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SOCIAL CONFLICT AND POPULIST POLICIES IN LATIN AMERICA

SOCIAL CONFLICT AND POPULIST POLICIES IN LATIN AMERICA

J. Sachs (1989)

Summary etc.

In a Nutshell

High income inequality in Latin America causes widespread calls for redistribution via policy that increases the incomes of the worst off, and this leads to over-expansionary policies that pay little heed to inflation and BOP concerns and thus contribute overall to weak economic performance.  Thus there is a linkage between social conflict and poor economic performance. Unlike the countries of northern Europe, LA has institutions that cannot properly mediate these social conflicts – bitter economic/distributional conflict is part of everyday life and this is reflected in a battleground type environment for making economic policy, with all the policy instability that implies. These conflicts are evinced in the extreme inequality that pervades the region; it is especially marked when compared with the East Asian countries, and this difference may explain the instability of the former as opposed to the stability of the latter. It also helps to understand why certain economic policy choices are made: austerity provokes unrest and so cannot be chosen even in high inflationary periods; trade policies are inward oriented so as to boost urban wages and to prevent landed elites and commodity exporters gaining excessively; necessary devaluations are delayed as they hurt the wage earning poor the most, and the delay further exacerbates the problem. In other words, because of the societal demands, over-expansionary macro policies are enacted which lead to BOP and inflation crises.

NB: this paper is not anti the motives of the populists (addressing inequality), nor pro the reactive orthodox measures that come after populism derived crisis. If anything it is the swings between these two positions that does the most damage. A middle ground needs to be sought.

Economic Populism and Inequality

  • Sachs found a significant correlation between inequality and the need to reschedule debt repayments. Unequal countries are prone to excessive foreign borrowing to redistribute, promote exports (raising urban wages), destabilizing labour militancy, enhancing elite power to evade taxes.
  • LA governments have rapidly increased budget deficits, often through borrowing. Big spend policies are needed to address serious inequalities. Such policies are particularly attractive for governments based on urban and working-class constituencies, such as the populist governments in LA which arose in response to the urbanization that occurred in the 30s and 40s. These governments were particularly sensitive to the needs of gov. employees, urban proles, public sector workers and the informal sector.
  • Politically populism is a multiclass movement based on state activism (Coniff), universal suffrage and charismatic leadership. They were generally distributive rather than redistributive [from a political science point of view one wonders why this form of government would be chosen over and above a purely redistributive government given the nature of poverty and inequality in the region].

A Macro Framework for Populism

  • Exchange rate is fixed by central bank using accumulated reserves (in many cases these were surpluses earned during WWII when capital imports virtually suspended from the core). A monetary expansion policy is undertaken (e.g.). Demand expands. As ex-rate is fixed imports and export prices are not changed. This pushes up demand for non-tradable, and in turn for labour leading to higher wages. Price of exports fall relative to non-tradable, and to the extent they are used to produce exports, the profit margins of exports are squeezed (so the policy is in favour of urban workers, and against exporters – and hence why it is so attractive to populist governments). This leads to lessening export production at the same time that demand thus imports are rising leading to a trade deficit. The deficit is financed by exchange reserves or foreign credit. Once these run out the party is over.
  • A BOP crisis hits. There is no capacity to peg the ex-rate, so a real depreciation occurs that lowers wages and restores export profitability and reduces internal demand. The real depreciation may be bigger than the initial appreciation since in the expansion stage, forex is lost and export capacity is less due to de-capitalization.
  • If the process is not reversed states are left with expansionary policy with a floating ex-rate and the result is inflation. Populist govs do not want to reverse the initial gains and may try to put in ex-rate controls, nationalize the banks (Peru 1987, Mex 1982).
  • It is the environment of unresolved social conflict that spurs this kind of populist policy cycle. Such policies would not be possible if the export sector was diversified out of the hands of a small elite, or agricultural holders were many and had political voice. The fact that LA was characterized by oligopoly meant the policies were feasibly enacted by governments with close ties to labour.

 

Argentina 1946-49, Juan Peron

  • Juan Peron replaced landowner focused conservative gov with a nationalist gov focussed on rapid industrialization. As labour secretary he was a big friend to urban labour: collective bargaining, social security, min wage increases etc.
  • Monetary policy and fiscal spending highly expansionary. Ex rate fixed and thus highly overvalued in PP terms. Wages rose due to backing of unions and economic expansion. High protection to build industry. Explicit aim to improve urban wages at expense of agricultural oligopoly. Real wages grew by 52% in three years.
  • Crisis hit when forex ran out.

 

Chile 1971-73, Salvador Allende

  • Similar mould to Peron, but more socialist aims (nationalisation, land reform etc.)
  • 1st year – fiscal expansion. Deficit grew from 2.7% GNP to 10.7%. Growth was 9% and real wages grew by 17%
  • Crash came in 1972 – inflation reached 163%

 

Brazil 1985-88, Jose Sarney

  • Cruzado plan – real wage increases, overvalued currency, large deficit. Early success, as in the above two cases was outstanding.
  • The plan did not last long without strain as external debt was already very high. With a new constitution on the horizon Sarney wanted office for as long as possible and maintained the populist policies even in the face of the cracks beginning to show.

Peru 1985-88, Alan Garcia

  • Created their own forex reserves by limiting debt servicing to 10% export values. Ex-rate and price freezes, with increase in public sector wages.

Common Features

Urban based governments intent on raising the living standards of the urban workers. In Arg, Braz, Peru, all took over after long periods of conservative rule i.e. lots of pent up conflict. All see initial explosion of growth and real wage increases with stable prices followed by late phase of falling GNP, wages and hyperinflation.

The turning point is when governments run out of forex or foreign credit so it cannot maintain the overvalued exchange rate. Peron had wartime reserves. Chile had little reserves. Garcia created his own, and Brazil had none and did not emulate Garcia hence why the Cruzado plan was so short lived.

Conclusion

Many problems in LA are external: IR rises, oil shocks, commodity collapse etc. But fiscal laxity at home is also responsible especially where drastic fiscal expansion was funding growth.

Populist measures follow from several factors: economic conflict, inequality, political instability leading to short tenures and thus horizons, and a deep cleavage in sectoral interests between the urban working classes and the primary commodity exporters.

Why did they choose such risky paths? – hard to say. Popularity? This doesn’t seem too satisfactory.

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