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DISTRIBUTIONAL COALITIONS AND THE POLITICS OF ECONOMIC REFORM

DISTRIBUTIONAL COALITIONS AND THE POLITICS OF ECONOMIC REFORM IN LATIN AMERICA

H.E. Schamis

World Politics 51.2 (1999) 236-268

 A Summary

In a Nutshell

Traditionally the emphasis when seeking to explain the free market reforms in Latin America has been on how losers were neutralized. This stems from the application of the logic of collective action: the costs of liberalization are great and concentrated on a few key groups (those industrialists who benefitted under ISI in particular), whereas the long run benefits are dispersed throughout the whole nation. This much larger group of beneficiaries is plagued by free riding problems and have little incentive to organize in favour of an open economy. For the small groups the cost of organization outweighs the benefits and so they lobby the state. These distributional coalitions induce the state to be more interventionist than it might otherwise prefer to be.

 Seen thus, for free market reforms to occur, these “losers” must be pacified in order for reform to become a reality. Analysis thus concentrates on top down decision-making (executive isolation) [see Armijo and Faucher], large electoral mandates, external imposition (IFIs) etc. as the key features that made reform possible in Latin America. What this misses is the extent to which there was an empowerment of winners. It is the influence of winners that offsets the capacity for collective action of the losers.

 The distributional coalitions that form behind liberalization are rent-seekers. They benefit from ties between the government and business; from uncompetitive privatization etc. (examples to follow).  It is true that an interventionist state is prone to rent-seeking behaviour, as the state has the power to grant entry into industries which exhibit profits greater than the opportunity cost. However, what was not previously appreciated was that liberalization policies also can generate incentives for rent-seeking, and indeed the success of the very reforms themselves was underpinned by this rent-seeking which allowed politicians to orchestrate distributional coalitions for change: empowering the winners. What is so novel about this approach is that in effect we are not talking about groups organizing to capture the state in order to intervene to distribute, but rather groups organizing to induce the state to withdraw from economic policy making.

 Some examples

Chile

  • Key policymakers of the Pinochet government served on the boards of large firms and economic conglomerates before and after holding central bank and cabinet posts leading to collusion between economic and political power. Monopolies were built as state firms were privatized, and the benefits of collusion were beneficial policies that allowed the firms to extract rents.

 Argentina

  • Once Menem converted to liberalism he had to get big business son board who would suffer from the loss of protections afforded under ISI. Menem offered many positions within government to the bosses of the big conglomerates so policy was in a sense negotiated with business.
  • With the passing of the State Reform Law virtually every state owned company was eligible for sale, and privatization became one of the key means of coalition building. Monopolies were sold off unbroken up, i.e. with monopoly rights intact, and sold at very favourable prices. Domestic capital was given excellent opportunity for investment and as such there was a large degree of horizontal diversification as domestic capitalists invested in a number of large monopoly ventures usually with foreign banks leading the way.
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