Category Archives: Economic History of Latin America (EH451)

Readings, essays etc. based on the course taught by Colin Lewis, Michelmas Term 2010/11

THE POLITICAL ECONOMY OF RECENT CONVERSIONS TO MARKET ECONOMICS IN LATIN AMERICA

THE POLITICAL ECONOMY OF RECENT CONVERSIONS TO MARKET ECONOMICS IN LATIN AMERICA

D. E. Hojman

Journal of Latin American Studies, Vol. 26, No.1 (Feb., 1994)

A Summary

 

In a Nutshell

The free market reforms that occurred in LA in the 1990s were remarkable particularly as they occurred under conditions of democracy at a time when it was thought such reforms could only be successfully implemented under authoritarian rule. However, there is no single sufficient factor that can explain the conversion. Different factors took on different significance in different countries, and what was of particular importance was the differing interaction between factors. Hojman outlines the 6 most important factors.

  1. Lessons learnt from the debt crisis and its aftermath
  2. More highly qualified technocrats
  3. Development of an entrepreneurial middle class
  4. Exhaustion of ISI
  5. Tax reform, export diversification and financial modernization
  6. Public opinion

 The Debt Crisis and Environment of Ideas

  • Free market reforms are easier to accept if the country is in crisis [Weyland – and the depth of the crisis may help understand the strength of the response, and public support for it]. Additionally policy makers may have learnt from recent mistaken attempts at heterodoxy e.g. the Menem government that followed Alfonsin in Argentina. Indeed, reforms did occur post crisis, but not always e.g. Chile in the 70s.
  • Temptation to see structural reform as imposed, but it is important to distinguish between stabilization and structural adjustment. Often academics confuse the two notions, but it was only the latter that was required by the IFIs. Part of the reason for the confusion is that structural reforms were undertaken as stabilization measures [see Weyland piece summarized this week].
  • There was an intellectual shift toward free market reforms. Whereas this had previously only been supported by the Chicago school economists, now MIT (Dornbusch) and Harvard (Sachs) were on board too.
  • Free market policies are rewarded by loans and investment, and populism is punished by withdrawal. This aspect is related to the internationalization of the world economy. Perhaps the forces of globalization were simply not capable of being resisted.
  • Chile’s reforms had little to do with the debt crisis. The reforms were a continuation of past experiments at export promotion, and perhaps inspired by the Chicago boys who were very active in that country.
  • Mexico can be more directly linked to the crisis, but there were important factors such as the new presence of highly trained technocrats, as well as the pressures arising from the close proximity to the US, and the lure of gains to be had from the NAFTA agreement.
  • Bolivia follows partly the crisis/acceptance idea [Weyland].

 Technocrats

  • Colombia has always had high academic standards in the finance and related ministries. A PhD is a prerequisite. This may explain the absence of populist policies in recent history as well as relative macroeconomic stability.
  • Venezuela is the opposite. They have been unable to train and maintain tax specialists, meaning tax reform has been very slow etc.
  • Chile’s reforms under the military regime were suggested by the Chicago economists.
  • Not present in Bolivia.
  • Technocrats could not persuade Brazil to adopt reforms.

 Entrepreneurial Middle Classes

  • The presence of a middle class does not start free market reform, but it may help sustain it. [I am not sure on what basis he says that reforms have ideological or political rather than sociological bases, but it is stated as a given in the text.] The main evidence for this is that middle classes have been developing for some time in LA, but it was not until the 80s that free market reforms were enacted in a broad range of economies.
  • The Sachs thesis that populist policies are easier to accept in countries with higher inequalities as the poor have little to lose seems to fit here. Chile had the most advanced middle class, and they were also the first to go for market reforms. Argentina likewise has a more even distribution than say Brazil, and this meant that reforms were more readily accepted.
  • In Mexico, a large middle class associated with the maquilas sprung up and demanded more openness. They were clearly to benefit from the NAFTA agreement.

 Exhaustion of ISI

  • Exhaustion had been forecast since the 1960s, but in the 80s/90s, many scholars now saw its decline as inevitable and irreversible.
  • The effects of this were felt differently in the different economies. In the medium sized economies of Chile, Colombia, Peru etc. exhaustion was felt earlier as domestic markets were too small to sustain industry. This meant some protection levels were at 1000% for the car market for example. The Andean pact was an attempt to extend ISI by increasing the market size, but it failed. In the larger economies such as Brazil, Argentina and Mexico, ISI continued to be more or less successful and there as an eventual switch to export promotion alongside ISI.
  • The size etc. of Brazil can explain why free market reforms were slower and less enthusiastically adopted there than in other states. Subsidies are still high, and industries are supported e.g. computer industry. Additionally, free market reforms are associated with Collor and he was thrown out on corruption charges so they have a bad name.
  • There was a significant demonstration effect provided by the East Asian miracle growth countries.

 Tax Reform, Financial Modernization and Export Diversification

  • None of these are necessary nor sufficient, but they did help the implementation of the reforms as once they are performed regression to a more backward policy regime is harder to achieve.
  • Colombia pioneered tax reform. Followed by Uruguay and Chile. They have generally been value added rather than progressive income taxes. Thus it has been necessary to leave behind the idea of income redistribution through taxation.
  • Diversification of exports has occurred. Between 1970 and 1990 primary exports fell from 66% to 41% of total exports, as manufactures rose from 11, to 35%. Export diversification occurs when a number of domestic products become competitive on an international market and as such is not the result of subsidies, but of micro-processes connected to the discovery, adoption and diffusion of technological capabilities etc. This is more a result of rather than a cause of free market reforms. But once it occurs and new middle classes of exporters arise, dynamic pressures are generated to pursue the reforms further.

 Public Opinion

  • Media has been behind the reforms (Chile ESP.).
  • There is broad support for the reforms.
  • Voter learning.
  • It is often argued that reform damages the poor [which I agree with in terms of poor design, sequencing, lack of focus on the poverty etc.]
  • [See Weyland piece for more in depth analysis of public opinion.

Other Possible Factors

  • Collapse of Soviet Union.
  • Bolivia demonstrated the ability to cut inflation from 1000s to single digits – i.e. a bandwagon.
  • Mexico encouraged by special relationship with US
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TENSIONS IN THE BUREAUCRATIC-AUTHORITARIAN STATE AND THE QUESTION OF DEMOCRACY

TENSIONS IN THE BUREAUCRATIC-AUTHORITARIAN STATE AND THE QUESTION OF DEMOCRACY

G. O’Donnell

In D. Collier (ed.) The New Authoritarianism

A Summary

 

In a Nutshell

This article is not strictly about the emergence of BA, but rather the evolution of it once in place. The central idea is this: A tension exists between the logic of the regime and its survival; a rejection of the basis of its own legitimacy. Popular classes are excluded from the benefits of BA and as such are expected to be tacitly consensual i.e. not put up any resistance due to the climate of fear based on violence. Initially much of the industrial sector and bourgeoisie are part of the supporting coalition. However, the orthodox policies pursued in the initial stages of BA alienate most of the middle classes and reveal that the only natural supporters of the regime are foreign capital and large domestic capital. The new losers join the ranks of the tacitly consensual popular classes. Thus the support base is extremely narrow.

 The solitude of power leads eventually for calls for more participation particularly by the somewhat excluded middle classes. Absent the ability to unite the nation behind a common narrative, such as the PRI in Mexico (based on revolutionary history); there is no way for the state to mediate between these conflicts. The excluded entrepreneurs lobby the state institutions for favours and special treatment and this causes an erosion in the state institutional capacity. Corporatism is not an option as the upper bourgeoisie do not want to be incorporated into the state. In this climate and absent other options for mediation between the state and the citizenry, there is nostalgia for democracy.

 If there is some democracy the state can base its authority on a source exterior to the state, whereas once the popular classes and middle classes are excluded it becomes obvious that the basis for the state is nothing more than its own conception of itself. It is revealed as operating for solely the highest bourgeoisie, and being based on coercion. The restoration of democracy would also mean that problems of succession would be solved, which were a frequent source of clash between governments and the military backers (no leader in Brazil was able to appoint his successor, and there was always tension surrounding the appointment.)

 Yet it would need to be the type of democracy that is still capable of excluding the popular classes, or at least preventing social mobilization based on class, whilst still giving enough legitimacy for the regime to be able to maintain its hegemony. In societies where the “threat” the popular classes posed to the established order pre-BA was very strong (such as Chile) such a suggestion of democracy cannot come from within the regime, as it is much securer in its purpose to prevent the mobilization of the working class. Where however, the threat was weaker (such as in Argentina), democratization in 1966 was incorporated into the regime as the ultimate goal toward which they would move. [This level of threat analysis is extended to many other variables in the works of O’Donnell, and will be summarized in the Remmer and Merx article also in this week’s selection.]

 He provides a useful list of characteristics of BA regimes:

 The regime is the guarantor of the domination of the upper fractions of a highly transnational bourgeoisie. This upper echelon is the sole social base of the regime.

  1. Institutionally it is based on normalization of the economy and restoration of order. This means political deactivation of the popular sector.
  2. It is a system of political exclusion of a previously activated popular sector which becomes subject to strict controls in order to remove it from the political life of the state. This is part of an attempt to impost “order” necessary to achieve growth, and to remove politics from the chaos of civilian rule.
  3. This exclusion involves the suppression of citizenship i.e. liquidation of political democracy, the channels of access to government, popular organizations, and channels of appeal for social justice. It places itself as before a “sick” nation expressed in rhetoric based on the severity of the crisis immediately before the imposition of BA.
  4. It promotes a pattern of capital accumulation based on a highly skewed distribution toward large oligopolistic units, private capital and some state institutions.
  5. It promotes the internationalization of the productive structure resulting in denationalization of society. This includes foreign debt financing, FDI etc.
  6. Through its institutions staffed by technocrats it seeks to appear objective in terms of economic rationality, and this rationality compliments the prohibition against invoking causes of substantive justice (redistribution).
  7. Access to the government is limited to those who stand at the apex of large corporations.  

ON THE CHARACTERISTICS OF AUTHORITARIAN REGIMES IN LATIN AMERICA

ON THE CHARACTERISTICS OF AUTHORITARIAN REGIMES IN LATIN AMERICA

F.H. Cardoso

In D. Collier (ed.) The New Authoritarianism

A Summary

 

Bureaucratic-Authoritarianism

  • Although military in nature the regimes are not headed by a single general who imposes order by decree (as in past episodes of military rule in LA). Rather the military rules as an institution in order to restructure the economy and society along the national security ideological line of modern military doctrine.
  • This is different from European fascism as BA fears popular mobilization whereas fascism relied upon it. It is precisely the fear of the popular classes that drives their repression under BA, and leads them to repress wages, cut organizational links between civil society and the state, and to control the election process. The army as guarantor of stability prefers a technocratic relationship between citizen and state.
  • The regime made no attempt to promote the doctrine of harmony amongst the classes by way of stimulating class organization. Nor was it corporatist. It did not in other words build links with society in a consistent manner.
  • It was not nationalist as fascism, or populism was. This is because it relies on being a dependent economy, and part of the economic strategy is industrialization based upon foreign investment and capital.
  • Mexico was not BA as the military was not involved.

Regime and State

  • Mexico highlights a distinction for Cardoso as between state and regime. Regime is the set of formal rules that binds institutions together, and the citizens to the rulers. The state meanwhile is the “pact of domination” that exists amongst the dominant classes, and the norms which guarantee their dominance.
  • Thus the “state” in LA could broadly be defined as dependent capitalist, and this explains why we see many similar traits between countries such as Brazil and Mexico (similar means of capital accumulation, wage control, income distribution). However, the regime in those countries was different, Braz being BA, and Mexico being something similar to liberal authoritarianism. Thus states that are the same can sustain a variety of regimes including both democratic (Colombia, Venezuela) and BA (Argentina, Brazil etc.).
  • There is room for exploring the compatibility between different forms of dependent capitalist state, and different types of regime. So it is valid to ask under what circumstances a democratic regime can be sustained given a capitalist state based upon increasing inequality. Some even argue that this is the reason for BA in Arg, Chile, Uruguay. However, the achievements of Venezuela and Brazil (pre-coup) in attaining similar patterns of development show it is possible under democracy as well. Furthermore, it is hard to believe that exclusively economic motives were behind the military mobilizations in the region.
  • Moreover it is hard to identify a homogenous set of economic interests within the BA states. So whilst Chile was concerned to dismantle state owned enterprises, Brazil enlarged the sphere of state production

 

  • “There is no greater irrationality than the belief that history can be fully understood through formal rationality.” Thus it is hopeless to look at political event from a purely economic perspective.
  • It is likewise simplistic to think the dependent capitalist process can only occur through authoritarianism.

OVERVIEW OF THE BUREAUCRATIC-AUTHORITARIAN MODEL

OVERVIEW OF THE BUREAUCRATIC-AUTHORITARIAN MODEL

D. Collier

In D. Collier (ed.) The New Authoritarianism

 A Summary

In a Nutshell

Modernisation theory in development literature suggested that socio-economic modernization and democracy go hand in hand, this is why the conversion to authoritarianism in LA proposed such a challenge to academics. More generally the change happened in an era where the expectations of the 50s and 60s that greater economic and social equality would lead to a more democratic form of politics, were eroded. In place of these ideas it was now suggested that in late developing nations, more advanced industrialization may coincide with the collapse of democracy, and an increase in inequality. Indeed it was posited that the social, political and economic tensions generated by the particular type of dependent capitalist industrialization led to the collapse of the populist regimes, and hence as the popular sector as one of political strength. The elimination of the popular sector from politics, and the associated regressive move of income toward the middle and upper classes greatly increased inequality under BA.

The remainder of the chapter summarizes the key points of the O’Donnell thesis:

Political Systems and Change

  • Regime: the structure of politics – repression, representation, freedoms etc.
  • Coalition: class and sectoral composition of dominant political forces.
  • Policies: specific tools for allocating resources.

There are three types of “constellation” for O’Donnell that have different patterns of regime, coalition and policy

  1. Oligarchic: limited political competition. The elite is based upon primary product exports, and policy is geared toward this end (open economy). The system is not yet incorporating or excluding as the popular sector is not yet activated
  2. Populist: incorporating, multi-class coalition of urban-industrial interests including industrial elite and working classes. Economic nationalism is common. The state promotes industrialization based upon consumer goods.
  3. Bureaucratic-Authoritarianism: excluding systems that are non-democratic. Central actors are technocrats, military and civilian. Policy is concerned with advanced industrialization, and representation, elections etc. are eliminated.

The political transformations that move us from one to the other derive from social and political tensions produced by industrialization and by changes in the social structure. There are three particularly relevant factors:

  1. Industrialization: different phases linked to political changes as payoffs accrue to different class groups. Consumer goods production associated with the move from oligarchy to populism. This allows for the incorporation of the working class as wage setting can be generous without import competition, and also beneficial in expanding the domestic market. Thus workers receive important material benefits. Once this phase is complete, there are tensions as opportunities for expansion become more limited. The cost of importing the capital and intermediate goods is driving inflation, a balance of payment deficit, foreign indebtedness etc. Thus a shift to more orthodox policies is needed to create deepening of industry through domestic manufacturing of intermediate and capital goods. However in order to do this technology, managerial experience and capital is needed, and these things are often associated with multinational corporations. The need to attract this type of investment drives the adaptation of the move to orthodoxy.
  2. Activation of the Popular Sector: The popular sector will challenge the move to orthodoxy. There is thus a gap between demands and policies leading to strikes, and political/economic crisis.
  3. Technocratic Rules: Technocrats perceive high levels of popular sector mobilization as an obstacle to economic growth. They are thus bale to form a coup coalition.

The above process was evident in Brazil (1964), Argentina (1966, and 1976), Uruguay and Chile (1973). The case of Mex was once where phases one ISI was completed in an already fairly authoritarian society meaning the transition to advanced industrialization were accompanied by a continuity of political institutions.

The Evolution of Bureaucratic-Authoritarianism

  • Groups that initially supported the coup (entrepreneurs and middle classes) soon find themselves hurt by the orthodox polices. This means the principal class that supports the government is foreign capital. After a while there are increased called for this relationship to expand to include the middle classes.
  • This transition occurs according to the level of threat existent in the pre-coup society. i.e. the greater the threat to capitalism in the pre-coup era, the stronger the technocratic coalition will be, and so they will be better able to maintain order. This is seen in Brazil where the pre-coup crisis was severe and the subsequent regime strong, as compared to Argentina where the crisis was far less serious meaning elite cohesion post-coup was weaker which ultimately led to the regime falling.

Conclusion

  • At a general level the framework focuses on the interaction between crucial features of politics in LA – dominant collation, regime and policy.
  • At a more specific level it focuses on economic problems associated with different levels of industrialization and the perception of threat as a driving force of the evolution of BA.

POLITICAL REGIMES AND ECONOMIC PERFORMANCE IN LATIN AMERICA

POLITICAL REGIMES AND ECONOMIC PERFORMANCE IN LATIN AMERICA

J. Hartlyn & S. Morely

Chapter 2 from Hartlyn & Morely Latin American Political Economy: Financial Crises and Political Change (1986).

 A Summary

Political Regimes

They define political regimes according to

  1. The right to free association, free speech and associated rights
  2. That the leaders compete in elections for periodic validation of the right to govern
  3. The ability of all citizens to effectively participate.

Authoritarian regimes are those that are lacking in one or more of the qualities.

Regime oscillations have been particularly dramatic in Argentina, Brazil and Peru. Chile and Uruguay were democratic for years before the turn to authoritarianism [which makes their fall all the more surprising, as the norms of democracy were presumably to some extent institutionalized. This could be a foil to the Huntington argument.]

  • Regime change has been associated with dramatic shifts in economic policy [indeed the dramatic shifts in some way seem to explain the prevalence of economic based arguments for the conversion to BA.] The moderate nature of politics in Colombia may thus explain why the economic changes have been rather more gradual [e.g. the beginnings of export promotion and mini devaluations – see Hirschman and Serra].
  • They define Mexico is semi competitive, although it may be better described as liberal authoritarian. In any event, the PRI have a legitimacy stemming from the revolution [Hirschman thinks this allows for unequal growth with social stability – this type of share experience narrative does not seem to form part of the Huntington thesis], but control has been extensive with occasional bouts of repression.

Bureaucratic Authoritarian Regimes

  • Brazil 1964, Arg 1966 – the military ruled as an institution rather than as individual military leaders. They had a technocratic approach to policy. Chile fell in 1973, as did Uruguay. A new BA regime installed in Arg in 1976.
  • Depoliticize and thus scale back the demands of labour based upon the threat from left wing mobilization from below and the need to impose economic growth and stability. This involved the erosion of forms of representation, unions, parties, etc.

Economic Growth and Social Equity

  • Growth in the post war period was good. It peaked in the 60s and growth fell in the 70s. Performance was very much conditioned on whether the country underwent an enforced contraction e.g. Brazil in 1964-67.
  • The 80s were obviously a disaster.
  • Although the region made huge increases in investment over the period, the rate of domestic saving was very low, meaning it was funded by foreign saving, i.e. debt. This is with the exception of Colombia. Thus much of the investment goods carried with them a serious liability, and repayment was contingent on the ability to earn forex. In other words, capital constraints were met by borrowing.
  • The balance of payments constraints were similarly met by foreign debt.
  • The period of ISI up to 1965 saw import ratios fell, and neglected exports which also fell. As the system wound up its usefulness and BA regimes came to power which started to think about new ways of developing based on market principals. In many countries tariff levels were cautiously reduced, subsidies for exports introduced, and a more realistic exchange rate pursued. This trend for more openness continued into the 70s except in Mexico. However, ISI was still in full swing, and Brazil regressed somewhat in response to the oil shocks. However, the region was more open
  • There were great advances made in life expectancy, and education whose potential has not fully been met by the lack of absorptive power of the formal labour market. This leads to potential unrest [Huntington].
  • By and large the growth did nothing to improve the state of income inequality as capital and skills intensive growth was pursued (consumer durables etc.). This ignores to some extent upward mobility, but nevertheless the picture is bleak.

 

 

POLITICAL ORDER IN CHANGING SOCIETIES

POLITICAL ORDER IN CHANGING SOCIETIES

Samuel P. Huntington

A Summary of the opening chapters

 

In a Nutshell 

“Economic development and political stability are two independent goals and progress toward one has no necessary connection with progress toward the other.”

  •  Huntington is arguing that institutions are not a necessary condition for economic growth nor modernization. Economic growth and specifically modernization do not wait to be invited by a set of good institutions, they force themselves on societies and governments without waiting for certain conditions to exist that would enable them to continue in a persistent and sustainable manner. So what role do institutions plays for Huntington? Are they thus non-essential components of society? Quite the contrary: Huntington states that that very stability of society is founded on the institutions in place. Modernization and growth are destructive forces for him, and they have a tendency to rip societies apart if strong political institutions are not in place to mediate the chaos that can ensue. Therefore, although good institutions may not be essential for growth and modernization, an absence of such institutions in the face of the unstoppable tide of modernization will lead to political and social decay, and eventually to failed states, constants coups, political violence and stagnation.
  • He uses the USA, USSR and GB as counterexamples drawn from Latin America (LA), Asia and Africa. I am going to leave out of this summary a lot of the country specific examples as I think the ideas are more important in this case.

The Political Gap 

“The most important distinction between countries concerns not their form of government but their degree of government.” 

  • In the US/GB/USSR the people and the government share a vision of the public interest and the principals upon which political order is based. There is consensus as to the legitimacy of the rulers. This gives them power to execute policy, collect tax etc. In short, it allows them to govern, and for Huntington nothing is more important than in a complex group of people, there is effective government.
  • In LA government do not govern – the political community is fragmented and institutions have little power. This difference between US/USSR/GB etc. and LA/Africa/Asia is the “political gap”.
  • There is also an “economic gap” but the two are not identical, although they are related. Countries with underdeveloped economies can be highly developed politically and vice-versa.
  • Huntington observes chaos is developing countries: coups (17 from 20 LA countries experienced coup since WWII), revolutionary violence, oligarchic dictatorships (Nicaragua etc.) – i.e. instability. He asks, what is the cause of this instability?
  • Thus the core thesis of his book was that it was caused by rapid social change brought on by modernization coupled with the slow development of political institutions (the political gap).
  • Modernization is increasing political participation before people have learnt how to associate with each other i.e. political and institutional development is lagging behind political participation and the result is instability.
  • Modern aid and overseas development plans are too focused on economic development rather than addressing the promotion of political stability as they assume that the latter follows the former. But this is not the case, as you see in the opening quotation.
  • Indeed it seems that preoccupation even with democratic institutions is folly. American always believe that free elections are the solution but Huntington says that in many modernizing countries they only exacerbate problems and tear down the structure of public authority. “The primary problem is not liberty but the creation of a legitimate public order. Men may of course have order without liberty but they cannot have liberty without order.” Thus in the chaos of competing forces Communism can provide an alternative. It may be no better at creating a prosperous society, but they do provide effective authority. [I am not sure of the extent to which he is approving or even recommending authoritarianism here. It would seem he is at least tacitly saying that authoritarianism is better than chaotic democracy, but then perhaps he is simply stating what appears to be an intuitive truth that we cannot have absolute liberty for all without governing structures to mediate human relationships when they reach out beyond the immediate family or clan level.

Political Institutions

“The level of political community a society achieves reflects the relationship between its political institutions and the social forces which comprise it.” 

  • Political community and institutions are only needed when societies move beyond interaction merely within their own clan. If all belonged to the same social force, conflict would be resolved through the structure of that social force. In modern, heterogeneous societies no single force can rule without creating political institutions that exist outside of the forces that created them.
  • When communities form outside of the clan or family men relate themselves to something other than themselves, an idea, a myth, a principal or code of behaviour. This is commonwealth – an agreement on the laws and rights that allow all to participate in mutual advantages. This type of complex community is thus ”produced by political action and maintained by political institutions”.

The strength of the community thus depends on the support for the organizations and the “level of institutionalization” How do we judge institutionalization?

  1. Adaptability/Rigidity – the more adaptable the more institutionalized they are, the more rigid, well, you get the idea. Institutions are set up for a specific purpose. Once the purpose is spent the institution may adapt or die. It must also adapt as new situations come along. Eventually this process of adaptation makes the organisation exist beyond its initial function – it valued by leaders and members for its own sake and it thus “develops a life of its own”.
  2. Complexity/Simplicity – the more complicated an organisation the more institutionalized they are. This involves multiplication of subunits, hierarchy etc. Simple systems are overburdened by modernization and will destroyed, a political system with several different political institutions is more likely to be able to adapt. It is more likely to be a mixed state which is more stable and will not dissolve into tyranny (if pure kingship), oligarchy (if pure aristocratic rule) nor mob rule (if pure democracy).
  3. 3.       Autonomy/Subordination – the more political institutions exist outside of other social groupings the more institutionalized they are. They are insulated from social pressures from particular power groups. “Political organisations and procedures which lack autonomy are, in common parlance, said to be corrupt.” Complexity contributes to autonomy.
  4. 4.       Coherence/Disunity – the more unified and coherent the more institutionalized. Effective organisations require substantial consensus about functional boundaries, conflict resolution etc. and that consensus must extend to those active in the system [rule of law]

Political Institutions and Public Interests

“The public interest in this sense is not something with exists a priori in natural law or the will of the people. Nor is it simply whatever results from the political process. Rather it is whatever strengthens government institutions. The public interest is the interest of the public institutions.” 

  • E.g. the public interest if GB might be approximated by the interests of the Crown, the Cabinet, and the Parliament.
  • Representative theory states that government institutions/actions are legitimate if they represent the will of the people. Huntington says this is wrong, rather they are legitimate to the extent that these institutions have distinct interests of their own apart from other groups [I do not fully understand this point. Perhaps it is just an extension of the autonomy criterion].
  • How are institutions related to the culture of a country? One of their key functions is to institutionalize trust that already exists at the heart of society. But they cannot do this without the existence of some trust ex ante the work of institutions. Thus, those societies where there is no trust will have difficulty building good institutions. He gives the example of LA where “self-centred individualism and distrust and hatred for other groups in society have prevailed”. The prevalence of such distrust means societies cannot progress beyond familial boundaries. [Putnam]
  • This problem is compounded by the fact that economic change and modernization erode or destroy traditional bases of association.

Modernization and Political Decay

  • Modernization involves social mobilization where major clusters of old ties and commitments are broken down. This means a change in values and attitudes. It also involves economic development (however measured). Modernization requires both these factors.
  • This is a disruptive process that can cause instability.

Effect of Modernization on Politics and Institutions

        I.            Political modernization means replacement of large number of traditional authorities by one single national authority. Government becomes the product of man not of God.

      II.            Political functions become differentiated

   III.            There is increased participation by groups in society. Whether this means greater control of the state by the people or the other way around depends on the general consensus. More people participate and more people are affected by politics.

  • The fact of social modernization (urbanization, industrialization, GNP rise, mass media expansion etc.) does not mean a necessary political modernization. E.g. LA progress toward democracy, stability etc. is “at best dubious”.
  • The effect of social modernization is disruptive to political systems – traditional loyalty is undermined; local chiefs are challenged by elite beaurocrats. Identity is eroded . There is a growth of group consciousness and this has an integrating and disintegrating effect on the social system e.g. it creates prejudices and conflicts between groups due to competition for resources, inequalities of economic development, unequal distribution of power etc.
  • “It is not the absence of modernity but the efforts to achieve it which produce political disorder. If poor countries appear to be unstable it is not because they are poor, but because they are trying to become rich. A purely traditional society would be ignorant, poor and stable.” [This refutes the poverty thesis – that countries are unstable because they are poor]. The evidence for this claim is that it was generally low middle income countries that experienced violence and coups, rather than the poorest of the poor.
  • Thus modernization creates instability and the higher the rates of change the greater the instability. This idea explains why when change was spread over centuries in US/GB etc. there was little violent instability, whereas in developing countries “problems of the centralization of authority, national integration, social mobilization, economic development, political participation, and social welfare have arisen not sequentially but simultaneously.”

 Social Mobilization and Instability

  • Urbanization, education, media etc. give rise to increased aspiration which produces tension if the aspirations cannot be met. It will also increase the public’s voice in politics. In the absence of strong and adaptable institutions such increases in participation will cause instability.
  • In general the higher the level of education of the unemployed the more extreme the destabilizing behaviour: “alienated university graduates prepare revolutions”.

Economic Development and Instability

Economic development provides the capabilities social mobilization demands so it should tend to reduce tension. However, it also leads to social frustration:

  1. Disrupts social groupings
  2. Produces “new money” classes who want power and status to reflect their wealth and are imperfectly assimilated into the social order
  3. Increases geographical mobility which undermines social ties. Increased urbanization can lead to political extremism.
  4. Widens gap between rich and poor and all the tension that goes with that
  5. Relative incomes do not rise for all so there is dissatisfaction
  6. Increased literacy and aspiration levels beyond what can actually be provided
  7. Aggravates regional/ethnic conflict over distribution and consumption
  8. Increases organizational capabilities of groups to make demands on the government which it will most likely be unable to satisfy.
  • There is much evidence in favour of the idea that economic development creates instability (Mexican revolution after 20 years of excellent growth/French Revolution the same), but much evidence against (USSR, Japan, West Germany). The conflicting evidence suggests the link is complicated. It is hypothesized that the relationship varies with the level of development. At low levels of development, economic growth creates instability. The effect is neutralized somewhat for middle development countries, and the link is reversed in highly developed countries.

The Gap Hypothesis

“Social mobilization…expose the traditional man to new forms of life, new standards of enjoyment, new possibilities of satisfaction. These experiences break the cognitive and attitudinal barriers of traditional culture and promote new levels of aspirations and wants. The ability of a transitional society to satisfy these new aspirations however, increases more slowly than the aspirations themselves. Consequently a gap develops between aspiration and expectation, want formation and want satisfaction…This gap generates social frustration and dissatisfaction.”

The reason for the frustration is found in a lack of social opportunity, and a lack of adaptable political institutions.

 Civic and Praetorian Polities

  • Political systems can be distinguished by their levels of institutionalization (INS) and their political participation (PP). The former can be either high or low (for Huntington) and the latter can be highly participatory (populace at large) middle (middle classes) low (aristocratic or other elite). The stability of a system depends on both of these factors. It depends on the ratio, and so a country with similarly low levels of both may be in fact more stable than a country with a highly institutionalized system and an even more highly participatory system.
  • Countries with low INS and high PP are societies where social forces act directly in the political sphere these are “praetorian polities”. High INS and low PP conversely are “civic polities”

 

Political Participation Ration of Institutionalization to Participation
 

HIGH: CIVIC

LOW: PRAETORIAN

Low: traditional Organic (Ethiopia) Oligarchical (Paraguay)
Medium: transitional Whig (Chile) Radical (Egypt)
High: modern Participant (USSR) Mass (Argentina)

 

  • Essentially the difference between civic and praetorian is that one set of systems are law abiding legitimate states, and the others are law neglecting systems where rulers act in general in their own interest.
  • Praetorian: fragile, fleeting forms of authority, charismatic leaders, military junta, populist dictator. All forms of government whirl and change in unpredictable manner. Politics and political participation are neither stable nor institutionalized.
  • Civic: recognizable, stable patterns of institutional authority, feudal or centralized, or federal. Parliamentary assemblies etc.
  • “Institutions impose political socialization as the price of political participation. In a praetorian society groups become mobilized into politics without becoming socialized by politics.”

 [Huntington goes on to talk about differences in these types of societies. However, I have no teased out his main ideas and the summary is quite long enough.]

 

THE TURN TO AUTHORITARIANISM IN LATIN AMERICA

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

A. O. Hirschman

In D. Collier (ed.) The New Authoritarianism

A Summary

 

In a Nutshell

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

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

Economic Arguments

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

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

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

Inequality

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

The Entrepreneurial and Reform Functions

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

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

THREE MISTAKEN THESES

THREE MISTAKEN THESES REGARDING THE CONNECTION BETWEEN INDUSTRIALIZATION AND AUTHORITARIAN REGIMES

J. Serra

From D. Collier (ed.), The New Authoritarianism in Latin America (1979)

A Summary

 

In a Nutshell

The main purpose for Serra is to dissuade from the view that bureaucratic-authoritarianism (BA) was a direct consequence of the type of industrialization that occurred in Latin America. That is, he refutes the claim that there is a necessary causal relationship between the form of regime and the economic conditions that existed at the end of the “easy” phase of ISI. He does show by showing that such an interpretation cannot explain why certain countries that followed the ISI method did not turn to BA (Colombia and Venezuela), and moreover it cannot explain important differences among the BA regimes that did emerge. He details problems both with the economic analysis that underpins economic explanations as well as the difficulties of convincingly arguing from economic conditions to political outcomes.

Specifically he examines three theses:

  1. Superexploitation thesis
  2. Deepening thesis
  3. Economic rationality thesis

 

Examples come from Brazil unless otherwise stated.

Superexploitation

  • Especially seen in the work of Marini.
  • Superexploitation of the working class a necessary condition for capitalist development in LA, and as such BA was needed to enforce relevant policies of wage/personal repression. BA was a means of preventing the working class from jeopardizing or frustrating growth by protest etc.
  • Wage compression is necessary both as a political tool of emasculating labour, and also to increase profits and hence capital accumulation by capitalists. Additionally consumer durables were the most dynamic source of growth for the economy, but as these were never likely to be part of the consumption bundles of the lower classes it was unnecessary to increase their wages as to do so would not increase domestic demand. In fact income had to be transferred to the middle classes. This means that productivity in the sector need not be increased. As the consumption power of the lower classes decreased, demand for “wage goods” declined thus ensuring that there was little technological change in that sector, such that the durables sector which was the most technologically absorptive could dominate. Authoritarianism was a fundamental condition for such exploitation.
  • There was significant wage compression.
  • According to ECLA etc. the consumer durables was indeed a leading sector.
  • There is indeed a disparity between income need to generate consumer durable demand and normal wage good demand given the per capita income of most LA economies at this time.
  • However, deriving a law that such economies should superexploit or perish involves an enormous step that involves both theoretical and empirical errors:

 

  • It is wrong to think that productivity need not be increased as workers do not consume durables. Between 1959 and 1970 productivity increased 75% in the industrial sector, and even more in the durables sector.
  • Between 1969-1970 32% of lower wage families’ expenditures were devoted to goods other than food and shelter. Also, many of the foodstuffs items were industrially processed.
  • Output and productivity in the “wage goods” sector increased in the period although less than the other industrial sectors.
  • The wage squeeze occurred due to weak unions, lack of popular organizations, and the political reasons for repression (fear by the regimes of an extreme threat to the established order), rather than merely as a tool to implement the superexploitation logic.

 

Deepening

  • According to ECLA and other structuralists IS had produced an excessive diversification of finished consumer goods (horizontal diversification) because the regressive income distribution that industrialization failed to reverse had generated over diversified demand of consumer goods and this led to a pattern of importing that prevented a “deepening” of industrial production i.e. away from consumer goods and toward intermediate and capital goods. This in turn led to a greater demand for imported technology in the consumer goods market, less inclination to invest in capital goods production (as goods could be imported cheaply), and closed market in exportable industrial goods. The implications of this are a fragmented pattern of imports and a large portion of the “backward linkages” from growth going abroad.
  • The O’Donnell thesis is that BA regimes correspond to economies at this point of industrialization, and they are necessary in order to implement the much needed deepening of industry. The deepening was necessary for the very survival of capitalism due to the problem of external bottlenecks. i.e. the bottlenecks were exacerbated by inflationary pressures causing a sociopolitical crisis, meaning the next step of development had to be domestic production of those goods (industrial/capital imports and eventually technology).
  • Thus the regimes pursued deepening as a fundamental objective.

 

To summarize the argument:

a)      Given the prior crisis of this type of capitalism and

b)     Its tendency to generate threatening processes of popular activation and assuming

c)      The defeat of non-capitalist alternatives we can conclude that

d)     Economic changes will tend to occur in the direction of deepening and will be associated with

e)      The emergence and expansion of BA, and

f)       In the 1st stage of BA one will find an orthodox approach to economic policy to achieve deepening.

Assessing the Hypothesis

  • Deepening had been pursued actively by the pre-BA regimes in the 50s and beginning of 60s [the coup in Brazil was in 1964].
    • The shift from the easy phase to the difficult phase had largely been achieved by 1964. Production of intermediate and capital goods was expanding rapidly and imports of these goods were falling.

 

  • The idea of exhaustion of ISI refers to a specific cycle of ISI, meaning it is not logically exhausted forever, but it reaches a stage where it can no longer be the principal engine for growth absent increasing the domestic market or changing the terms of trade. Thus the economies could undergo substitution cycles. However there was significant resistance from the vested entrepreneurial interests to moving to next cycle as it would change the industrial makeup of LA. However, had there been overcome the ISI system could have been maintained. Therefore, the situation LA found itself in the 60s did not imply a logical end to ISI, only political inability to continue it.
  • Deepening was not a particular concern for the BA regimes and was not seen as part of the core economic policies of the first two economic phases of BA 1964-67, 1967-71 and was pursued only to a limited extent in the following phase. Indeed Serra argues that deepening was never pursued until the last phases of the regime, and it was this attempt at deepening, once, the model of development had been found wanting, that caused the destabilization that toppled the regime.
    • The economists close to the regime did not discuss deepening. They basically adhered to orthodox thought according to O’Donnell. And yet, if the link between external bottlenecks and deepening is correct, then this is very far away from orthodox thought, as it essentially entails improving the forex position by restricting imports, domestically producing capital goods etc. This is not orthodox thought which was more likely to involve exporting primary products, FDI etc.
    • Serra suggests that deepening was not a serious contender to get Brazil out of the growth contraction hat occurred in the early 60s as it would have meant discrimination against the consumer durables sector (thought to be an engine of growth), and also as it would meant have meant a contraction of incomes whilst investments matures and problems of scale were overcome. It would also have met with strong resistance from the IFIs etc. Indeed the belief in the ability to internationalize the economy, and the existence of slack in the durables sector meant that there was a belief that durables could lead the next phase of growth.
    • The post 1964 growth trajectory was fairly amazing, but it was driven by the same sectors: durables and construction and non-traditional exports, with a key role played by the idle capacity. Levels of investment hardly increased form the 1962 level, all indicating that deepening was not a priority. There was little movement in the capital good sector; indeed policy gave incentives for purchase only of imported capital goods and machinery. Imposts of these goods between 1966-69 increased at 20% annually. This fact limited technological progress in this area.
    • In 1971 the consequences of a technologically backward capital goods sector were realized and there were incentive programmes for domestic purchases. However, the deepening was not accompanied by a contraction of horizontal expansion (large infrastructure projects, consumer durables projects, new car factories, Brasilia building etc.) and this overexpansion lead in 1974 to inflation and a balance of payments crisis. This period saw a vast increase in oil imports, meaning that the underlying economic problems accompanying expansion in this way were compounded with the first oil shock in 1973. The policy response to extreme inflationary pressure was heterodox price controls and increasing foreign debt.
    • The government that came to power in 1974 embarked on a more traditional deepening i.e. diverting growth from durables to producer goods, and an expansion of primary exports. They attempted to curb the exponential growth of consumer goods, particularly autos. However, this deepening was in no way more rational of effective than the deepening that occurred pre BA regime, and indeed deepening in some ways has been antagonistic for the BA regime, as they had to limit consumption expansion in a context of a declining demand growth, increasing inflation and major changes to investment patterns. These factors greatly reduce the predictability of economic policy and increase the conflict amongst different sections of the bourgeoisie, and industry.
    • Thus during the period up to 1974 the Brazilian economy greatly increased its dependence on the international economy despite some attempts at deepening.

Chile: the military regime did want to eliminate problems of horizontal diversification, but not so much by deepening, as by de-industrialization pursuant to opening the economy to international forces.

Economic Rationality

  • This thesis posits the existence of a rationality in the economic policy making process of BA regimes. This is because decision making is more efficient, resources are more efficiently allocated, and growth goals are no longer subverted to the turmoil of the civilian political process.

a)      Authoritarianism prevents premature social aspirations driven by mass media and electoral competition from getting in the way of growth goals [Huntington relevant here – i.e. without pre-existing institutions of moderation, countries that experience such growth as was seen in the 50s will tend to break down into authoritarianism].

b)     Political tranquility is needed to attract international capital and carry out major investment works

c)      Better resource allocation as planning is undertaken by objective technocrats, enabling the functioning of a healthy price system and a system of financial intermediation which reduces inflation.

  • Growth: Growth from 1968-74 was vigorous, around 10%. However between 1962-67 it was only about 3.7%, so the later growth could have been part of the upswing consequent of depressed growth early in the decade which created significant idle capacity to allow for subsequent expansion.
  • Balance of Payments:exports diversified and increased especially after 1968. This is attributable both to the export incentives, principally the mini-devaluations from August 1968 onwards, but there was also favourable conditions of external demand at this time.
    • It is hard to say that the export policies and ability to capitalize on external demand necessitated an authoritarian government. The wage compression can’t meaningfully explain the growth in manufactured exports relative the export incentives which could have been undertaken by the democratic government (e.g. Chile, Colombia). Additionally, there is no good argument to show that stability is more a precursor of investment for export than it had been for investment for domestic consumption.
    • Inflation: Inflation was reduced to around 20% from 80% but this is still a very high number and reflects the inability of the regime to balance deepening with a reduction in horizontal diversification.

Conclusions

  • The policies followed by the BA government may have been initially successful, but they proved unsustainable by 1974. The oil crisis is blamed, but the sectorial imbalances and un-deepening that occurred pre-1974 were responsible for the strain on the economy which was then aggravated by the oil shocks. As Hirschman notes, blaming the oil shocks for the decline in the expansion cycle is like blaming reality for not having behaved according to the requirements of an illusion: that forex was unlimited…
  • It seems that arguments from economic conditions to BA outcomes are foundationless on exampination of the empirical evidence.
  • Additionally the crisis and heterodox solutions pursued shows how changes in objective conditions lead policy makers previously noted as orthodox, to make decisions that would horrify the Chicago school: compulsory deposits for exports, return to ISI, price controls etc.

THE STANDARD OF LIVING IN LATIN AMERICA DURING THE TWENTIETH CENTURY

THE STANDARD OF LIVING IN LATIN AMERICA DURING THE TWENTIETH CENTURY

Asrtorga, Berges and Fitzgerald

A Summary

  • Create new dataset to examine 20th century for LA6 and last 50 years of 20th century for LA13. They use the data to classify into three main periods. 1900-39 1940-80 1980-2000.
  • Per capita income grows at higher rates in the middle period. The inflection points are roughly 1939 and 1980 which correspond to what some view as substantive policy changes, and others view as trade openness and factor productivity changes.

 

1900-39: modest growth and volatility

1939-80: much higher growth and lower volatility       for LA6 countries. Refelcts trends in

1980-00: lower and more volatile growth                          particular growth strategies. Firstly primary exports, then trade protection and state led insutrialistaion, followed by recovery from debt cris and liberalization.

  • Volatility varied almost as widely as the growth rates in the three periods.
  • Inequality remained extremely high in the century.
  • Per capita income between the LA6 countries has converged somewhat although absolute differences remain substantial.
  • Literacy and Life Expectancy too made great leaps in the middle decades. These improvements lead to a better quality labour force and better productivity.  There were two main reasons for the progress seen in these areas: 1) state intervention and targeted public expenditure (e.g. campanas de alfebatacion for literacy, and spending on urban sanitation to eradicate infectious diseases for life expectancy) and 2) urbanization leading to better social infrastructure.
  • Urbanisation increased rapidly in the middle decades. The comparison of urban and rural literacy levels suggests that urabisation had a positive effect ton literacy due to better access to primary education. Similar life expectancy data are not available, but the authors belive that urabnisation increased public investment in e.g. potable water and therefore increased life expectancy.

 

  • They construct a new living standard variable that shows that living standards doubled in the period 1900-1939, and again in 1940-80, but have increased only marginally since 1980.
  • The countries with best social indiactors in 1900 were Chile and Arg. By 1980 there had been convergence and the rest of the LA6 had caught up.
  • Economic growth was best in countries with relaticvely lower living standards in 1900 (mex, Braz) meaning the lower levels of social capital were not a barrier to fast growth in the century, but also that the accumulated stocks from 1980 were not enough to sustain economic growth. The growth in living standards and social capital in the middle decades were more a product of state investment rather than economic growth as the living standards continued to rise post 1980 whilst economic growth stagnated. This suggests that the causal link (in either direction) between social progress and living standards may not be as high as previously assumed. This questions the use of GPD as a measure of living standards.

 

External Convergence

  • Whilst internal convergence may have been strong, and convergence with USA in terms of literacy/life expectancy was good, there was little convergence in incomes.
  • The greatest narrowing of the income gap for the LA6 occurred in the 1930s, which is explained by the fact that Latin American output fell by much less than that of the US
  • during the Great Depression, and recovered more rapidly—largely because of the effective protection provided by exchange shortages and trade policy. However, this gain was short-lived and lost again during the Second World War boom in the USA.
  • After 1980 there was a marked divergence due to crisis in LA (and inability except in mexico to develop a broad based manufactures export economy) and continued manufacturing boom in USA.
  • Despite relative poverty of incomes, there was impressive convergience in living standards.
  • There has been little economic convergence with Northern Europe and LA has lost ground relative to Southern Europe and Asia.
  • The Argentine case offers a telling illustration. In 1900, Argentina was relatively well positioned vis-à-vis the southern European countries, with a comparable per capita income of US$487 versus US$632 (at 1970 PPP prices). In consequence, it could attract a major immigration flow of skilled labour from Spain and Italy seeking opportunities for upward social mobility. Despite the fall in world demand for its main exports, and exclusion from British Dominion trade in the 1920s and 1930s, Argentine income levels during the 1940s climbed to an average of 86 per cent of those in southern Europe.  Subsequently, political and economic instability and persistent distributional conflict saw a steady decline in Argentine income levels to just 24 per cent of those in southern Europe by 2000.

 

Conclusions

a)      Income growth in 1940-80 was highest with low volatility compared to previous periods and subsequent period. There was also a greater increase in social progress (literacy/life expectancy)

b)     Imporvements in living standards both absolute and relative were due to urbanization and state investment

c)      Much convergence in LA6 due to similar policy choices and industrialization patterns. This convergence was not shared by the LA13

d)     No economic convergence with USA. There was living standards convergence but LA6 currently at USA 1930 level whereas LA13 at 1900 levels.

e)      Social progress based on urbanization and state intervention not on economic growth.

“The quantitative difference between the economic and social results for 1939–1980

and the rest of the century is larger than in previous studies, and underlines the need for a renewed debate among economic historians on the strengths and weaknesses of the process of state-led industrialization now that the initial over-enthusiasm for the structural reforms of recent decades—themselves largely a reaction to the previous development strategy—has largely abated.”

 

  • 1940-1980 was the period of exceptional progress. It was period of increased manufacturing, increased productivity of labour in  both industry and agriculture as well as a shift from primary to secondary industries that accompanied urbanization. It is hard to avoid the conclusion that these gains were not made due to the reliance on the domestic market during the ISI period.
  • The authors note that it cannot be said that institutions at that point were in some way better than they had been, or than they were to become, nor that the highest performing countries (Mex, braz) had better istiutions than the lesser performing ones (Arg, Chile).

 

The authors suggest that the poor growth could be a product of the exposure to the international markets, as volatility is transmitted by commodity prices and the better growth rates of the larger countries as opposed to the smaller could be the result of lower debt/GDP in the former. They outline 2 criticisms of this view:

1)     The world economy was booming in the post war years and so LA growth in this period could be attributed to global trends. They argue against this: LA upturn happened before the USA, and secondly the period of low growth came after the process of liberalization occurred in which time both USA and Asia were booming.

2)   1940-80 was a growth time partly due to large debt accumulation and thus the period of liberalization was bound to see low growth. However “However, the debt crisis was fiscal in nature, and generated by an inability to raise tax revenue to modern levels rather than excess social expenditure or public investment, which implies that it was not caused by the industrialization model as such.” In fact the dangers of creating unsupportable deficits and inefficient industries behind tariff walls was well recongised in LA and repeated efforts weremade to raise taxes and increase manufactured exports.

  • The issue could be explained in terms of prevalent economic doctrine. Frustration at lack of growth in open economy pre 1930 ISI and state intervention. Debt crisis and inefficiencyliberalization and FDI as principal means of growth.
  • But all of these shifts can also be seen in terms of polical concerns: “the move away from economic liberalism towards public intervention and planned industrialization responded to pressures from the emerging urban classes and worldwide nationalist aspirations; while the move back to economic liberalism in the 1980s formed an essential part of the transition to democracy throughout the continent, and also matched a similar trend worldwide.”
  • And so, the trends were largely associated with changes in living standards [Huntington is relevant here]. As living standards increased largely in the middle decades it is not hard to see why support for liberalization has been weak given that living standards and incomes have largely stagnated since such policies were introduced.

ECLA AND THE FORMATION OF LATIN AMERICAN ECONOMIC DOCTRINE

ECLA AND THE FORMATION OF LATIN AMERICAN ECONOMIC DOCTRINE

E. V. K. FitzGerald

A Summary

 

 

In a Nutshell

There were important external events that led to the formation of economic policy in LA centred on ISI: 

·         the manufacturing drive that occurred during WWII due to lack of movement of capital goods; 

·         the lack of support from Washington regarding tariffs on imports from the US and exports to the US

·         Change in world view on integration

However, FitzGerald argues that cepalino theory is best understood as part of a wider postwar debate on world order, and not as a delayed reaction to the Great Depression

 

Postwar Reinsertion of Latin America in the World Economy

·         There was a worldwide discussion about the organization of the world economy. An influential book published by Staley in 1944 called for the industrialization of the South to ensure its integration with the world economy. The US was initially behind this position; indeed part of the remit of the Bretton Woods institutions was to stabilize world commodity process, promote manufactures trade and to plan investment.

·         In LA during the war little new investment had been made due to the impossibility of capital imports. However, industrial employment had risen nonetheless and this incorporated new urban workers into the political dialogue thus creating new calls for industrialization and the provision of social infrastructure.

·         Yet in 1945 at the inter-American conference in Mexico the US refused to grant aid to LA, or to give preferential tariff treatment. They now seemed to regard the economic problems of the region not as a consequence of trade matters, but of internal issues.

 

Contemporary Theories of Trade and Development

·         Growth in the 40s driven by primaries exports, and this was dependent on imported capital goods. It was thus thought that the terms of trade were determined exogenously, and there was a perceived imbalance between what terms commodities attracted as against manufactures. This is the concept of unequal exchange.

·         This concept was used to justify planned industrialization in Central Europe in the 20s. They regarded a difference between the nations at the “centre” and those on the “periphery” of the world economy (W. Sombart). Thus they wanted state led industrialization and economic autarky to overcome technological disadvantage. It is clear that these writing were read by economists in LA and particularly by Prebisch.

·         ELCA was created in 1948 as part of the UN.

 

 

ECLA Thinking

·         The 1948 survey described a structuralist interpretation of the main LA economies since 1937. There was a focus on the negative effect on growth seen from changing world trade conditions.

·         The 1949 survey was somewhat more radical and it was the first one over which Raul Prebisch had full control. The view taken was not just descriptive of the economic woes of the periphery, but also a criticism of the behavior of the core in setting higher prices, wages, and profits for itself on the one hand, and retarding the spread of technology and industry on the other. Domestic markets were not thought to be the optimal solution for LA but it was the best one given the limited import openness of the centre.

 

There were 4 key points:

1.       Terms of trade reflected a combination of collusive behavior between labour and business at the core which can “make” prices because of market control.

2.       Technology diffusion is retarded by institutional constraints. Increased productivity at the periphery is only reflected in more profit for the centre as prices fall.

3.       Import Substitution is second best alternative to fair prices and access

4.       National planning is legitimized by the need to use domestic profits for industrial investment rather than luxury consumption.

·         The crucial step in the critique is that the Centre was operating under monopolistic markets while competitive markets were seen in the periphery. Thus the argument was not counter Ricardo, but saying that Ricardian advantage did not exist due to protectionism at the Centre.

·         The surveys in the 50s followed similar lines, but with less emphasis on the “exploitation” of the periphery by the Centre.

 

The Doctrine in Retrospect

·         Some argue that the theories put forward by ECLA were based on the interwar experiences of depression and de-linking from the world economy.

·         Furtado argues it was a nationalist expression.

·         Cardoso and Pinto claim it was a technical critique of neo-classical theory.

·         It should rather be seen as the product of a larger discussion about how to order the world economy.

THE MACROECONOMICS OF POPULISM IN LATIN AMERICA

THE MACROECONOMICS OF POPULISM IN LATIN AMERICA

R. Dornbusch and S. Edwards (1989)

Summary etc.

In a Nutshell

Despite the politically heterogeneous aspects of populism in LA, the economic policy of populism shows very similar traits emphasizing growth and income over inflation and deficit finance. This means that not only do the policies ultimately fail, but they often hurt the very people they were designed to assist. Although there are initial successes, forex constraints eventually force realism onto policy makers and real wages cuts ending in instability and often coup, result.

The Populist Paradigm

  • Initial conditions – slow growth possibly after IMF stabilization (later populist episodes) which have reduced living standards. Serious inequality provides economic and political appeal for a radical programme
  • No constraints – existing reserves allow for a rejection of conservative paradigm and risks of inflation from deficit spending are downplayed as there is thought to be lots of idle capacity to take up new demand.
  • The policy prescription – reactivation of the economy and redistribution. Forex to be saved by restructuring of the economy.
  • Phase I – vindication. Growth, real wage increases, employment are high etc. Inflation controlled by ex rate controls etc. Imports increase and inventories run down
  • Phase II – bottlenecks from increased demand mean shortages. Budget deficit worsens considerably and inflation increases.
  • Phase III – pervasive shortages, inflation accelerates. Attempts at stabilization by depreciation sees real wage cuts and political instability. The government is lost.
  • Phase IV – Orthodox stabilization under a new government. IMF programme. Decline is persistent due to lost capacity, and capital flight.

Allende’s Chile

  • Elected 1970
  • Influence by ECLAC thinking – inequality a key problem and unemployment, and the past administration condemned as dependent and monopolistic. There had been stagnant growth and increasing inflation. There was a large trade surplus.
  • The Allende programme was aimed at:
    • Structural economic transformations including nationalization
    • Raising real wages
    • Reducing inflation
    • Increasing growth
    • Increasing consumption
    • Reducing dependency on the ROW
  • The increase in AD was to come from government spending, and accompanied by income redistribution and administrative controls on prices. Thus it was in the stucturalist tradition.
  • It was thought that there was a huge amount of idle capacity in the economy as the economy was slanted toward the upper tier of the income distribution which wanted high capital/labour ratio luxury goods. If demand could be stimulated at the lower end of the scale, lower ratio goods would be wanted and the idle capacity would take up the slack without a resulting upward pressure on prices. So if there was redistribution the result would be inflation free expansion of demand and output.
  • The substantial forex reserves would be relied upon to prevent production bottlenecks.
  • There was little attention put on the financial sector as it was assumed that the lower capital/labour ratio production would need less investment.
  • A trade policy to diversify exports was needed: they abandoned the crawling peg and fixed the ex-rate.
  • They failed to realise that this would only produce a short burst of economic activity.
  • The first year saw success. Demand increased as did output. GDP grew at 7.7% and wages increased 17%. Labour’s share of GDP increased to 62%, more than 10% than a year earlier. This paid off politically in municipal elections where the president’s party increased its support dramatically. However, the deficit had grown from 3% to 11% of GDP.
  • The orthodox budget equilibrium recommendations had to be ignored to achieve the political objectives of raising support (Lopez – economist in the administration).
  • By the end of 1971, forex reserves were halved, inflation pressure mounting, there were shortages and production responses became more sluggish.
  • In 1972 inflation reached triple figures and the deficit was at 13% GDP. Inflation led to people moving to the informal economy and thus the tax base was eroded – vicious circle. It was not politically expedient to deal with these problems by reducing gov expenditure or reducing wages.
  • They took radical steps to stop the problems without addressing the causes; action taken on ex-rate front, but not on wages. Rationing etc. was introduced.
  • 1973 saw a coup. Although the middle classes had be alienated, it should be noted that Allende’s party share of vote rose from 30% in 1970 to 44% in 1973 even with the inflation etc. The military, foreign companies and governments all had a part to play in his downfall, and once he was out the devastating wage cuts took over.

Garcia’s Peru

  • Came to power in 1985 with a message of growth and redistribution.
  • Peru had grown well in 50s and 60s but stagnated in the late 70s with growing inflation.
  • The 1980-85 period was extremely testing: terms of trade deteriorating, IR rates, credit rationing etc. The IMF programmes saw inflation increase and GDP decline.
  • Garcia introduce heterodox solution to utilize idle capacity, reverse high unemployment, and to tame high inflation.
  • In Peru 1% of the population was getting 50% of the income. There was a huge gap between actual and potential output. They were unimpressed with the IMF programmes. Heterodoxy promised an end to inflation without the attendant costs of unemployment.
  • The policies focussed on: raising AD through wage increases;  Re-establishment of ex-rate control and abandonment of devaluation policy; external account managed by ISI and debt service limitations. Garcia effectively suspended the external constraint by suspending debt servicing which allowed for a widening trade deficit.
  • Short term the policies were a big success – inflation declined, employment rose, real wages were 52% higher after one year, the economy grew by 9.5% in 1986 and 6.7% in 1987. Thus given enough forex, and a depressed economy, domestic demand stimulation can work through capacity utilization – Garcia was celebrated.
  • The turning point was the bank nationalization in 1987. The aim was to get hands on the banks to have some control over credit to business. They had run out of forex. In that year, growth was slowing, inflation was high and the external constraints were now biting so bottleneck appeared.
  • Inflation was out of control, a result of the ex-rate situation and the deficit – subsidies and the decline in the tax base exacerbating the problem. The declining forex reserves forced a more realistic exchange rate and this spurred on inflation. So all they had really done was delay the cost of deficit spending for a year or two.

SOCIAL CONFLICT AND POPULIST POLICIES IN LATIN AMERICA

SOCIAL CONFLICT AND POPULIST POLICIES IN LATIN AMERICA

J. Sachs (1989)

Summary etc.

In a Nutshell

High income inequality in Latin America causes widespread calls for redistribution via policy that increases the incomes of the worst off, and this leads to over-expansionary policies that pay little heed to inflation and BOP concerns and thus contribute overall to weak economic performance.  Thus there is a linkage between social conflict and poor economic performance. Unlike the countries of northern Europe, LA has institutions that cannot properly mediate these social conflicts – bitter economic/distributional conflict is part of everyday life and this is reflected in a battleground type environment for making economic policy, with all the policy instability that implies. These conflicts are evinced in the extreme inequality that pervades the region; it is especially marked when compared with the East Asian countries, and this difference may explain the instability of the former as opposed to the stability of the latter. It also helps to understand why certain economic policy choices are made: austerity provokes unrest and so cannot be chosen even in high inflationary periods; trade policies are inward oriented so as to boost urban wages and to prevent landed elites and commodity exporters gaining excessively; necessary devaluations are delayed as they hurt the wage earning poor the most, and the delay further exacerbates the problem. In other words, because of the societal demands, over-expansionary macro policies are enacted which lead to BOP and inflation crises.

NB: this paper is not anti the motives of the populists (addressing inequality), nor pro the reactive orthodox measures that come after populism derived crisis. If anything it is the swings between these two positions that does the most damage. A middle ground needs to be sought.

Economic Populism and Inequality

  • Sachs found a significant correlation between inequality and the need to reschedule debt repayments. Unequal countries are prone to excessive foreign borrowing to redistribute, promote exports (raising urban wages), destabilizing labour militancy, enhancing elite power to evade taxes.
  • LA governments have rapidly increased budget deficits, often through borrowing. Big spend policies are needed to address serious inequalities. Such policies are particularly attractive for governments based on urban and working-class constituencies, such as the populist governments in LA which arose in response to the urbanization that occurred in the 30s and 40s. These governments were particularly sensitive to the needs of gov. employees, urban proles, public sector workers and the informal sector.
  • Politically populism is a multiclass movement based on state activism (Coniff), universal suffrage and charismatic leadership. They were generally distributive rather than redistributive [from a political science point of view one wonders why this form of government would be chosen over and above a purely redistributive government given the nature of poverty and inequality in the region].

A Macro Framework for Populism

  • Exchange rate is fixed by central bank using accumulated reserves (in many cases these were surpluses earned during WWII when capital imports virtually suspended from the core). A monetary expansion policy is undertaken (e.g.). Demand expands. As ex-rate is fixed imports and export prices are not changed. This pushes up demand for non-tradable, and in turn for labour leading to higher wages. Price of exports fall relative to non-tradable, and to the extent they are used to produce exports, the profit margins of exports are squeezed (so the policy is in favour of urban workers, and against exporters – and hence why it is so attractive to populist governments). This leads to lessening export production at the same time that demand thus imports are rising leading to a trade deficit. The deficit is financed by exchange reserves or foreign credit. Once these run out the party is over.
  • A BOP crisis hits. There is no capacity to peg the ex-rate, so a real depreciation occurs that lowers wages and restores export profitability and reduces internal demand. The real depreciation may be bigger than the initial appreciation since in the expansion stage, forex is lost and export capacity is less due to de-capitalization.
  • If the process is not reversed states are left with expansionary policy with a floating ex-rate and the result is inflation. Populist govs do not want to reverse the initial gains and may try to put in ex-rate controls, nationalize the banks (Peru 1987, Mex 1982).
  • It is the environment of unresolved social conflict that spurs this kind of populist policy cycle. Such policies would not be possible if the export sector was diversified out of the hands of a small elite, or agricultural holders were many and had political voice. The fact that LA was characterized by oligopoly meant the policies were feasibly enacted by governments with close ties to labour.

 

Argentina 1946-49, Juan Peron

  • Juan Peron replaced landowner focused conservative gov with a nationalist gov focussed on rapid industrialization. As labour secretary he was a big friend to urban labour: collective bargaining, social security, min wage increases etc.
  • Monetary policy and fiscal spending highly expansionary. Ex rate fixed and thus highly overvalued in PP terms. Wages rose due to backing of unions and economic expansion. High protection to build industry. Explicit aim to improve urban wages at expense of agricultural oligopoly. Real wages grew by 52% in three years.
  • Crisis hit when forex ran out.

 

Chile 1971-73, Salvador Allende

  • Similar mould to Peron, but more socialist aims (nationalisation, land reform etc.)
  • 1st year – fiscal expansion. Deficit grew from 2.7% GNP to 10.7%. Growth was 9% and real wages grew by 17%
  • Crash came in 1972 – inflation reached 163%

 

Brazil 1985-88, Jose Sarney

  • Cruzado plan – real wage increases, overvalued currency, large deficit. Early success, as in the above two cases was outstanding.
  • The plan did not last long without strain as external debt was already very high. With a new constitution on the horizon Sarney wanted office for as long as possible and maintained the populist policies even in the face of the cracks beginning to show.

Peru 1985-88, Alan Garcia

  • Created their own forex reserves by limiting debt servicing to 10% export values. Ex-rate and price freezes, with increase in public sector wages.

Common Features

Urban based governments intent on raising the living standards of the urban workers. In Arg, Braz, Peru, all took over after long periods of conservative rule i.e. lots of pent up conflict. All see initial explosion of growth and real wage increases with stable prices followed by late phase of falling GNP, wages and hyperinflation.

The turning point is when governments run out of forex or foreign credit so it cannot maintain the overvalued exchange rate. Peron had wartime reserves. Chile had little reserves. Garcia created his own, and Brazil had none and did not emulate Garcia hence why the Cruzado plan was so short lived.

Conclusion

Many problems in LA are external: IR rises, oil shocks, commodity collapse etc. But fiscal laxity at home is also responsible especially where drastic fiscal expansion was funding growth.

Populist measures follow from several factors: economic conflict, inequality, political instability leading to short tenures and thus horizons, and a deep cleavage in sectoral interests between the urban working classes and the primary commodity exporters.

Why did they choose such risky paths? – hard to say. Popularity? This doesn’t seem too satisfactory.