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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.
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