Category Archives: Washington Consensus

DEVELOPMENT, NEOLIBERALISM AND ELECTORAL POLITICS IN LATIN AMERICA

DEVELOPMENT, NEOLIBERALISM AND ELECTORAL POLITICS IN LATIN AMERICA

R. Espinal

Development and Change Vol. 23

 A Summary

In a Nutshell

The notion of development has been changing in Latin America, as well as the ideas linking democracy and development.  Modernization theory has seen several challenges. Firstly it was surprising given the progress of modernization in the 50s and 60s that authoritarian regimes emerged where the theory posited a strong link between socio-economic development and democracy. Dependency theory then argued that democracy was not viable in the midst of widespread poverty and exploitation – a strong state was needed to pursue the much needed redistributive agenda. And yet contrary to the predictions of both of these theories democracy re-emerged in a time when poverty not only persisted but had intensified. Some  academics stressed ideological shifts in favour of democracy as a result of discredited military governments. Others thought it emerged due to international pressures, particularly coming from the US.

From Developmentalism to Neoliberalism

  • From the 1940s – 70s the state remained the central actor in the process of development. And yet it was the negative effects of developmentalism and particularly the recession in the mid-70s that led to a change of thought in the region, pioneered by Chile, and later followed in the 80s by the majority of LA economies. The state increasingly was the target of criticism.
  • In the midst of economic decline and crisis, neoliberalism that emphasised the market as the best means of organising production and income distribution, became the dominant ideology. The crisis served to unravel the problems inherent in developmentalism, and also liberalism was seen as a sign of modernity. The problem of development was no longer cast in terms of dependency or periphery, but as a problem of a corrupt and inefficient state that was preventing growth and modernization.
  • Yet with the exception of those that could form links with the international economy, the adjustment process proved catastrophic and the emphasis on technocratic leadership was antagonistic to a broad-based democracy.
  • As the region began to democratise, civilian governments were engaging with neoliberal reforms. This was an innovation as previously they had been imposed from the top down.  Additionally it acquired a more broad interpretation and application, moving from questions of a purely economic nature to an ideology that was redefining the relationship between the citizens and the state.

Electoral Politics and the New Right

  • As the dominant discourse in the region was neoliberalism, the populist parties that came to power were forced to implement policies that were in many ways alien to their traditions (PRI, Peronistas). These policies in turn helped to weaken corporatist ties with e.g. labour. E.g. Menem, fujimori etc.
  • What was curious was that the reforms, ideologically the mainstay of right of centre parties, were enacted by populists. This is because the populists were able to transform their politics to adopt an neoliberal agenda which pre-empted the growth of the parties of the Right. The Right were also unable to organize successfully.
  • In Mexico the Salinas government accepted neoliberal reforms, and confronted powerful union bosses, thus challenging corporatist ties. This is because the policies of export promotion, trade liberalisation etc. required weaker unions as the policies were in many respects an attack on organised labour.
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SIXTY YEARS Of ECLAC

SIXTY YEARS Of ECLAC: STRUCTURALISM AND NEO-STRUCTURALILSM

R. Bielschowsky

CEPAL Review 97, (April 2009)

 A Summary

In a Nutshell

This is a review of the thought coming out of CEPAL since its inception in 1948. The main point is that there has been a long continuity of ideas all centred around structuralist interpretations of development. Broadly though the period from 1950-1990 was the structuralist period.

  • The 1950s thought was focussed on industrialization.
  • The 1960s was concerned with industrial deepening as well as the reduction of inequality.
  • The 1970s saw focus shift somewhat to the reorientation of development styles.
  • The 1980s was a period of hiatus when ECLAC sought to concentrate more on macroeconomic issues of stability in response to the crisis that pervaded the region.

Since 1990 however, there has been a reformulation of the structuralist paradigm which has earned itself the moniker “neo-structuralism”. In essence this preserves the two main objectives of developing the productive to engage with the international economy whilst building a fairer and more equal society. However, the thinking was updated to encompass the realities of the international trading environment i.e. globalisation had progressed to such an extent that a wholly inward looking development model was no longer feasible. However, it also preserved alternative strategies and policies that were at odds with the neoliberal agenda. The programme was hetoerdox on macroeconomic issues, development oriented in terms of resource allocation and state intervention, and universalist in the social sphere.

The Structuralist Stage 1948-1990

  • The central countries were the producers of industrialised goods whereas as the periphery was characterised by production of primary products, a lack of productive diversity, varied levels of sector productivity with an unlimted supply of labour at subsitence wage levels and an institutional setting poorly oriented toward investment and technological progress.
  • Industrialisation which had been progressing spontaneously in the 30s and during WWII, progressed without the support of devlopment policy meaning an inability to close the widening gap between the centre and the periphery.
  • Overcoming the peripheral status required investment in multiple sectors, introducing technical progress and income redistribution. This project was critical due to the basic asymmetry between world demand for primary products, and the burgeoning peripheral demand for industrial products that would mean structural deficits in the balance of payments with negative repercussions for inflation and growth. This was particularly the case given the decline in the terms of trade in the post war period.
  • In the 60s it was recongised that the industrialization that had occurred was not eradicating poverty etc. and so institutional reform, including land reform, in order to link institutions with development.
  • The 70s carried forward these analyses but industrial deepening was now thought to be dependent on export promotion (as in the NICs) together wit expansion of the domestic market. This was put forward as a way to reduce external vulnerability as well as an alternative to excessive foreign borrowing. Additionally the message was pro income redistribution meaning the restoration of democracy in the region.
  • The 80s shifted toward renegotiation of debt to allow adjustment with growth. In general ideas were heterodox. There was a general rejection of neoliberalism in favour of what would become known as neo-structuralism.

The Neo-Structuralist State 1990-2008

  • A reconsideration of neoliberalism was urged, meaning new trade policies, control of capital flows and new social policies. The thinking was not anti neo-liberal as such as CEPAL had to build bridges with those economies that had undertaken neoliberal reforms. Particularly, whilst state participation in the economy needed to be reviewed, CEPAL continued to advocate a key role for the state in the socio-economic development agenda.
  • Trade openness should be selective and strengthened with a high and stable exchange rate to create genuine competitiveness i.e. that based on productive capacity and innovation with human capital development, rather than that based on wage advantages, or exchange rates.

New Developments

a)      Reform evaluation: based on the performance of the 1990s, the neoliberal reforms were evaluated. On the light side there was inflation control, reduction of deficits, increased fdi, export diversification. On the dark side there was volatile growth, continued crisis, unstable flows of capital, increased poverty and inequality.

b)      A Global Agenda: new ideas about how to relate to a globalised world.

c)      Countercyclical macro policies: instability of growth linked to financial capital volatility. Macroeconomic policy should not be pro-cyclical and it should target the real economy.

THE POLITICS Of ANTIPOLITICS

THE POLITICS Of ANTIPOLITICS

CHAPTER 27 B. LOVEMAN

PROTECTED DEMOCRACIES: ANTIPOLITICS AND POLITICAL TRANSITIONS IN LATIN AMERICA, 1978-1994

A Summary

In a Nutshell

Despite the conversion to democracy in Latin America fundamental aspects of antipolitics remain. The aspects most antithetical to democracy are

a)      The wide constitutional provisions that allow for regimes of exception.

  • These provisions ranged from partial or complete suspension of civil liberties to suspension of the constitution, and even to military law.
  • These were not new innovations, they have been a constant part of Latin American constitutionalism.
  • Such measures have frequently legitimised tyranny.
  • Regimes of exception were invoked frequently in Peru and El Salvador, in response to guerrilla warfare.

b)      The continued and in some cases expanded role of the military as guardians of the constitution, and arbiters of peace in the face of challenges both external and internal.

  • In the 50s and 60s the military expanded its mission by widening the definition of national security. The military saw itself as the founder of their nations as well as the guardians.
  • The transition constitutions not only continued to recognise this role, but they often expanded it. In Guatemala the military is charged with preventing presidents seeking re-election.
  • In effect the measures make the military an autonomous branch of government – the political arbiter of the new democracies.

c)      Draconian national security laws founded on a very wide principal of national security that allows for rights to be suppressed.

  • Examples being censorship, political repression etc.
  • They outlaw certain types of political activity based on the preservation of national security. In effect however they are no more than a permanent limit on civil liberties and rights.

The above factors question the depth of democracy in Latin America, and even if the provisions are not used, their presence in the constitution etc. is indication that Latin American states will continue to be protected democracies.

Their existence is nothing new, indeed they have been present in Latin American politics since the colonial era. Thus one of the reasons for their continued existence is that they were inherited by the transition governments. However, notwithstanding the truth of this statement, it is still the case that in many cases the measures were expanded under the transition rulers. This is the case with the national security laws in Peru.

Although there may have been some will amongst politicians to purge the law of antidemocratic provisions, the nature of transition governments meant that such a project was not feasible. This is because the military were not willing to allow their power to be curtailed; this manifested itself in an inability for governments to convict military personnel guilty of human rights violations under authoritarian regimes, and also a continued special place for the military in public life, including policy formation.

As the military governments were not ousted by popular uprising, they were not entirely discredited as an institution. Therefore a delicate tension remains between civilian governments and the military. The civilian regime must be careful not to enact policy that would impel the military to take action. This was no easy task in Latin America, as neoliberalism was provoked angry protest in several cases – Venezuela and Brazil being the most important examples. Thus pragmatism and centrism were the fundamental tenets of policy debate, rather than wide ranging political debate. That being said, the feeling that there were no alternatives to neoliberalism severely limited the ability of the military to object, no matter how unpopular the reforms were. There was a constant concern that there would be a military response should civilian governments act “imprudently” in matters of concern to the military.

Thus the transition democracies were based on compromise. Whilst power was transferred to civilian governments by free elections, this could only occur if a number of conditions held:

  • Impunity from prosecution for human rights crimes for military personnel.
  • Acceptance of military imposed restrictions on who may stand for office (continued exclusion of the Left).
  • Observance of significant restraints on incoming governments.

In sum, the civilian governments had to accept the reality of military guardianship meaning that the transfer of power had as a price tag surrender to the traditional impediments to full democracy.

THE POLITICS OF MARKET REFORM

THE POLITICS OF MARKET REFORM

K. Weyland

Chapters V and VI

A Summary

 

In a Nutshell

Weyland interprets the conversion to market economics using prospect theory. This essentially postulates that the crisis affecting Brazil, Argentina and Peru meant that a majority of the population saw themselves in the “domain of losses” mostly due to inflation. They thus made a risk seeking response in electing political outsiders (Collor, Menem and Fujimori respectively). These new chief executives also saw themselves in the domain of losses thus becoming highly risk acceptant and therefore led their countries down a path of market reforms. They were not tied down by previous decision bias, and they had learnt from the recent failure of heterodoxy. In choosing the reform measures they were far more drastic and draconian than even the IFIs were advocating. They imposed high short-term costs on important sectors, and strata of society. Yet, the public were initially supportive. This fact reflects the acceptance of costs due to risk seeking in the domain of losses.

 Venezuela’s public did not accept the reforms. Perez was not a political outsider, and when tried to push through reforms there were major riots in the streets. The driving factor behind acceptance in the other cases, and failure for Venezuela was the severity of the crisis. In Venezuela, inflation had not reached anything like the levels it had in Peru, Argentina, Brazil, and as such the majority did not see themselves in the domain of losses meaning that the high costs imposed by stabilization were thought to be unjustified.

 The politics of this time should be classified as neo-populist due to reliance on the anti-establishment credentials by the politically outsider presidents of BAP, as well as the invocation of the will of the people against entrenched interests.

 The Rise of Political Outsiders

  • The huge losses suffered due to hyperinflation looked set to continue, so in Braz, Arg and Peru, the voters took a risk by electing political outsiders with weak track records. By contrast, Venezuelans elected a former president, Perez, as the economic decline was much more gradual and so the populace did not see themselves in the domain of losses.
  • The governments of BAP had been thoroughly discredited (collapse of spring plan [Arg], summer plan [Braz]). Thus risk seeking in the domain of losses induced voters to reject decisively the incumbents. Critically for the argument, there were much more moderate alternatives, that offered change at a much lower risk than the candidates actually chosen as they had technical know-how, organizational capabilities etc. However, the risk seeking led electorates to reject the political class as a whole and vote for outsiders. The politicians themselves reinforced their outsider credentials by populist campaign rhetoric which attacked established elites.

 The Initiation of Drastic Adjustment

The Depth of the Crisis

  • On taking office the presidents were privy to the previously private information about the full extent of the crisis, so they took over under much worse economic conditions.
  • Conditions varied: Venezuela did not have hyperinflation. Argentina was worse than Brazil as Arg had been in stagnation for years whereas Braz had been growing. Also Brazil was fully indexed so the population did not feel the effects of inflation in the same way. The burden there fell mostly in the large informal sector.

 External Constraints and Pressures

  • IFIs recommended orthodox adjustment. But in none of the countries was this decisive. The IMF had a lot of influence in Venezuela and Peru, but the programmes in Argentina and Brazil were designed by domestic economists, although they did follow broadly the Washington Consensus. All plans were radically bolder and more risky (e.g. debt moratorium and capital freezing in Brazil, and the convertibility plan in Arg) than the IFIs recommended who were worried about domestic backlash. 

 Learning from Prior Experiences

  • Heterodoxy had lost its appeal.
  • So there was learning, but no real learning about how to enact market reform. Additionally, the experience of Chile was not good – the early stabilization there caused a huge increase in poverty and eventually the crisis of the early 80s. There were only really positive results when reforms were made in a more incremental way with sustained growth. Moreover the violent reaction by the people of Venezuela to the neoliberal reforms was widely interpreted as a rejection of the paradigm.

 Domain of Losses

  • The presidents overshot IFI influence and owned the policies. As soon as the crisis passed and growth resumed they reverted to risk aversion.
  • They were not tied down by prior decision bias so could chart a new course.
  • They saw themselves in the domain of losses. This led them to choose particularly risky policies.

Venezuela:

  • Raised public sector prices, reduced public spending, opened up the country to trade.
  • Deep recession caused by enactment at high speed.
  • The oil bonanza of 1990-91 caused Perez to slack off it austerity program, using the funds for public spending to ease the pain of adjustment.

Argentina:

  • Menem also proceeded at high speed, diverging from his campaign rhetoric by trying to dismantle ISI model
  • 1st plan failed at end of 1989, so he upped the ante by forcibly retaining financial assets (highly risky due to offence caused to capitalists).
  • Convertibility plan tied the government’s hands to non-intervention in ex-rate policy which sent a signal to international investors.

Brazil:

  • Collor chose the most radical plan on the table.
  • Spending cuts, tax hikes, privatization, liquidity confiscated for 18 months, froze savings accounts.

Peru:

  • Abrupt devaluation, tax increases
  • Painful stabilization especially given the already high level of poverty.
  • In all cases the paths chosen had lower expected values than some of the more prudent alternatives. Yet they held the promise of a quick turnaround, and this promise was enough to risk potentially total economic meltdown. The more moderate response was particularly feasible in Venezuela due to the absence of hyperinflation.

 The Popular Response

  • Divergence in the severity of the problems facing the citizens determined the different levels of support for reform.
  • Presidents diverged from their campaigns, and could not have foreseen the popular support, showing that they did not act as simple agents of the citizens.
  • In BAP initial support was very strong. There was even support when Fujimori closed down the Congress. Not the case in Venezuela.

 Neo-Populism

  • Outsiders + heterogeneous support networks + “will of the people” rhetoric against special interests, meant that neoliberal economics and populist politics went hand in hand [although the working classes were the hardest hit by the reforms, so their welfare was not at the top of the priority list as it was with more traditional populism].
    • They weakened interest groups, extended personal latitude, dismantle bureaucratic structures etc. which allowed them to assault the numerous subsidies and protections that were part of the reform.
    • Neo-populist rhetoric legitimized the reforms
    • Increase tax takings allowed new forms of discretionary spending further boosting support. [See Schamis].
    • In the end Collor went the same was as Perez whereas Fujimori and Menem won re-election. Whereas Collor was constrained by the Brazilian congress, Fujimori was able to shut congress due to the extraordinary depth of the crisis in Peru which made such an action acceptable.

 Slowdown of Reform

  • The Argentine convertibility plan controlled inflation and growth between 1991-1994 reached 7.5%.
  • Peru grew at 7% in 1993 and 14% in 1994.
  • As the economies recovered, leaders and population entered into the domain of gains, so Menem and Fujimori gave up their initial boldness and became much more cautious. Labour market deregulation and social security reform languished in congress, and continued privatization required ever more concessions.
  • The Mexican crisis of 1994 motivated the Menem government to give a renewed push.

 Political Failure of Neoliberal Reform in Brazil

  • Collor was unable to achieve stabilization. Prices were on the rise again in 1991 after two shock plans had failed. He was politically isolated without much political support so was unable to enact audacious reforms like the convertibility package in Argentina. He lacked the clout to push policy through congress.
  • He did however set in motion the processes that enabled the subsequent Franco government to undertake adjustment efforts.

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