Tag Archives: Free market reforms



L.E. Armijo & P. Faucher

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

A Summary

 In a Nutshell

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

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

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

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


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

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

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

 External Assistance

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

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

 Executive Isolation

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

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

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

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

 Pro-reform Shift in Elite Preferences

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

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

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

 Bargaining was also extremely important:


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


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

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


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

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


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

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

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