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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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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.

CRISIS AND REFORM IN LATIN AMERICA

CRISIS AND REFORM IN LATIN AMERICA: FROM DESPAIR TO HOPE

S. Edwards

Chapter 2 (Muddling through: Adjustment from 1982 to 1987)

Chapter 3 (The emergence of a new Latin American Consensus)

A Summary 

In a Nutshell

The ISI programs and debt explosions (LT debt quadrupled from $45.2bn to $176bn between 1975-82, and total debt in 1982 was at $333bn) were bound to require adjustment and that came in the form of the Mexican debt crisis which quickly spread to the other countries of LA. The crisis was the product of both external (increased IRs, slow growth in the industrialized world leading to fewer exports, oil shocks and consequent lending, overvalued currency leading to capital flight in speculation against the domestic currency) and domestic factors (macroeconomic disequilibria, overvalued ex rate, inefficient industry).  In response to the crisis new models were sought, and the transition democracies chose heterodox solutions which stabilized inflation and prices briefly but its failure to tackle the underlying structural and fiscal problems meant these packages were doomed to failure. At this point of renewed frustration the free-market reforms advocated by Washington etc. provided an alternative, although the intellectual and public support for those programs had begun before the conditionality programs of loans were made by the IFIs. There were in fact three main factors that lead to the adoption of the free-market reforms: the East Asian miracle was looked to as a model of growth; the example of Chile once the newly democratic government made it clear they would largely continue the free-market policies brought in by Pinochet; the influence of the IFIs.

 The Mexican Crisis and Latin American Response

  • Looking at debt spreads the author suggests the August 1982 crisis was not anticipated . Once the crisis set in the spreads were large and volatile reflecting the chaos of the end of the Portillo administration (nationalizing banks, suspension of debt payments). Things calmed down with the new austerity measures introduced by the Madrid government. In 1983 negotiations with the IMF paid off and the debt was rescheduled. 
  • Once the Mexican government announced it could not meet obligations new funds were dramatically reduced (up to 40%). Even countries who were stable macoeconomically such as Colombia were affected by the reduction in lending. Net transfers of resources went from being negative to strongly positive ($12bn p.a.)
  • The region was forced to reverse the current account deficit. Between 1982-86 the region as a whole went from -$2bn deficit to more than $39bn surplus! They achieved this by contractions in imports and investments. On the import side this was mainly intermediate and capital goods which restricted possibilities for investment and domestic production(exchange rate control, capital controls and quotas were the tools). On the investment side it was largely infrastructure and construction that was cut. The policies were for short-term effectiveness without much thought for welfare.

  Expenditure reducing policies

  • Reduced public investment
  • Severe control of public sector wages despite inflation
  • Borrowing from national banks in response to less credit crowded out private borrowing and kept investment in check.
  • Mex, Uruguay and Ven all cut public expenditure by around 20%

 Expenditure switching policies

  • Import restrictions
  • Nominal devaluations
  • Import tariff hikes (at least initially)
  • The author states that quantitative restrictions of this sort can be justified only as a means of establishing credibly the willingness to adjust the macroeconomic position, but only in the very short-run. In the long-run they hurt the economy e.g. Mexico where extensive restrictions between 1982-84 cut intermediate good imports thus reducing the prospects for future growth.
  • 1986 saw some relaxing of restraints e.g. Chile reduced tariffs to a uniform 20%

 Despite the valiant efforts of the LA countries the trade surpluses continued to fall short of the interest payments. Gradually it was realized that countries in crisis in LA needed an increase in new money (!!!) to kick start growth that would allow for sustainable policies [and a means to conditionality for the IFIs] and this became part of the accepted thinking with the 1989 Brady Plan.

 Heterodox Stabilization of the Mid-1980s

  • Heterodox solutions to hyperinflation occurred in Arg, Brazil and Peru. These policies emphasize price control and deemphasize demand management and fiscal discipline.
  • Some argue they were really designed to strengthen government role. They were seen as alternatives to plans based on free-markets and restraint and as such they were a final attempt to develop with the government still taking a dominant role.

 Argentina’s Austral Plan

  • June 1985.
  • Price and wage freezes
  • Fiscal adjustment to correct deficit (increase in cost of public services to achieve this)
  • Monetary reform.
  • Initially worked well to reduce inflation. But price of services increased in real terms thus leading the state to lose control of deficit they previously had corrected as they had frozen the prices at an albeit higher level than previously.
  • Once deficit and inflation began to climb again the Alfonsin government was ushered in an they took steps toward liberalization.

 Brazil Cruzado Plan

  • President Sarney Feb 1986
  • Similar plan but less emphasis on fiscal correction.
  • Demand rose to levels inconsistent with price freeze so there was disequilibria, shortage etc. Fiscal imbalance put further strain on the economy.
  • Eventual collapse left Brazil with even higher inflation.

 Mexican heterodoxy

  • Under Madrid administration was more successful due to mix of income policies with credit and fiscal restraint. In other words they tried to address some of the underlying problems. Additionally the fiscal problems were brought under control before the income policies were enacted unlike in Arg.
  • Also the plan was part of a larger modernization strategy including deregulation and opening of the economy.
  • There was more social support in Mex.

 As a result of the failures of heterodoxy the region looked for a new paradigm.

 The New Paradigm

  • Away from state interventionism, inward orientation and macroeconomic imbalance and toward competition, market orientation and openness. There was also a drive to redefine the role of the state. Now an effective strong state was sought, not an interventionist state.
  • Perez in Ven
  • Menem in Arg
  • Gaviria of Colombia
  • Fujimori of Peru all supported market-based reform.
  • The transformation of views was due to a variety of factors: failure of heterodoxy and sense that state-based development models had worn out their use (ISI). In some ways heterodoxy was government intervention’s last chance to show its relevance in a globalized world and it failed miserably. The propagation of the ideas was made possible by high level alliances between technocrats and politicians.

 East Asian Experience

LA (and the IFIs) looked to EA to see why they had had such sustained economic success when LA had failed given that in the period 1965-80 they were growing at similarly healthy rates of 6/7% p.a. Four policy differences were advanced:

  1. EA avoided excessive and variable protectionist policies
  2. EA stayed away from overvalued currency
  3. EA maintained macroeconomic environment with steady inflation
  4. EA had fewer regulations in almost all commercial spheres.
  • e.g. Korea – merchandise exports grew at 23% p.a. between 1963-90. But in years 1950-63 the external sector was highly distorted due to ISI policies. It was a “highly repressed economy” in this period. In 63/64 they began to look outward – human capital accumulation, currency devaluation, gradual tariff reduction, import prohibitions eliminated, export encouraging programs implemented, competitive currency rates maintained. They were more flexible with policy than LA. When a policy was not working to increase exports it was binned, plus export subsidies etc. were given in a competitive manner – if the company did not perform the subsidy was not removed. So they did not have the same rent seeking aspect as the LA experience.
  • However there are great differences between the regions: inflation much greater in LA and ex rates more volatile. Politics and income distribution may have also played a part in the differences: in EA an overvalued currency hurt a huge number of producers of tradable goods in the rural sector. In LA an overvalued currency only affected a small number of often absent large landowners [why?], so the political costs of an overvalued currency were much greater in EA. [Also the factor mix was different. EA was abundant in labour and LA in land. Both were “backward”. This predicts different patterns of support and resistance to trade opening. See notes on Rogowski Coalitions]

 Chile as Role Model

  • Chile was looked to as a role model especially after the democratic government said it would continue to pursue the Pinochet reforms.

 Role on IFIs

  • Influenced the propagation of ideas through empirical research(many papers on EA comparison, on the benefits between trade restrictions and poor growth etc.), sector analysis, lending practices etc.
  • In terms of the lending practices the LA authorities were forced in some cases to implement reforms due to conditional release of funds by the IFIs. The author notes they often went further than the IFIs had suggested. E.g. see Grindle

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”.

THE POLITICS OF MARKET REFORM

THE POLITICS OF MARKET REFORM

K. Weyland

Chapters V and VI

A Summary

 

In a Nutshell

Weyland interprets the conversion to market economics using prospect theory. This essentially postulates that the crisis affecting Brazil, Argentina and Peru meant that a majority of the population saw themselves in the “domain of losses” mostly due to inflation. They thus made a risk seeking response in electing political outsiders (Collor, Menem and Fujimori respectively). These new chief executives also saw themselves in the domain of losses thus becoming highly risk acceptant and therefore led their countries down a path of market reforms. They were not tied down by previous decision bias, and they had learnt from the recent failure of heterodoxy. In choosing the reform measures they were far more drastic and draconian than even the IFIs were advocating. They imposed high short-term costs on important sectors, and strata of society. Yet, the public were initially supportive. This fact reflects the acceptance of costs due to risk seeking in the domain of losses.

 Venezuela’s public did not accept the reforms. Perez was not a political outsider, and when tried to push through reforms there were major riots in the streets. The driving factor behind acceptance in the other cases, and failure for Venezuela was the severity of the crisis. In Venezuela, inflation had not reached anything like the levels it had in Peru, Argentina, Brazil, and as such the majority did not see themselves in the domain of losses meaning that the high costs imposed by stabilization were thought to be unjustified.

 The politics of this time should be classified as neo-populist due to reliance on the anti-establishment credentials by the politically outsider presidents of BAP, as well as the invocation of the will of the people against entrenched interests.

 The Rise of Political Outsiders

  • The huge losses suffered due to hyperinflation looked set to continue, so in Braz, Arg and Peru, the voters took a risk by electing political outsiders with weak track records. By contrast, Venezuelans elected a former president, Perez, as the economic decline was much more gradual and so the populace did not see themselves in the domain of losses.
  • The governments of BAP had been thoroughly discredited (collapse of spring plan [Arg], summer plan [Braz]). Thus risk seeking in the domain of losses induced voters to reject decisively the incumbents. Critically for the argument, there were much more moderate alternatives, that offered change at a much lower risk than the candidates actually chosen as they had technical know-how, organizational capabilities etc. However, the risk seeking led electorates to reject the political class as a whole and vote for outsiders. The politicians themselves reinforced their outsider credentials by populist campaign rhetoric which attacked established elites.

 The Initiation of Drastic Adjustment

The Depth of the Crisis

  • On taking office the presidents were privy to the previously private information about the full extent of the crisis, so they took over under much worse economic conditions.
  • Conditions varied: Venezuela did not have hyperinflation. Argentina was worse than Brazil as Arg had been in stagnation for years whereas Braz had been growing. Also Brazil was fully indexed so the population did not feel the effects of inflation in the same way. The burden there fell mostly in the large informal sector.

 External Constraints and Pressures

  • IFIs recommended orthodox adjustment. But in none of the countries was this decisive. The IMF had a lot of influence in Venezuela and Peru, but the programmes in Argentina and Brazil were designed by domestic economists, although they did follow broadly the Washington Consensus. All plans were radically bolder and more risky (e.g. debt moratorium and capital freezing in Brazil, and the convertibility plan in Arg) than the IFIs recommended who were worried about domestic backlash. 

 Learning from Prior Experiences

  • Heterodoxy had lost its appeal.
  • So there was learning, but no real learning about how to enact market reform. Additionally, the experience of Chile was not good – the early stabilization there caused a huge increase in poverty and eventually the crisis of the early 80s. There were only really positive results when reforms were made in a more incremental way with sustained growth. Moreover the violent reaction by the people of Venezuela to the neoliberal reforms was widely interpreted as a rejection of the paradigm.

 Domain of Losses

  • The presidents overshot IFI influence and owned the policies. As soon as the crisis passed and growth resumed they reverted to risk aversion.
  • They were not tied down by prior decision bias so could chart a new course.
  • They saw themselves in the domain of losses. This led them to choose particularly risky policies.

Venezuela:

  • Raised public sector prices, reduced public spending, opened up the country to trade.
  • Deep recession caused by enactment at high speed.
  • The oil bonanza of 1990-91 caused Perez to slack off it austerity program, using the funds for public spending to ease the pain of adjustment.

Argentina:

  • Menem also proceeded at high speed, diverging from his campaign rhetoric by trying to dismantle ISI model
  • 1st plan failed at end of 1989, so he upped the ante by forcibly retaining financial assets (highly risky due to offence caused to capitalists).
  • Convertibility plan tied the government’s hands to non-intervention in ex-rate policy which sent a signal to international investors.

Brazil:

  • Collor chose the most radical plan on the table.
  • Spending cuts, tax hikes, privatization, liquidity confiscated for 18 months, froze savings accounts.

Peru:

  • Abrupt devaluation, tax increases
  • Painful stabilization especially given the already high level of poverty.
  • In all cases the paths chosen had lower expected values than some of the more prudent alternatives. Yet they held the promise of a quick turnaround, and this promise was enough to risk potentially total economic meltdown. The more moderate response was particularly feasible in Venezuela due to the absence of hyperinflation.

 The Popular Response

  • Divergence in the severity of the problems facing the citizens determined the different levels of support for reform.
  • Presidents diverged from their campaigns, and could not have foreseen the popular support, showing that they did not act as simple agents of the citizens.
  • In BAP initial support was very strong. There was even support when Fujimori closed down the Congress. Not the case in Venezuela.

 Neo-Populism

  • Outsiders + heterogeneous support networks + “will of the people” rhetoric against special interests, meant that neoliberal economics and populist politics went hand in hand [although the working classes were the hardest hit by the reforms, so their welfare was not at the top of the priority list as it was with more traditional populism].
    • They weakened interest groups, extended personal latitude, dismantle bureaucratic structures etc. which allowed them to assault the numerous subsidies and protections that were part of the reform.
    • Neo-populist rhetoric legitimized the reforms
    • Increase tax takings allowed new forms of discretionary spending further boosting support. [See Schamis].
    • In the end Collor went the same was as Perez whereas Fujimori and Menem won re-election. Whereas Collor was constrained by the Brazilian congress, Fujimori was able to shut congress due to the extraordinary depth of the crisis in Peru which made such an action acceptable.

 Slowdown of Reform

  • The Argentine convertibility plan controlled inflation and growth between 1991-1994 reached 7.5%.
  • Peru grew at 7% in 1993 and 14% in 1994.
  • As the economies recovered, leaders and population entered into the domain of gains, so Menem and Fujimori gave up their initial boldness and became much more cautious. Labour market deregulation and social security reform languished in congress, and continued privatization required ever more concessions.
  • The Mexican crisis of 1994 motivated the Menem government to give a renewed push.

 Political Failure of Neoliberal Reform in Brazil

  • Collor was unable to achieve stabilization. Prices were on the rise again in 1991 after two shock plans had failed. He was politically isolated without much political support so was unable to enact audacious reforms like the convertibility package in Argentina. He lacked the clout to push policy through congress.
  • He did however set in motion the processes that enabled the subsequent Franco government to undertake adjustment efforts.