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INTERNAL INCONSISTENCIES: LINKING THE WASHINGTON CONSENSUS AND POVERTY IN LATIN AMERICA

INTERNAL INCONSISTENCIES: LINKING THE WASHINGTON CONSENSUS AND POVERTY IN LATIN AMERICA

 

Rory Creedon LSE MPA (ID)

GV444

 Follow this link for the full essay: POVERTY AND THE WASHINGTON CONSENSUS

In what way did the Washington Consensus affect poverty in Latin America?

 There is a wealth of qualitative evidence that links the increase in poverty seen in Latin America between 1980 and 2002 to the free-market reforms undertaken in that period. There is a particularly strong association between poverty and the negative effects on employment of sudden exposure to external competition.[1] Empirically however, the causal underpinning of this correlation is somewhat more controversial. Characteristic of the debate is the differing stance taken by Huber & Solt as against Walton. The former conclude that there is a clear statistical link between poverty and the reforms[2]  whereas the latter maintains that once other macro level variables are controlled for there is no statistically significant relationship.[3] These contradictory stances are evidence of the chronic endogeneity and omitted variable problems that plague macro level empirical analysis of this sort, and whilst it is prudent to be sensitive to these different debates, this paper starts from the non-controversial assumption that the policies of the Washington Consensus at best did very little to address the problem of poverty in Latin America, and at worst failed to prevent a large scale increase in the number of people living in poverty. This essay argues that this failure sprung from an internal inconsistency between the initial concept of the Washington Consensus as a short term plan for macroeconomic stabilization, and the policy tools recommended. Whilst certain of the policy tools were pertinent for addressing the severe hyperinflation and balance of payments problems faced by Latin American economies (particularly reducing fiscal deficits, and ensuring a competitive exchange rate), others (particularly trade liberalization) should have been part of a more comprehensive development strategy. This conceptual confusion led to implementation of long-term development strategy policies as though they were short-term macroeconomic policy programmes and this kept poverty extremely high in Latin America.


[1] SAPRIN The Policy Roots of Economic Crisis and Poverty (2002)

[2] E. Huber and F. Solt Successes and Failures of Neoliberalism  Latin American Research Review, Vol. 39, No. 3 (2004) pg.156

[3] M Walton Neoliberalism in Latin America: Good, Bad, or Incomplete? Latin American Research Review, Vol. 39, No. 3 (2004) pg. 174

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INFORMALITY AND DISTRIBUTIVE POLITICS

INFORMALITY AND DISTRIBUTIVE POLITICS

Follow this link for full essay: INFORMALITY AND DISTRIBUTIVE POLITICS(final)

Rory Creedon London School of Economics (MPA ID)

 Introduction

An individual’s preferences regarding taxation may be derived from a number of sources such as the distance between his income and the average income[1] or notions of social justice. A further particularly salient source is that presented by Alesina and Rodrik [2]. Individuals, they argue, are endowed with labour, capital, or most likely a mixture of the two, whilst governments make productive investments financed by a tax on capital. The basic result of their model is that an individual who derives all of his income from capital will prefer the tax rate that maximizes the economy’s growth rate, whereas anyone who earns even part of his income by selling his labour will prefer a lower tax rate and a correspondingly lower growth rate.[3] To this insight I would like to add another: that the presence of a large informal economy will affect the preferences for taxation of both capitalists and wage earners.

The directional influence that a large informal economy will have on preferences for taxation is not discernable a priori. This is because the true nature of the key mechanism by which the informal economy affects preferences for taxation, namely the interaction between the informal and formal economy, is disputed. This essay analyses two major lines of thought on how the informal economy interacts with the formal economy. Dualists argue that the informal economy is a separate marginal sector not linked to the formal sector in any significant way. Structuralists on the other hand maintain that both the informal and formal economy are part of the same capitalist spectrum.[4] This essay does not assert the primacy of either of these views. Rather, within the stylized model presented by Alesina and Rodrik with the additional assumption of a large informal economy, I seek to emphasize that preferences over taxation will vary according to whether the true nature of the informal sector is closest to the dualist or structuralist tradition, thus reaffirming the importance of the debate. Arguments and examples are drawn largely from the literature surrounding the informal economy of Latin America as the extent of the informal economy in that region is such that it is impossible to ignore in terms of policy making and preferences over policy[5]. Additionally a particularly rich vein of scholarship has emerged in relation to the Latin American informal economy.


[1] A.H. Meltzer & S.F. Richard, A Rational Theory of the Size of Government The Journal of Political Economy, Vol. 89, No. 5, (Oct., 1981)  pp.916

[2] A. Alesina & D. Rodrik, Distributive Politics and Economic Growth The Quarterly Journal of Economics, Vol. 109, No. 2, (May 1994) pp. 465-90.

[3] Ibid. pg. 466

[4] M. Carr & M.A. Chen, Globalization and the Informal Economy: How Global Trade and Investment Impact on the Working Poor, ILO Employment Sector Working Paper on the Informal Economy, No. 1, Geneva, ILO pg. 5

[5] J.R. Franks Macroeconomic Policy and the Informal Sector in C. Rakowski (ed.) Contrapunto: The Informal Sector Debate in Latin America, New York: State University of New York Press (1994)

REVERSAL OF FORTUNE

REVERSAL OF FORTUNE: GEOGRAPHY AND INSTITUTIONS IN THE MAKING OF THE MODERN WORLD INCOME DISTRIBUTION

D. Acemoglu, S. Johnson & J.A. Robinson

The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov., 20020 pg. 1231-1294

This is a very short summary taken from an essay I wrote. It is not intended to be a full exposition but rather a study aide.

AJR take a similar approach [to Engerman and Sokoloff] albeit they illustrate their thesis with statistical findings. They show there is a negative relationship between countries that were relatively rich in 1500 and economic prosperity today; the “reversal of fortune”.[1] They use population density and extent of urbanization as proxies for economic wealth in 1500 and argue that it was the relatively poor areas in which the “institutions of private property” were established whereas the norm in relatively richer areas was “extractive institutions” where power is concentrated in an elite and expropriation risks for the population in general are large. This is because “relative prosperity made extractive institutions more profitable for the colonizers; for example, the native population could be forced to work in mines and plantations”.[2] They posit that societies with good institutions are more able to take advantage of the opportunity to industrialize as private property institutions are “essential for investment incentives and successful economic performance.”[3] For example, they show that the regression analysis of current income against urbanization in 1500 predicts that Uruguay which had no urbanization in 1500 should have a current income 105% greater than Guatemala which in 1500 had an urbanization rate of 9.2%, and this turns out to be pretty close to the truth.[4] In order to prove the effectiveness of their instrument, and to thus prove that institutions cause growth and not vice versa, they have to show that the urbanization/population density in 1500 has no direct effect on current GPD levels other than through the effect it had on early institutions. Once they include the variable in their regression and control for the effect of institutions they cannot reject the null hypothesis that the coefficient of the instrumental variable is equal to 0, in other words that it does not explain any of the variation in GDP other than through its effect on institutions.[5]

Although similar to the ES hypothesis in that AJR are supporting what has come to be known as the “institutional hypothesis”, the instrument they employ is pointedly different to that of factor endowments. Indeed they specifically control for geographic variables including soil type and climate and do not find them statistically significant in explaining variation in GDP today.  They also engage much more directly with other hypotheses such as the “geography hypothesis” as well as the “colonial identity hypothesis”, the “latitude hypothesis” and the “religious hypothesis” and conclude that once they have controlled for geographic variants, the identity of the colonizers, the position of the colony relative to the equator and the religious makeup of the colonial society, all of those variables do not significantly explain variation in current GDP across ex-colonies.


[1] Acemoglu, Johnson and Robinson Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov 2002) pp. 1231-1294

[2] Ibid.

[3] Ibid.

[4] Ibid

[5] Ibid. 

DELEGATIVE DEMOCRACY

DELEGATIVE DEMOCRACY

G.A. O’Donell

Journal of Democracy, Vol. 5 No. 1, (Jan., 1994) pp. 55-69

A Summary 

In a Nutshell

Although democracies in the then recently transitioned Latin American states was representative (based on popular elections) they were “delegative” rather than truly democratic. This was largely because of crisis both social and economic that they inherited from the authoritarian governments before them which gave rise to certain practices and conceptions about the proper exercise of power.

 The transition to democracy opens up the possibility of a second transition from government to democratic regime. Nothing guarantees that this will happen, but in order for it to do so a set of institutions needs to be built which enable the social and economic problems inherited to be dealt with in a regularized way. Delegative democracies lack these institutions and governmental effectiveness.

 [This argument is very much related to the executive isolation argument examined by Schamis as well as Armijo & Faucher in as much as it posits a policy/reform process characterised by a lack of horizontal accountability, a large electoral mandate and subsequent belief by the president that he has the authority to rule the country by decree at whim.]

 The Importance of Institutions

Institutions are regularized patterns of interaction that are known and accepted by social actors who consider that they will continue to act in the same way for an indefinite time period. The characteristics of a functioning institutional setting include:

  1. Institutions that incorporate and exclude – they determine the basis upon which resources, claims etc. are accepted as valid participants in the decision-making and implementation process.
  2. Institutions shape the probabilities of outcomes – certain rules fix the range of feasible outcomes and their likelihood within that range e.g. democracy precludes the use of force.
  3. Institutions aggregate – the rules lead individuals to make decisions about which level of aggregation of preferences is optimal for them.
  4. Institutions induce representation – following on from 3 the aggregation of preferences leads to the transformation of the potentially many voices into only a few that speak for many.
  5. Institutions stabilize expectations – leaders and representatives expect a narrow range of possibilities from interactions, and expect that deviations are likely to be counterproductive. It is at this point that an institution is in equilibrium.
  6. Institutions lengthen the time-horizons of actors – stabilization of behaviours implies that interactions are set to continue. This together with high levels of representation is the foundation for the “competitive cooperation” that characterises democracy. Thus one shot prisoners dilemmas are overcome by bargaining. The alternative to institutions is a colossal prisoner’s dilemma. 

Characteristics of Delegative Democracy

  • Rest on the premise that whoever wins the election may govern as he sees fit as they are the embodiment of the nation. The promises of his campaign need not be met (Menem, Fujimori). They are above organized interests.
  • A large majority must be won to sustain such claims, and as such often run-offs are used. The majority is used to sustain the myth of legitimate delegation.
  • [This is largely related to neo-populism: presidents campaign on personal charisma, they can restore the health of the nation etc. They and their technical advisers are initially infallible. In terms of policy however they behave in a delegative rather than populist fashion.]
  • The president isolates himself political institutions and interests. And this is main difference between DD and representative democracy: in representative there is vertical accountability (between the president and the people) but also horizontal accountability (president accountable across a network of relatively autonomous powers that can call into question and punish if necessary, improper ways of discharging the responsibilities of office. In DDs only the former type of accountability exists. Indeed horizontal accountability is a headache to be avoided for DD presidents. 

Examples

  • First democratic government of Uruguay (Sanguinetti) saw the implementation of incremental economic policies, whereby inflation slowly dropped whilst investment and wages slowly rose. Most of the policies were explicitly negotiated within congress and with participation from various interest groups.
  • By contrast Argentina (Austral Plan), Brazil (under the Cruzado plan, things were different under the Plan Real) and Peru (Inti Plan) all opted for drastic and surprising stabilization packages. The packages were disastrous [for O’Donell] and solved very few of the problems inherited from the B-A states.
  • What is interesting is that Uruguay inherited no less severe problems than did Argentina or Brazil, but it chose an incremental path rather than a shock doctrine. Why is this the case? O’Donell says it is because Uruguay was a case of re-democratization with working institutions of government. The president had to negotiate with congress and congress had to consult various interested parties. Consequently, even though preferences at the top may have been for stabilization [a supposition not backed up with evidence] they were “condemned to incrementalism”, and limited to modest goals.
  • “This is the drama of countries bereft of a democratic tradition”.

 [This thesis should be read in conjunction with those pieces that state that executive isolation played only a minor part in many liberalizations. For example the Brazilian Plan Real was negotiated, and evidence of coalition building is seen in many countries indicating that domestic support was important (although it should be conceded that that the coalition building was often extra-institutional) – see Schamis as well as Armijo.]

WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA?

WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA? A CONSUMPTION BASED THEORY OF TRADE POLICY PREFERENCES

A. Baker

World Politics 55 (April 2003), 423-55

A Summary 

In a Nutshell

Trade theory generally states that individuals make judgements about trade policy based on retrospective economic evaluations about earning power why is it that when polled Latin Americans consistently believe free trade to be good or somewhat good for the country. Particularly it is much more popular than privatization and this indicates that support of trade is not part of some wider stamp of approval for economic liberalism.

 The Heckscher-Ohlin model predicts that the relatively poor of Latin America should benefit from freer trade as they form the abundant factor: cheap labour. Conversely capitalists, including those with accumulated human capital, should be worse off, as it will be more profitable to import the services of such factors. This has not proved to be the case. Rather free trade has proved disastrous for employment opportunities at the lower end of the job market, the informal sector size increased greatly during the transition period. This may well be because those who are best able to benefit from free trade are those who have high levels of human capital as they have transferable skills and as such are able to adapt better to the shifting configuration of labour demand, and move more flexibly through the market. Thus in regions such as Latin America with large possibly majoritarian populations of undereducated people who have skills that are more specific to a particular sector or type of employment, there should be resistance to free trade policies.

 A retrospective economic evaluation based on earning power by citizens of Latin America should be negative for the majority who have lost out from trade opening. Why then does free trade seem to be so popular?

 The answer could be found in consumption. Most scholars overlook the fact that preferences for free trade could be formed by beliefs about liberalization by observing its impact on prices, quality and availability of goods for consumption. Under ISI citizens were charged extra to protect industry’s inefficiencies, and so once this system is dismantled all else equal there will be beneficial impact on prices for consumers. Thus individuals may be more willing to base their trade preferences on their status as consumers rather than producers of income earners. It could be that the links between trade liberalization and employment/wage variability are not obvious to those directly affected. Additionally everyone in the country is a consumer but not all are producers, meaning that trade preferences will be better tracked by trends in consumption rather than production.

“WE HAVE A CONSENSUS”

“WE HAVE A CONSENSUS”: EXPLAINING POLITICAL SUPPORT FOR MARKET REFORMS IN LATIN AMERICA

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.

  Crisis

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:

 Chile

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.

 Mexico

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.

 Argentina

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.

 Brazil

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.

LATIN AMERICAN ADJUSTMENT: HOW MUCH HAS HAPPENED?

LATIN AMERICAN ADJUSTMENT: HOW MUCH HAS HAPPENED?

J. Williamson (ed.)

Chapter 2 (What Washington Means by Policy Reform)

A Summary 

In a Nutshell
This is the excerpt in which JW defines the Washington Consensus. What is remarkable is that the consensus is not half as specific as the subsequent literature makes out. Additionally although the consensus seems to be broad it is by no means ubiquitous in that there are points of disagreement and the author has different opinions to those of the IFIs at times. Most importantly it does not readily identify with what came to be known as neo-liberalism in that it is not itself a doctrine for how a country should develop its economic, political nor social life and policy. Rather it is a handful of specific recommendations for stabilizing crisis economies. The author even states that Washington is unsure if its recommendations are good for kick-starting growth – they are a tool for stabilization, not a long-term growth strategy. At times it is very specific, and at times very vague. Rather weirdly they do not take into account the welfare distribution of the effects of the policy (although they do take into account the effects they may have on corruption!) and this could be seen as a limitation: JW later said they should be supplemented with pro-poor redistributive policies. The key takeaway is that the WC is comprised of “policy instruments rather than objectives or outcomes”.

 There are 10 broad recommendations: 

  1. Fiscal deficits
  • IMF had long made fiscal control an element of conditionality.
  • Differences of view however on whether fiscal discipline need imply a balanced budget
  • A deficit of more than 2% is evidence of policy failure. 

     2. Public Expenditure Priorities

  • Reducing expenditures preferable to raising taxes.
  • Subsidies should be cut
  • Increased investment in human capital such as education and health. This helps disadvantage and gives a return to the state.
  • Public infrastructure investment also important.
  • In other words, away from wasteful subsidies etc. toward investment that can bring returns.

 

       3.Tax Reform

  • Broaden the base, and keep marginal rates low

      4. Interest Rates

  • Market determined
  • Positive to discourage capital flight

       5. Exchange Rate

  • Achieving a competitive rate more important than how it is determined. It is crucial as an element of outward looking policies.

      6. Trade Policy

  • Limited tariffs 10-20% to still help developing industries to a certain extent without hurting too drastically the economy.
  • End to import licensing
  • Not expected to occur overnight.

       7. FDI

  • Restricting FDI is silly 

       8. Privatization

  • Relieves budget pressures and increases effectiveness of enterprises

     9. Deregulation

    10. Property Rights.

‘Paradigm found: In Search for the Washington Consensus’

Panizza, Francisco E. (2008) ‘Paradigm found: In Search for the Washington Consensus’ (manuscript)

A Summary 

In a Nutshell

The Washington Consensus was not (initially) an overarching doctrine of how a country should manage its economic nor political life. Rather it was a set of specific recommendations on how to tackle large deficits and hyperinflation. However it became part of the neoliberal “doctrine” and here it was expanded upon to reflect the beliefs of the liberals in markets. This doctrine became the dominant one on LA largely in response to crisis and as a means of turning away from what had come before. As ISI came to the end of its usefulness, the authoritarian regimes that were in power began to move away from the structuralist model but it was too late to prevent crisis. The crises in part lead to the downfall of those military regimes, but the heterodox solutions that the new democracies introduced only served (eventually) to aggravate the situation. The neoliberal model was pursued by LA governments in response to these constant failures. As such, Panizza is arguing that the reforms proposed by the Washington Consensus were not merely imposed upon LA due to their weak governments, nor because of bullying tactics from the IFIs (although he concedes their influence was great), but rather they were chosen as a rational response to crisis. 

What was the Washington Consensus?

  • Neoliberalism and the WC are now thought to go hand in hand. But Panizza shows that the former is a much wider concept.
  • WC was a list of policy prescriptions outlined by John Williamson  (JW) in Latin American Adjustment: How much has happened? that embodied the thinking of the economists of the time (esp. in USA). There were 10 main prescriptions:
  1. Fiscal Discipline
  2. Redirect public spending toward health/education/infrastructure i.e. that offer high economic returns and can improve income distribution
  3. Tax reform (broaden base, and cut marginal rates)
  4. Interest rate liberalization
  5. Competitive exchange rate
  6. Trade liberalization
  7. Liberalisation of FDI
  8. Privatisation
  9. Deregulation (barriers to entry)
  10. Secure property rights
  • The key for development was to emulate the market-oriented policies of the developed economies, and the evidence for this was the growth of new Asia.
  • It was a plan for stabilisation not necessarily a plan for long term growth management. Critically it does not distinguish between the best form of capitalism model; Anglo-Saxon, EU social market, Japanese corporate capitalism. It makes no claims about markets and trade in terms of welfare (JW later said the proposals should be supplemented with a PRS). It does not give “blind faith in markets” centre stage (JW).
  • Some prescriptions were very precise (deficit of no more than 2% /  Privatisation), some were e very vague (reduce tariffs to between 10 -20% in 5-10 years). 
  • Neoliberalism (NL)on the other hand is not just about the economy. It is a social, moral and political discourse. Based on British liberalism: freedom to pursue rational self-interest and competition  as main source of innovation and growth. 
  • WC was a set of codified policy agendas, BUT it had sufficient “surplus of meaning” that it could be re-interpreted, as it was so but the NLs. 

ISI

  • NL gained it hegemonic position due to its contrast with the directed economics of the ISI period.
  • ISI was born in ECLAC in the “structuralist economic doctrines” that said that developing nations had to travel a different path of development to the already developed economies, as their infant industries had no protection from competition unlike those of the developed world when they were developing. If industry was not protected they would be condemned to being agro exporters and resource providers (comparatively cheaper than industrial goods produced by the core).
  • Used currency overvaluation and tariffs to spur on home industry. Deficits and inflation were accepted consequences.
  • The state was the gatekeeper of the national interest (protect from threat of competition).
  • ISI had broad social base (Middle class in the large civil service, urban workers with higher wages, industrialists, elites who could be rewarded with industrial patronage by the state) although there were losers (peasant farmers, consumers).
  • But sectoral/individual gains began to become built-in prerogatives. This was aggravated in 60s and 70s when growth slowed, fiscal crises abounded, and inflation shot up. The result was the authoritarian attempt to dismantle ISI 

Dismantling ISI

  • On the left dependency theory claimed that LA should cut itself off from the market as being connected could only ever keep it underdeveloped due to the chain of exploitation starting in the core and spreading to the periphery.
  • On the right, free market ideas gained traction as it became ever more costly to mediate the problems caused by ISI. Monetarism (later to be called NL) was part of a narrow economic debate on how to solve bop and inflation problems. Inflation was a monetary problem caused by deficit and overexpansion of credit. This contrast with structuralist view that inflation was reversible using structural reforms to bring more people in the economy thus expanding the industrial base.
  • There was an overlapping political debate about spending and distribution. Monetarists wanted austerity, but sturcturalists said austerity caused recessions. 
  • 60s-80s no one narrative could dominate, rather there was a complex process of change. Elements of ISI were dismantled, or deepened depending on the country specific political/economic realities. Change was influenced by many factors including availability of financial resources to fund ISI (oil rents etc.) as well as political factors (how the government/elites dealt with popular protest etc.).
  • Chile was one of the first to dismantle ISI under Pinochet. This was in part a political move – the technocratic policies of monetarism excluded the working classes, and prevented the distributive struggles that were a breeding ground for socialism and the left in general. 
  • Internal contradictions in the military regimes of LA in the period prevented them from founding a true new political and economic order. 
  • Dismantling was uneven in the region:
  • e.g. Arg: rapid reduction of tariffs decimated local industry (weakening the Peronist working class – a benefit for the military). Tariffs still very high relative to the rest of the world. State reform was very limited and fiscal austerity was abandoned in the late 70s. In 80s recession tax revenue was eroded and resulted in large deficits as inflation reached 310% in 1983 (last year of military rule)
  • In Brazil, Mexico and Peru the 70s and 80s saw a deepening of state-led model. E.g. brazil had growth of 7.4% and industry was growing with low inflation.
  • E.g. Same for Mexico but it had a tight control over public spending. However with the rise of Echeverria (70-76) public spending was increased and deficit funded by borrowing. The increased borrowing and deficit and eventual capital flight lead to devaluation and financial crisis when external funding dried up in late 70s. Debt crisis of 1982! 
  • The 1982 crisis represented a watershed. Economic policy options narrowed and there was a paradigm shift that unshed in the hegemony of free market economics.

 Neoliberal Hegemony

  • The dominant ideas of IS had become discredited and the crisis weakened the elite’s ability to maintain the status quo (Olson). There was a new possibility of change (although direction was still unclear). NL did not become totally dominant until the late 80s.
  • Ideological shift was part of worldwide pattern following end of post war growth period, inflation and recession that lead to focus on the UK-US laissez-faire model. Additionally forces of globalization were become unstoppably strong. But this is not enough for Panizza to explain how NL became part of LA.
  • NL reforms were chosen by democratic states (except in Chile). So pressure from IMF etc. (although great) and worldwide trends, are not sufficient to explain why they were adopted in LA.

 

  • NL was part of the maturing of democracy in the region. When democracy was nascent in LA, liberal reforms were associated with the military regimes. Public debate about democracy focused on human rights etc. not on economics. So with the first elected presidents we do not see the introduction of NL reforms. Rather, reforms were heterodox
  • e.g. Peru. President Terry had tried liberal reforms (80-85) but there was much resistance. His successor Alan Garcia (85-90) returned to state led heterodoxy e.g. price freezes, wage increases, more spending financed by reduction in debt servicing. The result was hyperinflation.
  • e.g. Bolivia went democratic in 1982 with Siles Suazo at the head. He also used heterodox methods and they too failed to combat inflation. His successor Estenssoro then introduced a radical free market reform package.
  • In general the Heterodox solutions caused hyperinflation which obliterated livelihoods and jobs. There was a concomitant breakdown in social order and thus political order. The state could no longer regulate social relations and there were mass protests.

 

  • It was now a question of assigning responsibility for the crises. The problem was both old and new. New as it represented problems specific to the 80s (debt crisis, oil shocks etc.) and old as it was the result of deeper long term problems rooted in ISI. However, it was now argued by free-market adherents that the 80s crisis could not be overcome simply by fiscal adjustment packages and so the WC became a much wider NL economic and political reform agenda. There would have to be a wholesale reform of the relationship between citizen and state 
  • Alfonsin in Arg having implemented heterodox packages now turned around and sought to liberalise. It was too late though to stabilize the economy, and the political outsider Menem came to the fore and implemented wide ranging reforms [see Grindle from EH451]
  • Collor came to power in brazil on a similar mandate.
  • Mexico did not suffer such a huge turnaround – rather reform was more gradual
  • So NL’s rise was founded in the failure of the new democratic administrations in the 80s to deliver a better life and thus a change occurred in the relationship between democracy and free-market economics (as it was previously associated with military dictatorships as being the only governments powerful enough to force through such reforms). NL offered d a clear diagnosis and prescription. “In this new political context economic liberalism’s mistrust of the state and ultimately of politics, resonated with popular disillusionment with failed promises of a better life under democracy”.

Silent Revolution

THE SILENT REVOLUTION

Duncan Green

Chapters 1,3,4

A Summary

 

The first chapter is largely about ISI and it failures. It adds nothing new to my understanding. Like others he sees IS as a response to the crash in 1929 bringing the free-trade to an end and brought in ISI based on Keynes. It went hand in hand with populism which preferred to print money rather than take difficult distributive decisions. He emphasises the benefits of ISI including the raised life expectancy and literacy indicators as well as urban development (albeit with lots of inequality). Also it broadened political inclusion with the insertion of the working class into political life. But whilst EA countries successfully transitioned away from ISI, in LA they could not. This resulted in poor products, a two tier labour force, a continued reliance on imported capital goods etc. meaning that the trade deficit was not actually remedied. There was still huge inequality. Tariffs hurt the rural sector as capital good were expensive to import and overvalued currency made export uncompetitive. This lead to a large migration to urban centres.

As the flaws became apparent in the 60, governments tried to modify their policies.

He has a traditional line on debt: petro$s increased investment etc. and this was embraced by the neoliberal authoritarian regimes that also liberalized trade and caused de-industrialisation in e.g. Arg. He emphasises that ISI and huge debt do not necessarily go hand in hand e.g. Korea and EA countries who managed debt well.

 How did Neoliberalism Come to Dominate?

  • Support of local economists (Chicago university program in Chile)
  • Pre-existing crises in ISI
  • Lack of alternatives
  • Green is bemused at the rise of the technocrat which he sees as pivotal in the acceptance of the free-market reforms. He advocates Ha-Joon Chang’s historical approach to finding patterns and seeking their explanation rather than relying on abstract theory based on barely plausible assumptions. There is too much emphasis on mathematics and not enough on real life situations and people. He states rightly in my view that maths does not mean objectivity. Indeed decisions about policy always contain political choices about the rival merits of state and market and the role the state should play in people’s lives. He argues that replacing the state with the market disenfranchises people when pressure groups and individuals have learnt how to lobby the state in a certain way. In order to get the same influence over policy they would have to acquire influence over large corporations etc. [This seems pretty farfetched. Given the fluctuations between democracy and authoritarianism I doubt very much pressure groups knew if they were coming or going]
  • He argues that it could be that neoliberalism is more political than economic as it was designed as a counterfoil to the rise of communism – it was part of a battle for ideas not a serious map of where a country should aim to go.

 The Lost Decade

  • Green focuses on the human cost on liberalization: falling wages, rising inequality, redundancy, an increase in families below the poverty line, (a staggering 80.1% in Bolivia in 1991), breaking of the unions, de-industrialisation, bankruptcy etc.
  • The genesis of the reforms was found clearly in the recession of 1982-83 caused by sudden end to lending by the commercial banks. Now LA was exporting capital rather than importing. The could either declare a debt moratorium or generate trade surplus, so they did the latter. As exports were already depressed due to the overvalued currency and focus on inward development, this surplus could only come from import suppression i.e. stop the citizens consuming – this means devaluation and recession.
  • The rules of the debt game meant it kept increasing even while the population suffered. Payments that might have been used to purchase imports instead went to debt service.
  • He interprets the lack of domestic investment as a consequence of the capital exporting to service the debt, rather than a deliberate policy choice (unlike S. Edwards). It was more politically expedient to cut investment than sack employees although they did that too. “The level of investment is crucial to any economy’s prospects: Latin America was mortgaging its people’s future to pay its debts.”
  • There was the additional problem of turning the trade surplus into debt service payments as a large slice of the export income dollars was in private hands. In some cases the government was forced to print money to purchase the forex causing renewed inflation. If they did not, they had to tempt exporters to invest in government bonds with high interest which only lead to more debt, this time domestic.
  • Even despite the cuts, the devaluation and increasing cost of debt meant that deficits grew and grew and even the largest governments printed money with resulting hyperinflation.

 The False Dawn

  • There was a return to growth in 1984 but this was mainly due to Brazil’s Sarney government raising wages in a “growth first” policy framework that brought growth to 8% aided by restrictions on its debt service payments.
  • By 1985 there were doubts over the IMF style stabilisation. The result was heterodox solutions to managing inflationary expectations using freezes on wages, ex rates and prices. They are supposed to be a cooling off period in which time the government can deal with the underlying problems. However the deficits etc. were not dealt with, and the short term boom lead to a surge in consumption, but this could not be sustained and inflation made a fierce comeback as the plans failed.
  • 1984-87 saw the gradual shift toward the export-led growth model and trade liberalization that would be ubiquitous by the end of the decade. Whilst this saw imports increase investment was still stagnant and this may have laid the foundations for continued underperformance in the region.
  • The debt service “hemorrhage” continued to the detriment of healthcare and education etc. All public services suffered “the social and economic fabric of Latin America was falling apart”.

 

Social Impact of the Lost Decade

  • Up to 1980 % living in poverty had been falling. The welfare indicators had been rising (see Astorga et. Al). In 1980s 64 million new names were added to the list of the poor. There was hunger, disease and despair.
  • Lower wages, greater insecurity and steep price hikes for food basics. Meanwhile TV flooded the continent showing flashy American lifestyles leading to the dispossessed men turning to alcohol and rage causing family breakdown, crime and social disintegration.

 [What is interesting is the totally different way Green looks at the reforms. He looks to the human consequences rather than just the economic justifications or stabilisation successes. What we have to wonder though is how much of this was due to the popular mandate i.e. in the post crisis world (wherever the blame lies for the increased debt etc.), where hyperinflation was destroying wages and savings, did the people sign up for the reforms at any cost? Were the costs greater than they anticipated? Why did some governments go further than they were required to? (Weyland).]  

 Investment, Growth and Development

  • Capital inflows resumed in 1991 albeit in forms other than purely commercial loans: equity purchases, bond purchases, bank loans to LA companies, FDI in farms, factories and service industries.
  • Total debt began to rise again –by 1999 it had reached $762bn for the region.
  • But the new money dried up just like it had in the 80s and thus we had the 1994 Mexico crash. The liberalized financial markets meant investors could pour money into Mexico, but they could just as easily whip it out – so there was considerable flight risk. As every the taxpayer had to pick up the bill for bailing out the banks.
  • The capital had flowed in and had been sucked up as a new option in cushioning from the worst effects of the liberal adjustment. The capital inflows meant that the debt could be serviced and the economy restructured. Moreover it meant the currency could be kept strong thus curbing inflation by keeping import prices low. The consequence of course was trade deficit, but even this could be funded by the capital inflows, as long as they lasted.
  • However, once again LA was at the mercy of external events. The U.S IR rises of 1994 meant that Mexican bonds were no longer so desirable. There was political turmoil in that year too (Zapatista uprising) and investors lost confidence.
  • Brazil was next, the contagion had spread despite the relative health of Brazil. Investors pulled out $30bn in two months.
  • Then it spread to Argentina.
  • All three governments were forced into sudden devaluations. Argentina was worst hit, with large scale government cuts and $-denominated bank account freezes. This cause political and social chaos. Urban unemployment in Mex doubled. Brazil had 0 growth and 25% unemployment.

 Lessons for the Future

  • “Reliance on the fools’ gold of fickle capital inflows made the region vulnerable both to events beyond its control, such as the Asia crisis of 1998, and to the received wisdom of the markets.” If investors were not happy, they just pulled out.
  • “The main lesson is that capital account liberalization is not the answer to LA’s historical inability to save and invest sufficient quantities to generate growth and jobs.”
  • $isation of the currency can be an option for smaller countries.
  • FDI is better than other types of capital as it is sticky.

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 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

OVERVIEW OF THE BUREAUCRATIC-AUTHORITARIAN MODEL

OVERVIEW OF THE BUREAUCRATIC-AUTHORITARIAN MODEL

D. Collier

In D. Collier (ed.) The New Authoritarianism

 A Summary

In a Nutshell

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

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

Political Systems and Change

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

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

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

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

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

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

The Evolution of Bureaucratic-Authoritarianism

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

Conclusion

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

MACROECONOMIC POLICY AND THE INFORMAL SECTOR

MACROECONOMIC POLICY AND THE INFORMAL SECTOR

J. Franks in Contrapunto: The Informal Sector Debate in Latin America C. Rakowski (ed.)

 A Summary 

In a Nutshell

Macroeconomic policy effects the informal sector differently than it does the formal sector. Given the size of the informal sector (which he defines as economic activity which escapes traditional national income accounting excluding illegal activities) in Latin America, it should be incorporated into thinking about macroeconomic policy. Not paying it sufficient heed can lead policy to have unwanted or unforeseen consequences. Indeed, that the structural adjustment programmes of the 80s and 90s did not consider fully the informal sector in their strategies could be one explanation as to why they were not successful. Whilst many argue that it would be preferential for the entire informal workforce to be absorbed by the formal sector [J.J. Thomas], Franks makes the case that from a macro point of view (i.e. growth) there is an optimal level of informality. In other words some states could improve aggregate welfare by informalizing some of the economy.

 Effects of the Informal Sector on Macroeconomic Policy

Omitted Variable Bias

  • If the informal sector is omitted from macro models, any behavioural differences between the informal sector and the rest of the economy introduces bias into both the models and the policies the models suggest. The outcomes can thus be suboptimal.

 Currency Markets and FOREX

  • The existence of an alternative FOREX market can restric a government’s ability to maintain overvalued or multiple rates or to enforce strict controls on currency (to prevent capital flight etc).
  • Many of the goods produced in the informal sector are import substituting, and thus the sector is closely linked to the international economy, especially through tariff measures and foreign exchange policies.

 Fiscal Policy and Taxation

  • Tax structures may be a deciding factor in the decision to be formal/informal.
  • Formal firms can subcontract, meaning that higher taxes may actually lead to less revenue, [especially as corporation tax increases].
  • By reducing the tax base many governments have to rely on monetizing the deficit which leads to inflation.
  • Government spending can also reduce the size of the informal sector. To the extent that it crowds out private sector demand which will include a much higher percentage of informal sector goods than the higher government demand, jobs will be shed in the informal sector. Wages will be lower.
  • Increased taxes drive suppliers to go informal and the same taxes may reduce informal sector demand. So they pull in different directions.

 Employment Policy

  • Informality can serve as the employer of last resort.
  • Many government employment policies can have the oppopsit effect on the informal sector i.e. avoidance of wage law, social security, workplace regulation etc.
  • An increase in the minimum wage will have to be complied with by the formal sector, boosting wages but reducing demand for labour, so formal employment will fall. Firms also respond by informalizing certain of their activities. The new supply of informal workers will depress wages there, so the end effect of a wage rise in the formal sector is a wage fall in the informal sector. The same logic holds for workplace regulations.

 Disadvantages from Informality

  • Ability to evade government controls, particularly to evade taxes restricting the ability of the government to provide public services.
  • It indicates a failure at the government level for not providing sufficient formal sector work.
  • Undercuts government legitimacy.
  • Low productivity and low wages with often inferior products that will never be capable of being competitive on a grander scale or internationally. i.e. there is little export potential in the sector.

 Benefits from Informality

  • The sector shows often admirable efficiency in its use of plant and technology.
  • Uses much lower levels of foreign inputs for the same level of output relative to the formal sector. This helps improve BOP whilst the high real price paid for FOREX by the informal sector (on the black market) promotes more efficient use of that scarce resource.
  • The sector contains a disproportionate number of the urban poor. Thus programmes to assist the informal sector could be used to alleviate poverty.
  • The is a benefit in those who would otherwise be unemployed having some form of income generating possibilities.
  • It is much more flexible than the formal economy and as such it can adjust to changes in the macro picture much more quickly than the formal sector making it more efficient in that respect.
  • There are reasons to believe that informal sector promotion could lead to dynamic growth.

 Macro Adjustment and the Informal Sector

  • The size of the sector increased with the crises of the 80s and during stabilization. Some of the stabilization policies themselves could have been more successful had they incorporated the informal sector:
    • Increased taxes may not reduce deficits if it encourages more people to move to the informal sector.
    • Informal markets reduce the benefits from trade liberalization.
    • The flexibility of the informal sector indicates it should play a crucial role in adjustment, as it is an adaptive economy so it could ameliorate the burdens of adjustment by cushioning against the shock. E.g. in Bolivia during the 1985 austerity programme – it worked on a macro level but it caused huge hardships (unemployment, poverty, growth in living standards etc.). Employment in the informal sector grew but that meant declining incomes, and it did not absorb sufficient of the redundant formal sector workers. The contraction would certainly have been more severe had the informal sector not existed.  

An Optimal Level of Informality

  • The balance between he costs and benefits from informality change with the level of the informal sector. So whilst it may be beneficial to have a small informal economy to absorb displaced formal sector workers and to boost the economy, if it becomes too large the government loses control over the economy and may not be able to provide certain public goods.
  • As the level of informality grows the two sectors move from a mostly complementary relationship to a more competitive one.
  • Historical evidence suggests that informality becomes less important as incomes increase. The opportunity cost of being informal increases as formal sector wages increase.
  • A stabilization plan that damages the informal economy could thus hurt the economy, producing less growth and more unemployment.
  • Evidence suggests that the informal sector is more than just a safety valve absorbing workers hurt by adjustment. It changes the way adjustment works and shows dynamic potential that could be tapped to restore economies hurt by decades of debt crises.

COMPETING PERSPECTIVES ON THE LATIN AMERICAN INFORMAL SECTOR

COMPETING PERSPECTIVES ON THE LATIN AMERICAN INFORMAL SECTOR

A. Portes & R. Schauffler

Population and Development Review, Vol. 19, No.1 (Mar., 1993)

A Summary

In a Nutshell

The article presents different interpretations of the informal sector in Latin America. The main strains of thought are summarized below but the critical point is that how one thinks of the informal sector has implications for the policies that should be considered. If employment in the informal sector is driven by lack of demand in the formal sector then policies to expand formal employment should be pursued. If it is rather driven by rigidities in the law that exclude the masses (cost of formality), then de-regulation is needed. These are both demand side solutions. [Not actively contemplated in this article, but of importance are supply side solutions. For example if workers enter the informal sector voluntarily as it is the best alternative given their human capital levels etc. then policies to increase human capital to ensure that people can interact with the formal economy are needed. See summaries of Maloney and J.J. Thomas also in this week’s reading.]

[It seems to me that solutions can either be top down (employment policy, macro policy, de-regulation) or bottom up (education, credit policy, training) in order to convert informal enterprise to formal.]

Marginalization

There have been several major interpretative lines of thought regarding the informal sector in Latin America (LA). Early ideas described the sector in terms of marginalized workers. LA experienced high labour force growth rates post WWII due to high fertility and longer life expectancy due to improved sanitation etc. At the same time there was rapid urbanization driven by the Import Substitution Industrialization (ISI) model which had a strong urban bias in promoting manufactures over agriculture. Thus there was a huge influx of economic migrants to the urban areas which were already experiencing a large growth in available labour. The opportunities that awaited those migrants were not in any regards commensurate with their economic expectations as although ISI did generate significant demand for labour it was simply dwarfed by the number of migrants. Thus there was a huge excess supply of labour. Thus these workers formed the “margins” that were excluded from the modern urban economy.

Keith Hart

This interpretation neglected the extent to which this mass of people would adapt to their economic predicament. It did not however escape Keith Hart who coined the term “informal sector” and defined it as levels of economic activity with low barriers to entry in terms of skills and capital, a family owned dynamic, small scale, and labour-intensive.

This went well beyond the traditional concept of such workers as shoe-shiners, and presented a more dynamic view of popular entrepreneurship.

PREALC

The ILO PREALC programme in some ways regressed toward the marginalization interpretation. They presented informality in terms of a rational response to a critical situation, namely long-term unemployment. Like Hart they emphasized the duality of the urban labour markets in terms of formal and informal. The latter was driven by a motive of profit maximization, whereas the former was thought to be driven by a need to survive i.e. provide employment. The sector was thus synonymous with poverty.

This loses Hart’s dynamism, and focuses on excess supply of labour. Thus those in the informal sector are underemployed or low-productivity workers. Yet several researchers have found a considerable degree of heterogeneity in the informal sector, with some entrepreneurs consistently earning more than their formal sector counterparts. Often formal sector workers leave their jobs with accumulated training related skills, and use the severance pay to which they are entitled to start up an informal business. Thus we should distinguish between capitalized and under-capitalized microenterprises.

Additionally this interpretation leaves little room for analysis of interactions between the two sectors i.e. it is strongly dualistic. Recent research however indicates that much of the informal sector is technologically advanced (repair shops etc.) and have dynamic links with larger formal sector firms. One way in which this manifests itself is in the practice of formal firms outsourcing certain work to the informal sector to save on regulatory costs etc.

The identification of informality with poverty is unhelpful as is discourages complex analysis of the sector. [Whilst this may be true, if on empirical investigation the informal sector is highly correlated with poverty, then this may be of importance, as policies to support the informal sector could have positive effects on poverty (see summary of J Franks also in this week’s reading).]

De Soto

De Soto saw efficient production and enterprise in the informal sector defined as “illegal operations pursuing legal objectives”. He argued it is driven not by excess supply but rather by excess regulation. The LA state is “mercantilist” i.e. it grants the privileges of employment to a narrow elite, and informality is the popular response that breaks down this barrier. During the period of migration economic elites felt threatened by the increasing labour competition, so they erected barriers to participation. The natural solution then was to de-regulate the economy in order to unlock the potential contained within the informal sector. This line of thought was very popular with neo-liberal thinkers as during the age of adjustment a priority was to shrink the size of state interference.

If the origins really are to be found in the regulation of the economy then this would suggest that Northern Europe etc. would have a large informal economy. Similarly if all regulation were to be removed this would lead to economic anarchy. Markets etc. are highly regulated institutions [although this does not mean that those of LA in the period were not over-regulated].

Alternative Approach: Structural Articulation

This approach does not focus on duality, but sees the two concepts as a related continuum of capitalism. Hence the informal sector is income-earning activities unregulated by the state in contexts where similar activities are so regulated. The excess supply of labour has important consequences beyond merely the survival of the poor at the economic margin:

  1. The Functions of the Informal Economy: informal activities are closely related to formal activities. They supply all sorts of important goods to formal sector workers, but at a better price than their formal equivalents. Thus the sector is a subsidy to the formal sector as the consumption yield of formal wages is increased which lowers labour costs for employers below what they would be if no informal economy existed. Thus the informal economy provides support to profits in the formal sector by keeping wages low.  Additionally large firms reach down into the pool of informal labour to avoid regulations thus further decreasing costs to improve profits. E.g. clothing assembly in Guatemala.
  2. Heterogeneity of Class Positions: The informal sector is internally heterogeneous regarding earnings, productivity and profitability.

Policies

  • PREALC: as the informal economy is a problem of labour supply, the appropriate response is to rapidly expand employment in the formal sector. This is achieved through investments in industry either by the state or by private firms [could involve some sort of industrial policy, tariff protection etc.].
  • De Soto: Informal sector is not a problem of underdevelopment, but part of the solution. To harness the sector is the challenge, and this is done by de-regulation. This has a close affinity with the IMF/World Bank programmes enacted in the 80s.
  • Structuralist: survival type activities can be reduced by employment expansion, but rigidities in the labour markets also need to be addressed to make employment more attractive to employers. This implies a relaxation of laws in order to induce greater flexibility although certain key policies should be maintained such as health benefits, training etc. otherwise individuals may prefer the potentially higher pay of the informal sector to the poor conditions in the formal sector. In other words, key benefits in the formal sector can encourage people to work in larger firms [although one wonders how relevant this is in a situation of large excess supply]. Removal of all regulation a la de Soto would not help the informal sector as part of their advantage is built upon their ability to evade regulation.

 

The final word seems to be that complete absorption of the informal sector would be desirable [see opposing opinion in J. Franks] but this will not happen in the context of rigid labour laws. [Mexico presents a special case as the minimum wage etc. has been ignored there for a long time and other labour restrictions not enforced and yet a large informal sector was maintained – see Maloney].

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.