Category Archives: Political Economy of Populism

Populism in Latin America

POPULISM IN THE AGE OF NEOLIBERALISM

POPULISM IN THE AGE OF NEOLIBERALISM

K. Weyland

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

 

In a Nutshell

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

Populist Revival in the 1980s.

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

 


 

Neoliberal Neopopulism

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

 

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

THE LATIN AMERICAN ECONOMIES 1950-1990

Ffrench-Davies, Munoz, Palmer

Cambridge History of Latin America

A Summary 

In A Nutshell

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

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

 The World Economy

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

 Latin America and the World Economy

1950s

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

 1960-1973

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

 1973-81

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

 The 1980s

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

 ISI-Led Growth and Structural Change

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

 Industrialization

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

 Economic Integration

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

POPULISM

POPULISM: AUTHORITAIN AND DEMOCRATIC

Robert H. Dix

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

 A Summary

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

 Leadership

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

 Support

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

 Ideology and Program

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

  Organization and Leadership Style

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

 Conclusion

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

 How to account for the two different strains?:

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

 Dix’s Hypothesis

Populism of any type is comprised of two strains:

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

TOWARD AN ALTERNATIVE CONCEPTUALIZATION OF SOUTH AMERICAN POLITICS

TOWARD AN ALTERNATIVE CONCEPTUALIZATION OF SOUTH AMERICAN POLITICS

G. O’Donell

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

A Summary 

In a Nutshell

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

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

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

 Argentina and Brazil: From Incorporation to Exclusion

Expansion

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

 The End of Expansion

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

Political Actors after Populism

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

 

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

 Technocratic Roles

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

Bureaucratic-Authoritarianism

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

 

Coercion

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

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.