) saw the implementation of incremental economic policies, whereby inflation slowly dropped whilst investment and wages slowly rose. Most of the policies were explicitly negotiated within congress and with participation from various interest groups.
  • By contrast Argentina (Austral Plan), Brazil (under the Cruzado plan, things were different under the Plan Real) and Peru (Inti Plan) all opted for drastic and surprising stabilization packages. The packages were disastrous [for O’Donell] and solved very few of the problems inherited from the B-A states.
  • What is interesting is that Uruguay inherited no less severe problems than did Argentina or Brazil, but it chose an incremental path rather than a shock doctrine. Why is this the case? O’Donell says it is because Uruguay was a case of re-democratization with working institutions of government. The president had to negotiate with congress and congress had to consult various interested parties. Consequently, even though preferences at the top may have been for stabilization [a supposition not backed up with evidence] they were “condemned to incrementalism”, and limited to modest goals.
  • “This is the drama of countries bereft of a democratic tradition”.

 [This thesis should be read in conjunction with those pieces that state that executive isolation played only a minor part in many liberalizations. For example the Brazilian Plan Real was negotiated, and evidence of coalition building is seen in many countries indicating that domestic support was important (although it should be conceded that that the coalition building was often extra-institutional) – see Schamis as well as Armijo.]

WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA?

WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA? A CONSUMPTION BASED THEORY OF TRADE POLICY PREFERENCES

A. Baker

World Politics 55 (April 2003), 423-55

A Summary 

In a Nutshell

Trade theory generally states that individuals make judgements about trade policy based on retrospective economic evaluations about earning power why is it that when polled Latin Americans consistently believe free trade to be good or somewhat good for the country. Particularly it is much more popular than privatization and this indicates that support of trade is not part of some wider stamp of approval for economic liberalism.

 The Heckscher-Ohlin model predicts that the relatively poor of Latin America should benefit from freer trade as they form the abundant factor: cheap labour. Conversely capitalists, including those with accumulated human capital, should be worse off, as it will be more profitable to import the services of such factors. This has not proved to be the case. Rather free trade has proved disastrous for employment opportunities at the lower end of the job market, the informal sector size increased greatly during the transition period. This may well be because those who are best able to benefit from free trade are those who have high levels of human capital as they have transferable skills and as such are able to adapt better to the shifting configuration of labour demand, and move more flexibly through the market. Thus in regions such as Latin America with large possibly majoritarian populations of undereducated people who have skills that are more specific to a particular sector or type of employment, there should be resistance to free trade policies.

 A retrospective economic evaluation based on earning power by citizens of Latin America should be negative for the majority who have lost out from trade opening. Why then does free trade seem to be so popular?

 The answer could be found in consumption. Most scholars overlook the fact that preferences for free trade could be formed by beliefs about liberalization by observing its impact on prices, quality and availability of goods for consumption. Under ISI citizens were charged extra to protect industry’s inefficiencies, and so once this system is dismantled all else equal there will be beneficial impact on prices for consumers. Thus individuals may be more willing to base their trade preferences on their status as consumers rather than producers of income earners. It could be that the links between trade liberalization and employment/wage variability are not obvious to those directly affected. Additionally everyone in the country is a consumer but not all are producers, meaning that trade preferences will be better tracked by trends in consumption rather than production.