Category Archives: Democracy and Development in Latin America (GV444)

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

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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)

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.

GLOBALISATION AND THE PERCEPTION OF AMERICAN WORKERS

GLOBALISATION AND THE PERCEPTION OF AMERICAN WORKERS

Sheve and Slaughter

Chapter 3: Cleavages in Public Preferences about Globalisation

 A Summary

In a Nutshell

The authors seek to predict who might oppose measures to open up trade based on the assumptions that individuals are self-interested, that individual welfare is dependent on income, and that the individual knows how trade policy affects his income. They expect that those whose income suffers as a result of more open trade will oppose freer trade policy. They largely focus on the Heckscher-Ohlin (HO) framework of factor mobility where workers can move costlessly from sector to sector and across industries. Thus wages differ not by industry but by type of worker. They posit that this model better reflect long term horizons as compared with the Ricardo-Viner (RV) framework whereby workers cannot move across all industries, so wage differences are due to type of work rather than type of worker.

 They run empirical models to test the hypotheses they derive from the model, which is that those less skilled workers will be more opposed to trade liberalization than highly-skilled workers. Their data analysis confirms this. It also seems to suggest that the type of industry that employs a worker is not particularly relevant in predicting if he will be anti-free trade measures. Other important variables prove to be race (in certain circumstances), membership of a union and political awareness. However, these variables do not significantly alter the coefficients of the skills variable. Surprisingly political affiliation is not significant in predicting if a person will be against free trade policy.

Theory

  • Trade policy affects factor incomes by changing a country’s product prices.
  • An industry enjoying a rise in product price post liberalisation will earn +ve profits, and if product price is falling the reverse is true. Optimising firms earning +ve profits increase production so economy wide demand for different types of labour changes i.e. demand for labour in expanding sectors will rise relatively. For equilibrium to be restored the wages of the two industries must adjust. 
  • The HO model says that trade protection is extended to sectors that employ factors of production in which the country is relatively poorly endowed as these are the workers who lose income in the move from autarky to free trade. So the types of workers who are abundant support free trade, and those that are scarce support protectionism. E.g. US tariffs were higher in less skill intensive industries in 70s and 80s (as they have a greater proportion of skilled workers). 
  • The RV model says income is linked to sector of employment not the type of worker. So sectors whose prices fall post free trade (ones with comparative disadvantage) realize income loss for their workers, and thus they are opposed to free trade. i.e. those workers who work in protected industries should oppose trade liberalisation. 
  • Trade policy affects regional economic performance, and so if it acts to shrink industries with less comparative advantage, then areas with a lot of such industries will see demand for housing fall and thus housing prices fall. So in areas with a greater concentration of activity in sectors with weak comparative advantage, homeowners will tend to oppose free trade.

 

Data Analysis

They do statistical analysis of National Election Studies surveys of samples of the US population. I will not describe the data nor the regressions, just summarise the findings reported.

 There is little statistical evidence to suggest that the person’s industry of employment influences policy preferences. This counters the RV model.

  • However, the coefficients on the skills variable (measured in terms of years of education) is significant and means that if you take a high school dropout and give them a full education they are 25% more likely to be in favour of free trade. So, in support of the HO model, it is the individual’s skill level that matters most for probability  of supporting free trade measures. This indicates that intersectoral labour mobility is high in the US over the time horizons in which people are evaluating trade policy.
  • They perform a robustness check by including other variables, such as political party identification, ideology, race, gender etc. and find that the coefficients in the skills variable is not significantly affected. However the check reveals that there is another important variables as trade union membership appears to be a determinant of opinions regarding free trade. Also, a small effect is found in those supporting environmental causes in being against free trade.
  • They also conclude that political awareness is a factor. Those who are more attentive an knowledgeable about politics are less likely to support new trade restrictions.
  • The confirm their hypothesis regarding home ownership.

DISTRIBUTIONAL COALITIONS AND THE POLITICS OF ECONOMIC REFORM

DISTRIBUTIONAL COALITIONS AND THE POLITICS OF ECONOMIC REFORM IN LATIN AMERICA

H.E. Schamis

World Politics 51.2 (1999) 236-268

 A Summary

In a Nutshell

Traditionally the emphasis when seeking to explain the free market reforms in Latin America has been on how losers were neutralized. This stems from the application of the logic of collective action: the costs of liberalization are great and concentrated on a few key groups (those industrialists who benefitted under ISI in particular), whereas the long run benefits are dispersed throughout the whole nation. This much larger group of beneficiaries is plagued by free riding problems and have little incentive to organize in favour of an open economy. For the small groups the cost of organization outweighs the benefits and so they lobby the state. These distributional coalitions induce the state to be more interventionist than it might otherwise prefer to be.

 Seen thus, for free market reforms to occur, these “losers” must be pacified in order for reform to become a reality. Analysis thus concentrates on top down decision-making (executive isolation) [see Armijo and Faucher], large electoral mandates, external imposition (IFIs) etc. as the key features that made reform possible in Latin America. What this misses is the extent to which there was an empowerment of winners. It is the influence of winners that offsets the capacity for collective action of the losers.

 The distributional coalitions that form behind liberalization are rent-seekers. They benefit from ties between the government and business; from uncompetitive privatization etc. (examples to follow).  It is true that an interventionist state is prone to rent-seeking behaviour, as the state has the power to grant entry into industries which exhibit profits greater than the opportunity cost. However, what was not previously appreciated was that liberalization policies also can generate incentives for rent-seeking, and indeed the success of the very reforms themselves was underpinned by this rent-seeking which allowed politicians to orchestrate distributional coalitions for change: empowering the winners. What is so novel about this approach is that in effect we are not talking about groups organizing to capture the state in order to intervene to distribute, but rather groups organizing to induce the state to withdraw from economic policy making.

 Some examples

Chile

  • Key policymakers of the Pinochet government served on the boards of large firms and economic conglomerates before and after holding central bank and cabinet posts leading to collusion between economic and political power. Monopolies were built as state firms were privatized, and the benefits of collusion were beneficial policies that allowed the firms to extract rents.

 Argentina

  • Once Menem converted to liberalism he had to get big business son board who would suffer from the loss of protections afforded under ISI. Menem offered many positions within government to the bosses of the big conglomerates so policy was in a sense negotiated with business.
  • With the passing of the State Reform Law virtually every state owned company was eligible for sale, and privatization became one of the key means of coalition building. Monopolies were sold off unbroken up, i.e. with monopoly rights intact, and sold at very favourable prices. Domestic capital was given excellent opportunity for investment and as such there was a large degree of horizontal diversification as domestic capitalists invested in a number of large monopoly ventures usually with foreign banks leading the way.

IDEOLOGICAL PERIODS IN POLITICAL ECONOMY

IDEOLOGICAL PERIODS IN POLITICAL ECONOMY

A. Hira

Chapter 2 and Conclusion from Ideas and Economic Policy in Latin America

 In a Nutshell

Ideas are important.

Traditional interpretation of the neo-liberal reforms in LA miss the fact that the political economies of Brazil and Venezuela are very different but the tried the same reforms. Moreover, despite the heterogeneity of system and history within the states of Latin America, whether it be the period of inter-war globalization, post was import substitution or late 20th Century liberalization, the region has moved often in a similar direction. Thus to focus only on international actors or domestic conditions etc. is to miss the importance of the power of ideas. Criteria such as the was the relationship between a state and the world economy is viewed informed distinct orientations toward development that are signs of different ideological perspectives. It is the dynamic creations to the answers of development issues that constitute the discourse on development.

Whilst it is true to say that dominant coalitions select policy to suit themselves, the menu of economic policies available is derived from the economic ideological frameworks that are available at a particular time in history. Paradigms of development represent pools of ideas that delimit policy choices. These ideologies are worked into the state apparatus by knowledge networks which during the time of interest consisted of expert technocrats (previously the knowledge networks were driven by ECLAC and then the Chicago boys].

Crisis is an important feature of this type of analysis. This is because paradigms change as anomalies accumulate (i.e. something that cannot be explained by the current paradigm). When the accumulation of anomalies reaches a crisis limit a new paradigm must come to dominate. Thus a crisis is an acclaimed failure of the current framework of economic policies to achieve their stated goals. Whilst not the only way to change an ideology, it is one of the most fundamental instigators of change. [This would place a greater emphasis on crisis than Armijo & Faucher allow for. In other words it was not until ISI was thoroughly discredited that a new paradigm fed by expertise from USA and Britain etc. could come to dominate. Without the hegemony of that idea, the selection of neo-liberal policies would not have been possible, as policy makers can only select policy from a menu which contains those policies available under the dominant ideologies.] It should be noted that international pressures and domestic coalitions are still need to pressure for change and support it, and particularly important are the reverberations between the two, but an active ideology is also essential. The ideology legitimizes.

A hegemony of ideas breeds stability in policy making. First ECLAC then the Washington Consensus. It is this stability that is essential for growth. [It could then be argued that the failure of ISI and the crisis of the 1980s, international and exogenous conditions aside, could be partly attributed to a faltering ideology, which led to instability of policy. The actions necessary to complete the ISI model such as regional integration faltered as there was a lack of political will both because the ideology was not strong enough now, coming out of ECLA, and secondly that the B-A did not have at their core the same ideology as the previously populist regimes.]

[This is important for evaluating the Engerman and Sokoloff thesis (EH451) and also the AJR thesis:  Doctrinal and ideological changes and their effects on growth are also not understandable in the light of the institutional hypothesis. Although doctrine and ideology are doubtless formed against a backdrop of institutions there is a wealth of other factors – social, economic, international, that shape them as they in turn shape policy, institutions, incentives and thus growth. From the importance of Comte in the positivist strains of thought at the turn of the 20th Century[1] to the extraordinary influence of Raul Prebisch, Latin American politics and policy specifically related to growth and development has often been dominated by thinkers that exist outside of its own institutional makeup. Furthermore an institutional focus does not recognise the social causes of populism such as rapid urbanization, an increasingly “mass society”, plus the electoral gains to be made (in certain periods of history) from nationalism in casting foreign investment/involvement in a malicious light.[2] It therefore cannot explain the cyclical nature of Latin America’s dalliances into large scale redistributionary politics. A similar story can be told in relation to the apparent cycles of authoritarianism. What we see in Latin America are periods of large doctrinal and ideological changes and these change economic outcomes in ways that endowments cannot predict.[3] We see this even in the modern history of the region: the shift toward liberalization as doctrine and the consequent effects on growth in the 1980s was caused in part by debt crisis, external pressures and trends in thought, and internal political pressures as part of the transition to democracy.[4] The institutions of private property and the more wide institutions of the market surely were important in seeking to redress the allocative inefficiencies of the structuralist period, but they are again only part of the story. Therefore the ES and AJR hypotheses are not sufficiently sensitive to such ideological contexts and their causes.]


[1] Hale Political Ideas and Ideologies in Latin America, 1870-193  in L. Bethell (ed.) Ideas and Ideologies in Twentieth Century Latin America (1996)

[2] Dix Populism: Authoritarian and Democratic Latin American Research Review XX 2 (1985) pp.29-52

[3] North, Summerhill and Weingast Order, Disorder and Economic Change: Latin America vs. North America

[4] Astorga, Berges and Fitzgerald, The Standard of Living in Latin America During the Twentieth Century, Economic History Review, LVIII, 4 (2005), pp. 765–796

“WE HAVE A CONSENSUS”

“WE HAVE A CONSENSUS”: EXPLAINING POLITICAL SUPPORT FOR MARKET REFORMS IN LATIN AMERICA

L.E. Armijo & P. Faucher

Latin American Politics and Society, Vol. 44 No.2 (Summer, 2002) pp.1-40

A Summary

 In a Nutshell

It was previously thought that free-market reform in Latin America would not be successful due to the vested interests that benefited under the ISI system that were sure to oppose any reform that weakened their position. Political actors would not find a reform strategy viable as much of their support base had benefitted from ISI, and collective action theory indicates that such concentrated benefits are easier to defend than the on aggregate greater benefits that would in essence accrue to the whole population. Given that the reforms occurred in a time of “re-democratization” [although on this one should read carefully the O’Donnell analysis of Delegative Democracy] in which sensitivity to the median voter (most likely living in a state of poverty), then it is surprising that the neo-liberal agenda which supposedly favours capital over labour, and multinationals over local firms came to be implemented. Why did this happen?

  In trying to account for the support for neo-liberal reform in Latin America, the authors place most emphasis on

  1. The changing identities and attitudes of the elites, businesses, and other interest groups. Identities changed generally by the deconstruction of the unionized labour movement, and by the new powers that emerged as winners from the free-market policies. The attitudes and preferences of existing elites changed to support neo-liberalism because of a sense that reform was inevitable, and at that stage it is rational to accept reform but try to win concessions. More importantly the, was the political bargaining and coalition building undertaken by the leaders in order to build support for the reforms. This took the form of offering concessions to certain interest groups, favourable pricing when privatizing and other such forms of quasi-patronage. [This is similar to the Schamis argument.]
  2. A change in the preferences of the public. They argue that such radical reforms could not have been undertaken without at least the tacit consent of the populace, given that they occurred in a period of democracy. This type of support is somewhat harder to explain, although they suggest that the benefits from an end to inflation and macroeconomic instability have tangible benefits especially for the poor who are otherwise unable to insulate themselves from the detrimental effects associated with those problems. [An additional thesis particularly relevant for explaining support for more open trade is provided by A. Baker who suggests a consumption based theory of support whereby people prefer the lower consumption costs associated with free market economics, even if the open international competition in effect reduces jobs at home and causes de-industrialization. This is because the links between the open economy and unemployment are not as easily discernible as the links between trade and lower prices.]

 In so stressing these two factors are key, they are arguing against theses that try to explain to free market reform based upon the assumption that reforms were domestically unpopular with both the elites and the populace. The three most important of these are, the  crisis thesis, the external assistance thesis, and the executive isolation thesis. The main takeaway then, is that political exclusion is not necessary for market reform, and such reform does not run against democratic traditions.

  Crisis

Economic crisis stimulates efforts by political leaders and makes citizens willing to endure transition pain. During crisis people are willing to put up with policies they otherwise would not accept, and as things get worse people are willing to take bigger risks to solve the problem [Weyland].

However, although the index of reform constructed which shows a convergence in level of reform between Mex, Arg, Braz and Chile such that only 8% of the reform scale differed from most reforming to least, the level of crisis between those states was somewhat different. Chile was less crisis prone. More importantly there does not seem to be a strong correlation between the timing of the crisis and the implementation of the reforms [important point for criticising Weyland]. Chile was an early reformer in the 70s, but it is not clear that at that stage, Chile was any worse off than Mexico which suffered close to a decade of forex shortage before the 1982 crisis.

They conclude that whilst a helpful condition is probably not necessary and certainly not sufficient. [In terms of an ideational interpretation it seems that crisis is often necessary to discredit the old ideology and usher in a new ideology which informs the choices available to policy makers. See Anil Hira piece summarized this week.]

 External Assistance

Governments that receive a lot of overseas aid/assistance/capital can use the funds to help ease transition pain of neo-liberalism thus making reform more feasible. This is very much linked to the types of pressure from conditionality imposed by the IFIs.

The authors argue that actually the countries studied were relatively immune to pressure from Washington, especially Mexico given its special relationship with the US. They all had fairly well developed industrial bargaining levers they could pull such that reform would only be enacted at their insistence. This confirms the view that the most successful and wide reaching reforms were actually undertaken under home initiative away from IFI influence.

 Executive Isolation

This includes that idea that if elected with a strong mandate the president can act as he chooses. More generally the logic is that if the president and his technocrats are shielded from the day-to-day demands of political actors (including voters), then reform has a better chance of being implemented. The problems of collective action highlighted above will be solved if the president is isolated from the demands of strong interest groups.

The view is founded on analysis prevalent during the rise of the East Asian Tigers, that posited that benevolent dictators are enable superior economic outcomes.

However, during the 70s all four countries were under authoritarian regimes, and only Chile chose to go with reform. Additionally there was huge variation between the size of the mandates given to the presidents of the newly democratic nations. Moreover, even where mandate was large, they were often not elected on a platform of neoliberalism (Menem, Fujimori).

Centralization of decision-making, often a key feature of the isolation hypothesis was only an aspect of the polities of Mexico and Chile, not Arg and Braz which have strong traditions of federalism. Chile and Mexico were also able to overcome problems of excessive veto players, and checks and balances as they were more authoritarian in nature. Brazil and Arg were not so, and yet there was convergence of the levels of reform. Clearly the isolation thesis is somewhat lacking.

 Pro-reform Shift in Elite Preferences

Isolation is not enough to ensure survival. Political systems depend upon support from a relevant set of political actors the identity of who will shift given different types of regime. Thus the coalition that sustained ISI needed to change to sustain neo-liberalism.

Once reform was initiated the identities of the elites changed, as due to openness and financial integration with the world economy there was greater influence for external investors and for domestic capital. Moreover, recession had weakened the labour movement.

There was also a shift in preferences of the elites. They may have feared losses from a continuation of the ISI model which seemed discredited. There may have been a bandwagon effect whereby they recognised that reform was going to happen regardless, so it was better to try to carve out concessions and favours from the government.

 Bargaining was also extremely important:

 Chile

Stabilization was painful but compensated for by state investment through CORFO to provide incentives to non-traditional exporters. Certain business owners also received tax rebates; export subsidises, and import protection. There was subsidized credit for investors wishing to invest in the newly privatized state companies.

 Mexico

The government tried coalition building. They linked trade opening to a strategy for reducing inflation. This and other government-business pacts also proved pivotal in mobilizing support for reform.

In Mexico there was a significant effect of reform from the top. Labour and business was often excluded from negotiating the specifics of reform. This was reinforced by the pre-eminence of the PRI. Thus Mexico missed much of the countervailing political pressure. Whilst this fact was expedient for reform, it was not sufficient.

 Argentina

Argentine reform also seems quite centralized. Menem performed a complete volte-face, and the State Reform laws gave him power to privatize and make policy by decree. This looks like insulation.

Yet the specifics of reform reveal a large amount of coalition building. Capital could participate on favourable terms in privatization, side payments were made to existing elites. The financial sector was won over by promises of the management of the previously state help pension and social security funds.

 Brazil

Had the least executive isolation, and the most political bargaining.

The plan that eventually worked the Plan Real, was negotiated fully in advance within a distinctly political framework. Partial trade exemptions were allowed, and privatization occurred at a slow pace.

The political bargaining may have been even more important as the crisis etc. was not of the same magnitude as in the other states.

CRISIS AND REFORM IN LATIN AMERICA

CRISIS AND REFORM IN LATIN AMERICA: FROM DESPAIR TO HOPE

S. Edwards

Chapter 2 (Muddling through: Adjustment from 1982 to 1987)

Chapter 3 (The emergence of a new Latin American Consensus)

A Summary 

In a Nutshell

The ISI programs and debt explosions (LT debt quadrupled from $45.2bn to $176bn between 1975-82, and total debt in 1982 was at $333bn) were bound to require adjustment and that came in the form of the Mexican debt crisis which quickly spread to the other countries of LA. The crisis was the product of both external (increased IRs, slow growth in the industrialized world leading to fewer exports, oil shocks and consequent lending, overvalued currency leading to capital flight in speculation against the domestic currency) and domestic factors (macroeconomic disequilibria, overvalued ex rate, inefficient industry).  In response to the crisis new models were sought, and the transition democracies chose heterodox solutions which stabilized inflation and prices briefly but its failure to tackle the underlying structural and fiscal problems meant these packages were doomed to failure. At this point of renewed frustration the free-market reforms advocated by Washington etc. provided an alternative, although the intellectual and public support for those programs had begun before the conditionality programs of loans were made by the IFIs. There were in fact three main factors that lead to the adoption of the free-market reforms: the East Asian miracle was looked to as a model of growth; the example of Chile once the newly democratic government made it clear they would largely continue the free-market policies brought in by Pinochet; the influence of the IFIs.

 The Mexican Crisis and Latin American Response

  • Looking at debt spreads the author suggests the August 1982 crisis was not anticipated . Once the crisis set in the spreads were large and volatile reflecting the chaos of the end of the Portillo administration (nationalizing banks, suspension of debt payments). Things calmed down with the new austerity measures introduced by the Madrid government. In 1983 negotiations with the IMF paid off and the debt was rescheduled. 
  • Once the Mexican government announced it could not meet obligations new funds were dramatically reduced (up to 40%). Even countries who were stable macoeconomically such as Colombia were affected by the reduction in lending. Net transfers of resources went from being negative to strongly positive ($12bn p.a.)
  • The region was forced to reverse the current account deficit. Between 1982-86 the region as a whole went from -$2bn deficit to more than $39bn surplus! They achieved this by contractions in imports and investments. On the import side this was mainly intermediate and capital goods which restricted possibilities for investment and domestic production(exchange rate control, capital controls and quotas were the tools). On the investment side it was largely infrastructure and construction that was cut. The policies were for short-term effectiveness without much thought for welfare.

  Expenditure reducing policies

  • Reduced public investment
  • Severe control of public sector wages despite inflation
  • Borrowing from national banks in response to less credit crowded out private borrowing and kept investment in check.
  • Mex, Uruguay and Ven all cut public expenditure by around 20%

 Expenditure switching policies

  • Import restrictions
  • Nominal devaluations
  • Import tariff hikes (at least initially)
  • The author states that quantitative restrictions of this sort can be justified only as a means of establishing credibly the willingness to adjust the macroeconomic position, but only in the very short-run. In the long-run they hurt the economy e.g. Mexico where extensive restrictions between 1982-84 cut intermediate good imports thus reducing the prospects for future growth.
  • 1986 saw some relaxing of restraints e.g. Chile reduced tariffs to a uniform 20%

 Despite the valiant efforts of the LA countries the trade surpluses continued to fall short of the interest payments. Gradually it was realized that countries in crisis in LA needed an increase in new money (!!!) to kick start growth that would allow for sustainable policies [and a means to conditionality for the IFIs] and this became part of the accepted thinking with the 1989 Brady Plan.

 Heterodox Stabilization of the Mid-1980s

  • Heterodox solutions to hyperinflation occurred in Arg, Brazil and Peru. These policies emphasize price control and deemphasize demand management and fiscal discipline.
  • Some argue they were really designed to strengthen government role. They were seen as alternatives to plans based on free-markets and restraint and as such they were a final attempt to develop with the government still taking a dominant role.

 Argentina’s Austral Plan

  • June 1985.
  • Price and wage freezes
  • Fiscal adjustment to correct deficit (increase in cost of public services to achieve this)
  • Monetary reform.
  • Initially worked well to reduce inflation. But price of services increased in real terms thus leading the state to lose control of deficit they previously had corrected as they had frozen the prices at an albeit higher level than previously.
  • Once deficit and inflation began to climb again the Alfonsin government was ushered in an they took steps toward liberalization.

 Brazil Cruzado Plan

  • President Sarney Feb 1986
  • Similar plan but less emphasis on fiscal correction.
  • Demand rose to levels inconsistent with price freeze so there was disequilibria, shortage etc. Fiscal imbalance put further strain on the economy.
  • Eventual collapse left Brazil with even higher inflation.

 Mexican heterodoxy

  • Under Madrid administration was more successful due to mix of income policies with credit and fiscal restraint. In other words they tried to address some of the underlying problems. Additionally the fiscal problems were brought under control before the income policies were enacted unlike in Arg.
  • Also the plan was part of a larger modernization strategy including deregulation and opening of the economy.
  • There was more social support in Mex.

 As a result of the failures of heterodoxy the region looked for a new paradigm.

 The New Paradigm

  • Away from state interventionism, inward orientation and macroeconomic imbalance and toward competition, market orientation and openness. There was also a drive to redefine the role of the state. Now an effective strong state was sought, not an interventionist state.
  • Perez in Ven
  • Menem in Arg
  • Gaviria of Colombia
  • Fujimori of Peru all supported market-based reform.
  • The transformation of views was due to a variety of factors: failure of heterodoxy and sense that state-based development models had worn out their use (ISI). In some ways heterodoxy was government intervention’s last chance to show its relevance in a globalized world and it failed miserably. The propagation of the ideas was made possible by high level alliances between technocrats and politicians.

 East Asian Experience

LA (and the IFIs) looked to EA to see why they had had such sustained economic success when LA had failed given that in the period 1965-80 they were growing at similarly healthy rates of 6/7% p.a. Four policy differences were advanced:

  1. EA avoided excessive and variable protectionist policies
  2. EA stayed away from overvalued currency
  3. EA maintained macroeconomic environment with steady inflation
  4. EA had fewer regulations in almost all commercial spheres.
  • e.g. Korea – merchandise exports grew at 23% p.a. between 1963-90. But in years 1950-63 the external sector was highly distorted due to ISI policies. It was a “highly repressed economy” in this period. In 63/64 they began to look outward – human capital accumulation, currency devaluation, gradual tariff reduction, import prohibitions eliminated, export encouraging programs implemented, competitive currency rates maintained. They were more flexible with policy than LA. When a policy was not working to increase exports it was binned, plus export subsidies etc. were given in a competitive manner – if the company did not perform the subsidy was not removed. So they did not have the same rent seeking aspect as the LA experience.
  • However there are great differences between the regions: inflation much greater in LA and ex rates more volatile. Politics and income distribution may have also played a part in the differences: in EA an overvalued currency hurt a huge number of producers of tradable goods in the rural sector. In LA an overvalued currency only affected a small number of often absent large landowners [why?], so the political costs of an overvalued currency were much greater in EA. [Also the factor mix was different. EA was abundant in labour and LA in land. Both were “backward”. This predicts different patterns of support and resistance to trade opening. See notes on Rogowski Coalitions]

 Chile as Role Model

  • Chile was looked to as a role model especially after the democratic government said it would continue to pursue the Pinochet reforms.

 Role on IFIs

  • Influenced the propagation of ideas through empirical research(many papers on EA comparison, on the benefits between trade restrictions and poor growth etc.), sector analysis, lending practices etc.
  • In terms of the lending practices the LA authorities were forced in some cases to implement reforms due to conditional release of funds by the IFIs. The author notes they often went further than the IFIs had suggested. E.g. see Grindle

LATIN AMERICAN ADJUSTMENT: HOW MUCH HAS HAPPENED?

LATIN AMERICAN ADJUSTMENT: HOW MUCH HAS HAPPENED?

J. Williamson (ed.)

Chapter 2 (What Washington Means by Policy Reform)

A Summary 

In a Nutshell
This is the excerpt in which JW defines the Washington Consensus. What is remarkable is that the consensus is not half as specific as the subsequent literature makes out. Additionally although the consensus seems to be broad it is by no means ubiquitous in that there are points of disagreement and the author has different opinions to those of the IFIs at times. Most importantly it does not readily identify with what came to be known as neo-liberalism in that it is not itself a doctrine for how a country should develop its economic, political nor social life and policy. Rather it is a handful of specific recommendations for stabilizing crisis economies. The author even states that Washington is unsure if its recommendations are good for kick-starting growth – they are a tool for stabilization, not a long-term growth strategy. At times it is very specific, and at times very vague. Rather weirdly they do not take into account the welfare distribution of the effects of the policy (although they do take into account the effects they may have on corruption!) and this could be seen as a limitation: JW later said they should be supplemented with pro-poor redistributive policies. The key takeaway is that the WC is comprised of “policy instruments rather than objectives or outcomes”.

 There are 10 broad recommendations: 

  1. Fiscal deficits
  • IMF had long made fiscal control an element of conditionality.
  • Differences of view however on whether fiscal discipline need imply a balanced budget
  • A deficit of more than 2% is evidence of policy failure. 

     2. Public Expenditure Priorities

  • Reducing expenditures preferable to raising taxes.
  • Subsidies should be cut
  • Increased investment in human capital such as education and health. This helps disadvantage and gives a return to the state.
  • Public infrastructure investment also important.
  • In other words, away from wasteful subsidies etc. toward investment that can bring returns.

 

       3.Tax Reform

  • Broaden the base, and keep marginal rates low

      4. Interest Rates

  • Market determined
  • Positive to discourage capital flight

       5. Exchange Rate

  • Achieving a competitive rate more important than how it is determined. It is crucial as an element of outward looking policies.

      6. Trade Policy

  • Limited tariffs 10-20% to still help developing industries to a certain extent without hurting too drastically the economy.
  • End to import licensing
  • Not expected to occur overnight.

       7. FDI

  • Restricting FDI is silly 

       8. Privatization

  • Relieves budget pressures and increases effectiveness of enterprises

     9. Deregulation

    10. Property Rights.

‘Paradigm found: In Search for the Washington Consensus’

Panizza, Francisco E. (2008) ‘Paradigm found: In Search for the Washington Consensus’ (manuscript)

A Summary 

In a Nutshell

The Washington Consensus was not (initially) an overarching doctrine of how a country should manage its economic nor political life. Rather it was a set of specific recommendations on how to tackle large deficits and hyperinflation. However it became part of the neoliberal “doctrine” and here it was expanded upon to reflect the beliefs of the liberals in markets. This doctrine became the dominant one on LA largely in response to crisis and as a means of turning away from what had come before. As ISI came to the end of its usefulness, the authoritarian regimes that were in power began to move away from the structuralist model but it was too late to prevent crisis. The crises in part lead to the downfall of those military regimes, but the heterodox solutions that the new democracies introduced only served (eventually) to aggravate the situation. The neoliberal model was pursued by LA governments in response to these constant failures. As such, Panizza is arguing that the reforms proposed by the Washington Consensus were not merely imposed upon LA due to their weak governments, nor because of bullying tactics from the IFIs (although he concedes their influence was great), but rather they were chosen as a rational response to crisis. 

What was the Washington Consensus?

  • Neoliberalism and the WC are now thought to go hand in hand. But Panizza shows that the former is a much wider concept.
  • WC was a list of policy prescriptions outlined by John Williamson  (JW) in Latin American Adjustment: How much has happened? that embodied the thinking of the economists of the time (esp. in USA). There were 10 main prescriptions:
  1. Fiscal Discipline
  2. Redirect public spending toward health/education/infrastructure i.e. that offer high economic returns and can improve income distribution
  3. Tax reform (broaden base, and cut marginal rates)
  4. Interest rate liberalization
  5. Competitive exchange rate
  6. Trade liberalization
  7. Liberalisation of FDI
  8. Privatisation
  9. Deregulation (barriers to entry)
  10. Secure property rights
  • The key for development was to emulate the market-oriented policies of the developed economies, and the evidence for this was the growth of new Asia.
  • It was a plan for stabilisation not necessarily a plan for long term growth management. Critically it does not distinguish between the best form of capitalism model; Anglo-Saxon, EU social market, Japanese corporate capitalism. It makes no claims about markets and trade in terms of welfare (JW later said the proposals should be supplemented with a PRS). It does not give “blind faith in markets” centre stage (JW).
  • Some prescriptions were very precise (deficit of no more than 2% /  Privatisation), some were e very vague (reduce tariffs to between 10 -20% in 5-10 years). 
  • Neoliberalism (NL)on the other hand is not just about the economy. It is a social, moral and political discourse. Based on British liberalism: freedom to pursue rational self-interest and competition  as main source of innovation and growth. 
  • WC was a set of codified policy agendas, BUT it had sufficient “surplus of meaning” that it could be re-interpreted, as it was so but the NLs. 

ISI

  • NL gained it hegemonic position due to its contrast with the directed economics of the ISI period.
  • ISI was born in ECLAC in the “structuralist economic doctrines” that said that developing nations had to travel a different path of development to the already developed economies, as their infant industries had no protection from competition unlike those of the developed world when they were developing. If industry was not protected they would be condemned to being agro exporters and resource providers (comparatively cheaper than industrial goods produced by the core).
  • Used currency overvaluation and tariffs to spur on home industry. Deficits and inflation were accepted consequences.
  • The state was the gatekeeper of the national interest (protect from threat of competition).
  • ISI had broad social base (Middle class in the large civil service, urban workers with higher wages, industrialists, elites who could be rewarded with industrial patronage by the state) although there were losers (peasant farmers, consumers).
  • But sectoral/individual gains began to become built-in prerogatives. This was aggravated in 60s and 70s when growth slowed, fiscal crises abounded, and inflation shot up. The result was the authoritarian attempt to dismantle ISI 

Dismantling ISI

  • On the left dependency theory claimed that LA should cut itself off from the market as being connected could only ever keep it underdeveloped due to the chain of exploitation starting in the core and spreading to the periphery.
  • On the right, free market ideas gained traction as it became ever more costly to mediate the problems caused by ISI. Monetarism (later to be called NL) was part of a narrow economic debate on how to solve bop and inflation problems. Inflation was a monetary problem caused by deficit and overexpansion of credit. This contrast with structuralist view that inflation was reversible using structural reforms to bring more people in the economy thus expanding the industrial base.
  • There was an overlapping political debate about spending and distribution. Monetarists wanted austerity, but sturcturalists said austerity caused recessions. 
  • 60s-80s no one narrative could dominate, rather there was a complex process of change. Elements of ISI were dismantled, or deepened depending on the country specific political/economic realities. Change was influenced by many factors including availability of financial resources to fund ISI (oil rents etc.) as well as political factors (how the government/elites dealt with popular protest etc.).
  • Chile was one of the first to dismantle ISI under Pinochet. This was in part a political move – the technocratic policies of monetarism excluded the working classes, and prevented the distributive struggles that were a breeding ground for socialism and the left in general. 
  • Internal contradictions in the military regimes of LA in the period prevented them from founding a true new political and economic order. 
  • Dismantling was uneven in the region:
  • e.g. Arg: rapid reduction of tariffs decimated local industry (weakening the Peronist working class – a benefit for the military). Tariffs still very high relative to the rest of the world. State reform was very limited and fiscal austerity was abandoned in the late 70s. In 80s recession tax revenue was eroded and resulted in large deficits as inflation reached 310% in 1983 (last year of military rule)
  • In Brazil, Mexico and Peru the 70s and 80s saw a deepening of state-led model. E.g. brazil had growth of 7.4% and industry was growing with low inflation.
  • E.g. Same for Mexico but it had a tight control over public spending. However with the rise of Echeverria (70-76) public spending was increased and deficit funded by borrowing. The increased borrowing and deficit and eventual capital flight lead to devaluation and financial crisis when external funding dried up in late 70s. Debt crisis of 1982! 
  • The 1982 crisis represented a watershed. Economic policy options narrowed and there was a paradigm shift that unshed in the hegemony of free market economics.

 Neoliberal Hegemony

  • The dominant ideas of IS had become discredited and the crisis weakened the elite’s ability to maintain the status quo (Olson). There was a new possibility of change (although direction was still unclear). NL did not become totally dominant until the late 80s.
  • Ideological shift was part of worldwide pattern following end of post war growth period, inflation and recession that lead to focus on the UK-US laissez-faire model. Additionally forces of globalization were become unstoppably strong. But this is not enough for Panizza to explain how NL became part of LA.
  • NL reforms were chosen by democratic states (except in Chile). So pressure from IMF etc. (although great) and worldwide trends, are not sufficient to explain why they were adopted in LA.

 

  • NL was part of the maturing of democracy in the region. When democracy was nascent in LA, liberal reforms were associated with the military regimes. Public debate about democracy focused on human rights etc. not on economics. So with the first elected presidents we do not see the introduction of NL reforms. Rather, reforms were heterodox
  • e.g. Peru. President Terry had tried liberal reforms (80-85) but there was much resistance. His successor Alan Garcia (85-90) returned to state led heterodoxy e.g. price freezes, wage increases, more spending financed by reduction in debt servicing. The result was hyperinflation.
  • e.g. Bolivia went democratic in 1982 with Siles Suazo at the head. He also used heterodox methods and they too failed to combat inflation. His successor Estenssoro then introduced a radical free market reform package.
  • In general the Heterodox solutions caused hyperinflation which obliterated livelihoods and jobs. There was a concomitant breakdown in social order and thus political order. The state could no longer regulate social relations and there were mass protests.

 

  • It was now a question of assigning responsibility for the crises. The problem was both old and new. New as it represented problems specific to the 80s (debt crisis, oil shocks etc.) and old as it was the result of deeper long term problems rooted in ISI. However, it was now argued by free-market adherents that the 80s crisis could not be overcome simply by fiscal adjustment packages and so the WC became a much wider NL economic and political reform agenda. There would have to be a wholesale reform of the relationship between citizen and state 
  • Alfonsin in Arg having implemented heterodox packages now turned around and sought to liberalise. It was too late though to stabilize the economy, and the political outsider Menem came to the fore and implemented wide ranging reforms [see Grindle from EH451]
  • Collor came to power in brazil on a similar mandate.
  • Mexico did not suffer such a huge turnaround – rather reform was more gradual
  • So NL’s rise was founded in the failure of the new democratic administrations in the 80s to deliver a better life and thus a change occurred in the relationship between democracy and free-market economics (as it was previously associated with military dictatorships as being the only governments powerful enough to force through such reforms). NL offered d a clear diagnosis and prescription. “In this new political context economic liberalism’s mistrust of the state and ultimately of politics, resonated with popular disillusionment with failed promises of a better life under democracy”.

Silent Revolution

THE SILENT REVOLUTION

Duncan Green

Chapters 1,3,4

A Summary

 

The first chapter is largely about ISI and it failures. It adds nothing new to my understanding. Like others he sees IS as a response to the crash in 1929 bringing the free-trade to an end and brought in ISI based on Keynes. It went hand in hand with populism which preferred to print money rather than take difficult distributive decisions. He emphasises the benefits of ISI including the raised life expectancy and literacy indicators as well as urban development (albeit with lots of inequality). Also it broadened political inclusion with the insertion of the working class into political life. But whilst EA countries successfully transitioned away from ISI, in LA they could not. This resulted in poor products, a two tier labour force, a continued reliance on imported capital goods etc. meaning that the trade deficit was not actually remedied. There was still huge inequality. Tariffs hurt the rural sector as capital good were expensive to import and overvalued currency made export uncompetitive. This lead to a large migration to urban centres.

As the flaws became apparent in the 60, governments tried to modify their policies.

He has a traditional line on debt: petro$s increased investment etc. and this was embraced by the neoliberal authoritarian regimes that also liberalized trade and caused de-industrialisation in e.g. Arg. He emphasises that ISI and huge debt do not necessarily go hand in hand e.g. Korea and EA countries who managed debt well.

 How did Neoliberalism Come to Dominate?

  • Support of local economists (Chicago university program in Chile)
  • Pre-existing crises in ISI
  • Lack of alternatives
  • Green is bemused at the rise of the technocrat which he sees as pivotal in the acceptance of the free-market reforms. He advocates Ha-Joon Chang’s historical approach to finding patterns and seeking their explanation rather than relying on abstract theory based on barely plausible assumptions. There is too much emphasis on mathematics and not enough on real life situations and people. He states rightly in my view that maths does not mean objectivity. Indeed decisions about policy always contain political choices about the rival merits of state and market and the role the state should play in people’s lives. He argues that replacing the state with the market disenfranchises people when pressure groups and individuals have learnt how to lobby the state in a certain way. In order to get the same influence over policy they would have to acquire influence over large corporations etc. [This seems pretty farfetched. Given the fluctuations between democracy and authoritarianism I doubt very much pressure groups knew if they were coming or going]
  • He argues that it could be that neoliberalism is more political than economic as it was designed as a counterfoil to the rise of communism – it was part of a battle for ideas not a serious map of where a country should aim to go.

 The Lost Decade

  • Green focuses on the human cost on liberalization: falling wages, rising inequality, redundancy, an increase in families below the poverty line, (a staggering 80.1% in Bolivia in 1991), breaking of the unions, de-industrialisation, bankruptcy etc.
  • The genesis of the reforms was found clearly in the recession of 1982-83 caused by sudden end to lending by the commercial banks. Now LA was exporting capital rather than importing. The could either declare a debt moratorium or generate trade surplus, so they did the latter. As exports were already depressed due to the overvalued currency and focus on inward development, this surplus could only come from import suppression i.e. stop the citizens consuming – this means devaluation and recession.
  • The rules of the debt game meant it kept increasing even while the population suffered. Payments that might have been used to purchase imports instead went to debt service.
  • He interprets the lack of domestic investment as a consequence of the capital exporting to service the debt, rather than a deliberate policy choice (unlike S. Edwards). It was more politically expedient to cut investment than sack employees although they did that too. “The level of investment is crucial to any economy’s prospects: Latin America was mortgaging its people’s future to pay its debts.”
  • There was the additional problem of turning the trade surplus into debt service payments as a large slice of the export income dollars was in private hands. In some cases the government was forced to print money to purchase the forex causing renewed inflation. If they did not, they had to tempt exporters to invest in government bonds with high interest which only lead to more debt, this time domestic.
  • Even despite the cuts, the devaluation and increasing cost of debt meant that deficits grew and grew and even the largest governments printed money with resulting hyperinflation.

 The False Dawn

  • There was a return to growth in 1984 but this was mainly due to Brazil’s Sarney government raising wages in a “growth first” policy framework that brought growth to 8% aided by restrictions on its debt service payments.
  • By 1985 there were doubts over the IMF style stabilisation. The result was heterodox solutions to managing inflationary expectations using freezes on wages, ex rates and prices. They are supposed to be a cooling off period in which time the government can deal with the underlying problems. However the deficits etc. were not dealt with, and the short term boom lead to a surge in consumption, but this could not be sustained and inflation made a fierce comeback as the plans failed.
  • 1984-87 saw the gradual shift toward the export-led growth model and trade liberalization that would be ubiquitous by the end of the decade. Whilst this saw imports increase investment was still stagnant and this may have laid the foundations for continued underperformance in the region.
  • The debt service “hemorrhage” continued to the detriment of healthcare and education etc. All public services suffered “the social and economic fabric of Latin America was falling apart”.

 

Social Impact of the Lost Decade

  • Up to 1980 % living in poverty had been falling. The welfare indicators had been rising (see Astorga et. Al). In 1980s 64 million new names were added to the list of the poor. There was hunger, disease and despair.
  • Lower wages, greater insecurity and steep price hikes for food basics. Meanwhile TV flooded the continent showing flashy American lifestyles leading to the dispossessed men turning to alcohol and rage causing family breakdown, crime and social disintegration.

 [What is interesting is the totally different way Green looks at the reforms. He looks to the human consequences rather than just the economic justifications or stabilisation successes. What we have to wonder though is how much of this was due to the popular mandate i.e. in the post crisis world (wherever the blame lies for the increased debt etc.), where hyperinflation was destroying wages and savings, did the people sign up for the reforms at any cost? Were the costs greater than they anticipated? Why did some governments go further than they were required to? (Weyland).]  

 Investment, Growth and Development

  • Capital inflows resumed in 1991 albeit in forms other than purely commercial loans: equity purchases, bond purchases, bank loans to LA companies, FDI in farms, factories and service industries.
  • Total debt began to rise again –by 1999 it had reached $762bn for the region.
  • But the new money dried up just like it had in the 80s and thus we had the 1994 Mexico crash. The liberalized financial markets meant investors could pour money into Mexico, but they could just as easily whip it out – so there was considerable flight risk. As every the taxpayer had to pick up the bill for bailing out the banks.
  • The capital had flowed in and had been sucked up as a new option in cushioning from the worst effects of the liberal adjustment. The capital inflows meant that the debt could be serviced and the economy restructured. Moreover it meant the currency could be kept strong thus curbing inflation by keeping import prices low. The consequence of course was trade deficit, but even this could be funded by the capital inflows, as long as they lasted.
  • However, once again LA was at the mercy of external events. The U.S IR rises of 1994 meant that Mexican bonds were no longer so desirable. There was political turmoil in that year too (Zapatista uprising) and investors lost confidence.
  • Brazil was next, the contagion had spread despite the relative health of Brazil. Investors pulled out $30bn in two months.
  • Then it spread to Argentina.
  • All three governments were forced into sudden devaluations. Argentina was worst hit, with large scale government cuts and $-denominated bank account freezes. This cause political and social chaos. Urban unemployment in Mex doubled. Brazil had 0 growth and 25% unemployment.

 Lessons for the Future

  • “Reliance on the fools’ gold of fickle capital inflows made the region vulnerable both to events beyond its control, such as the Asia crisis of 1998, and to the received wisdom of the markets.” If investors were not happy, they just pulled out.
  • “The main lesson is that capital account liberalization is not the answer to LA’s historical inability to save and invest sufficient quantities to generate growth and jobs.”
  • $isation of the currency can be an option for smaller countries.
  • FDI is better than other types of capital as it is sticky.

LATIN AMERICAN CLASS STRUCTURES

LATIN AMERICAN CLASS STRUCTURES: THEIR COMPOSTION AND CHANGE DURING THE NOLIBERAL ERA

A. Portes & K. Hoffman

Latin American Research Review, Vol. 38, No.1 (Feb., 2003)

A Summary

In a Nutshell

The size of the informal sector increased greatly during the neoliberal era of adjustment. The paper also provides interesting data on the stratification of classes within LA.

Class Structures

  1. Capitalists as owners of large scale means of production sit at the top and account for 1-2% of society. They receive profits.
  2. Senior executives are below them, running sizable organizations. They account for between 1 and 5% of society. They receive salaries and bonuses tied to profits.
  3. Next come professionals, university trained elite workers employed by private firms to positions of responsibility. They trade on their scarce expertise and account for around 5% of the population. They earn salaries based on their expertise.

Together the above three classes account for around 10% of society.

  1. Next come the “petty bourgeoisie”. These are micro-entrepreneurs who have some resources, skills and employ a small number of workers on a face-to-face basis [whatever that means]. These people have been the traditional link between the modern economy (1-3) and the mass of informal labour; they organized labour into producing low cost goods for consumers, and low cost inputs for subcontracting formal firms. During the 90s this class became a refuge for redundant civil servants and other skilled workers displaced by adjustment. Indeed, in 1998 100% of new jobs were in the micro sector.

The Informal Sector and Adjustment

  • The formal sector shrank during the age of ISI. But the neoliberal adjustment saw the formal sector shrink as the modern industrial sector was destroyed by cheap imports from new open market doctrine.
  • Income inequality rose greatly during the neoliberal period. Data indicate that for most LA countries, average urban incomes either stagnated or declined (with the exception of Chile in the 1990s). This was reflected in those employed in micro enterprise. Meanwhile the incomes of the top quintile grew much faster. As a result of the rise in incomes of the rich relative to the proletariat, the gulf between economic conditions and life chances was exacerbated. It is not necessary to be unemployed in LA to be poor – the vast majority of the working population receive wages that condemn them to poverty.
  • They describe the informal sector as “forced entrepreneurism”. As the contraction of the state sector and formal private employment has shrunk the subordinate classes have had to search for other economic alternatives. The liberalization regime favoured those with resources and left the rest to fend for themselves. Thus informality and to a certain extent crime, and emigration are “ADAPTIVE STATEGIES” for coping with harsh economic realities. This has happened along with a move to broad support populist parties.
  • It is strange that the poverty in the employed and informal sectors has not given rise to class based politics in the democratic era. Populism remains, but that is not identified solely with the poor [the turn left is relevant here????].
  • In this sense neoliberalism has been a success as the changes it has wrought in society have weakened the basis for organized class struggle and popular mobilization of discontent. Nevertheless, the economic hardships etc. could mean that this peace is unsustainable.

MACROECONOMIC POLICY AND THE INFORMAL SECTOR

MACROECONOMIC POLICY AND THE INFORMAL SECTOR

J. Franks in Contrapunto: The Informal Sector Debate in Latin America C. Rakowski (ed.)

 A Summary 

In a Nutshell

Macroeconomic policy effects the informal sector differently than it does the formal sector. Given the size of the informal sector (which he defines as economic activity which escapes traditional national income accounting excluding illegal activities) in Latin America, it should be incorporated into thinking about macroeconomic policy. Not paying it sufficient heed can lead policy to have unwanted or unforeseen consequences. Indeed, that the structural adjustment programmes of the 80s and 90s did not consider fully the informal sector in their strategies could be one explanation as to why they were not successful. Whilst many argue that it would be preferential for the entire informal workforce to be absorbed by the formal sector [J.J. Thomas], Franks makes the case that from a macro point of view (i.e. growth) there is an optimal level of informality. In other words some states could improve aggregate welfare by informalizing some of the economy.

 Effects of the Informal Sector on Macroeconomic Policy

Omitted Variable Bias

  • If the informal sector is omitted from macro models, any behavioural differences between the informal sector and the rest of the economy introduces bias into both the models and the policies the models suggest. The outcomes can thus be suboptimal.

 Currency Markets and FOREX

  • The existence of an alternative FOREX market can restric a government’s ability to maintain overvalued or multiple rates or to enforce strict controls on currency (to prevent capital flight etc).
  • Many of the goods produced in the informal sector are import substituting, and thus the sector is closely linked to the international economy, especially through tariff measures and foreign exchange policies.

 Fiscal Policy and Taxation

  • Tax structures may be a deciding factor in the decision to be formal/informal.
  • Formal firms can subcontract, meaning that higher taxes may actually lead to less revenue, [especially as corporation tax increases].
  • By reducing the tax base many governments have to rely on monetizing the deficit which leads to inflation.
  • Government spending can also reduce the size of the informal sector. To the extent that it crowds out private sector demand which will include a much higher percentage of informal sector goods than the higher government demand, jobs will be shed in the informal sector. Wages will be lower.
  • Increased taxes drive suppliers to go informal and the same taxes may reduce informal sector demand. So they pull in different directions.

 Employment Policy

  • Informality can serve as the employer of last resort.
  • Many government employment policies can have the oppopsit effect on the informal sector i.e. avoidance of wage law, social security, workplace regulation etc.
  • An increase in the minimum wage will have to be complied with by the formal sector, boosting wages but reducing demand for labour, so formal employment will fall. Firms also respond by informalizing certain of their activities. The new supply of informal workers will depress wages there, so the end effect of a wage rise in the formal sector is a wage fall in the informal sector. The same logic holds for workplace regulations.

 Disadvantages from Informality

  • Ability to evade government controls, particularly to evade taxes restricting the ability of the government to provide public services.
  • It indicates a failure at the government level for not providing sufficient formal sector work.
  • Undercuts government legitimacy.
  • Low productivity and low wages with often inferior products that will never be capable of being competitive on a grander scale or internationally. i.e. there is little export potential in the sector.

 Benefits from Informality

  • The sector shows often admirable efficiency in its use of plant and technology.
  • Uses much lower levels of foreign inputs for the same level of output relative to the formal sector. This helps improve BOP whilst the high real price paid for FOREX by the informal sector (on the black market) promotes more efficient use of that scarce resource.
  • The sector contains a disproportionate number of the urban poor. Thus programmes to assist the informal sector could be used to alleviate poverty.
  • The is a benefit in those who would otherwise be unemployed having some form of income generating possibilities.
  • It is much more flexible than the formal economy and as such it can adjust to changes in the macro picture much more quickly than the formal sector making it more efficient in that respect.
  • There are reasons to believe that informal sector promotion could lead to dynamic growth.

 Macro Adjustment and the Informal Sector

  • The size of the sector increased with the crises of the 80s and during stabilization. Some of the stabilization policies themselves could have been more successful had they incorporated the informal sector:
    • Increased taxes may not reduce deficits if it encourages more people to move to the informal sector.
    • Informal markets reduce the benefits from trade liberalization.
    • The flexibility of the informal sector indicates it should play a crucial role in adjustment, as it is an adaptive economy so it could ameliorate the burdens of adjustment by cushioning against the shock. E.g. in Bolivia during the 1985 austerity programme – it worked on a macro level but it caused huge hardships (unemployment, poverty, growth in living standards etc.). Employment in the informal sector grew but that meant declining incomes, and it did not absorb sufficient of the redundant formal sector workers. The contraction would certainly have been more severe had the informal sector not existed.  

An Optimal Level of Informality

  • The balance between he costs and benefits from informality change with the level of the informal sector. So whilst it may be beneficial to have a small informal economy to absorb displaced formal sector workers and to boost the economy, if it becomes too large the government loses control over the economy and may not be able to provide certain public goods.
  • As the level of informality grows the two sectors move from a mostly complementary relationship to a more competitive one.
  • Historical evidence suggests that informality becomes less important as incomes increase. The opportunity cost of being informal increases as formal sector wages increase.
  • A stabilization plan that damages the informal economy could thus hurt the economy, producing less growth and more unemployment.
  • Evidence suggests that the informal sector is more than just a safety valve absorbing workers hurt by adjustment. It changes the way adjustment works and shows dynamic potential that could be tapped to restore economies hurt by decades of debt crises.