The Politics of Freeing Markets in Latin America

Chile, Argentina, and Mexico

Judith A. Teichman

• Publisher: The University of North Carolina Press
• Year: 2003
• ISBN:
  9780807875070
• Topic: Economics
• Subtopic: Comparative Economics
• Index: Economics

In the 1980s and 1990s, nations throughout Latin America experienced the dual transformations of market liberalizing reforms and democratization. Since then, perhaps no issue has been more controversial among those who study the region than the exact nature of the relationship between these two processes. Bringing a much-needed comparative perspective to the discussion, Judith Teichman examines the politics of market reform in Chile, Argentina, and Mexico, analyzing its implications for democratic practices in each case. Teichman considers both internal and external influences on the process of Latin American market reform, anchoring her investigation in the historical, political, and cultural contexts unique to each country, while also highlighting the important role played by such international actors as the World Bank and the International Monetary Fund (IMF). Informed by interviews with more than one hundred senior officials involved in the reform process, her analysis reveals that while the initial stage of market reform is associated with authoritarian political practices, later phases witness a rise in the importance of electoral democracy. She concludes, however, that the legacy of authoritarian decision making represents a significant obstacle to substantive democratization.

chapter one

POLITICS AND MARKET REFORM IN LATIN AMERICA

GLOBALIZATION, IDEAS, AND POLICY CHANGE

The energy crisis of 1973–74 initiated important changes in the world economic order: an increase in trade competition, the decline in U.S. economic dominance, and the struggle by multinationals to lower costs through reorganizing production. These changes, involving the elimination of economic borders and an increase in international exchange, are at the core of what has become known as globalization. The energy crisis and its attendant economic difficulties also triggered a reassessment of the role of the state in the economy. Ideas that had germinated in the academic community for years now began to reach policy makers. With the elections of Ronald Reagan in the United States and Margaret Thatcher in Great Britain policies geared to bring about a greater reliance on market forces (trade liberalization, privatization, and deregulation) gained increasing recognition worldwide. Indeed, policy prescriptions calling for a greater reliance on market forces and the withdrawal of the state came to represent a new “international policy culture” (Ikenberry 1990, 103–4; Kahler 1992, 124).

Latin America, with the notable exception of Chile, proved stubbornly resistant to this new international policy culture, however. Indeed, the opportunities for foreign borrowing made possible by the increase in price and demand for petroleum probably prolonged the resistance to change in many countries of the region. With the 1973–74 energy crisis, OPEC (Organization of Petroleum Exporting Countries) petrodollars channeled through the commercial banks aggressively sought borrowers in Latin America. Confronted with a variety of needs, both real and perceived (high oil bills, pressures for state spending, industrial needs for inputs, public demand for consumer goods), the largest Latin American states embarked on a binge of borrowing that culminated in the 1981–82 international debt crisis. That crisis forced highly indebted countries into negotiations with the International Monetary Fund (IMF) and produced agreements putting in place stabilization programs, which involved a variety of short-term austerity measures (devaluation, reduction in government spending, restriction of wage and salary increases) seen as necessary to rectify trade imbalances, reduce inflation, and initiate economic recovery to ensure the repayment of debt. When, by the mid-1980s, recovery eluded highly indebted countries, attention turned to the institution of longer-term market reform measures (structural adjustment) such as trade liberalization and privatization, while austere stabilization programs continued to be negotiated and implemented simultaneously.¹ Latin American policy reform, therefore, has been marked by the important contextual feature of economic crisis and, oftentimes, harshly austere government policies.²

While the multilateral lending institutions encouraged policy reform, the debt crisis also provided an opportunity for domestic critics of statism, whose voices had been subdued during the binge years of proliferative borrowing, to press for policy change. By the second half of the 1980s, the persistence of economic difficulties in the region gave growing legitimacy to the viewpoints of market reformers and propelled the new policy ideas rapidly forward among high-level state bureaucrats and politicians. At the same time, debt negotiations offered an important forum for the transfer of market reform ideas because these reforms were part of structural adjustment (market reform) packages negotiated with the International Monetary Fund and the World Bank. Country after country carried out trade liberalization, the privatization of public companies, and deregulation. By the mid- to late 1990s, countries began to undertake what has become known as “second stage reform” (Pastor and Wise 1999; Naim 1994; Torres 1997), a phase whose features, although far from uniform, include the privatization of companies remaining in state hands, regulatory reforms, changes in labor legislation, measures to combat poverty, and improvements in governance.

This book is the story of the market reform process in three Latin American countries: Chile, Argentina, and Mexico. It is a story that involves a consideration of the impact of sweeping historical forces and the acumen of individual actors; it accords an important role to both domestic and international forces. Indeed, domestic and international factors have become intertwined in new and intriguing ways in the era of globalization. By the mid-1990s, all three countries had carried out extensive market reforms under distinct regime types. Chile was the region’s earliest and for many years most radical market reform case, carrying out the socially costly aspects of its reform process under highly repressive military rule (1973–89). Under the elected Concertación government (1990–present), an alliance of Christian Democrats and socialists, Chile not only maintained the reforms carried out by the military regime but moved into the privatization of sacrosanct public companies while struggling to alleviate poverty and inequality. Chile is the region’s clearest case of domestically driven reform, having begun the process a decade before the full impact of the debt crisis and the new international policy environment were felt in the region. Although taking some initial steps during the 1976–82 period of military rule, Argentina implemented extensive market reform at the federal level under the elected Peronist government of Carlos Menem, in power between 1989 and 1999. Carried out in the wake of the traumatic hyperinflationary episode of the late 1980s, Argentina’s reforms, which included the privatization of important public companies in such areas as petroleum and railways, were completed in a very brief time period. Post-1994 reform efforts focused on labor flexibilization³ and privatization at the provincial level. Mexico’s market reform program, led by a liberalizing authoritarian one-party-dominant regime, began slowly in 1983 and accelerated as the economic crisis renewed in 1985–86. The political fallout of the 1994–95 peso crisis, including the loss of control of Congress, stalled a number of proposed market reforms and brought increased attention to corruption and poverty issues.⁴

While it is widely recognized that the political context within which market reform has been carried out is integral to the process, the nature of the relationship between market reform and political change has been fraught with considerable controversy. The spread of market reform throughout the region demonstrates that elected regimes are capable of carrying out politically risky and socially costly reforms. But the issue of how and why they have been able to do so and what the implications are for democratic stability and practices in the longer term remains an area of ongoing research and discussion. This book aims to contribute to our understanding of the relationship between market reform and politics through examining the issue comparatively, across regime type and over time. In the following section, I sketch the major issues of the current debate and then situate this study within these broader concerns.

LATIN AMERICAN POLITICS IN THE MARKET REFORM ERA

Alongside the dramatic reversal of the statism that had come to characterize economic policy in Latin America, the decade of the 1980s also witnessed a concerted move toward political liberalization and democratization as countries shed military rule and moved to establish a variety of formal democratic practices. As we will see, this process has been examined in a variety of ways: democratization has been explored from procedural and substantive perspectives and from the point of view of responsiveness to public input. The market reform/democracy discussion has become extraordinarily intractable, involving not only differing concepts of democracy but also varying assessments of the economic and social impacts of economic reforms along with conflicting viewpoints on the possibilities opened up by such changes.

Given that Latin America’s transition to democratic rule involved, in most cases, the removal from power of highly repressive military regimes, most early works focused on the acquisition of the formal attributes of liberal democracy, particularly elections (O’Donnell and Schmitter 1986; Drake and Silva 1986; Seligson 1989). Recent work agrees that impressive progress has been made in the formal procedural requisites for liberal democracy (Lowenthal and Domínguez 1996; Agüero 1998).⁵ Indeed, now, more than ever before, the democratizing regimes of Latin America appear more firmly rooted and more durable, as more and more of them prove capable of surviving economic crises and transferring power through elections (Remmer 1996; Castañeda 1996, 47). The centrality of elections in much of the literature stems from their presumed role in making it possible for citizens to hold political leaders accountable through the opportunity to remove leaders from power.⁶

Early observers acknowledged that elites largely determined the conditions of transition to democracy and that they would try to determine whether liberalization would be expanded into a broader process of democratization (O’Donnell and Schmitter 1986, 7–11; Diamond and Linz 1989, 9–10). In the 1990s, as the threat of military intervention dissipated, praises for procedural advances in democracy were increasingly tempered by growing concerns about a variety of obstacles that appear to be diminishing the quality of Latin American democracy. Latin American democracies have been described as “delegative democracies” (O’Donnell 1994a), “hybrid” (Conaghan, Malloy, and Abugattas 1990, 26), and “fragile” (Hakim and Lowenthal 1993), signifying that while such regimes have electoral processes, they also have features believed to be antithetical to the spread and consolidation of democracy. Much of this literature takes a substantive rather than simply procedural definition of democracy, although there is by no means agreement on exactly what the substantive features of democracy are or should be. But clearly, for these authors, democracy involves much more than the peaceful transfer of power as a consequence of competitive elections and the protection of the basic civil liberties well known to liberal democracy. It involves such attributes as the independence of civil society and social groups from the state, free public contestation over government priorities and policies (Linz and Stepan 1996, 3–11), the operation of mechanisms that protect the weakest members of society, executive accountability to the public, the subjugation of military and police power to civilian authority, and the operation of the rule of law (Lowenthal and Domínguez 1996, 5). Others have judged democratic institutions as inadequate, pointing to corrupt and weak judiciaries and impotent legislatures.

Perhaps no issue has been more controversial than the extent to which market reform has contributed to, or detracted from, this process of democratization. On the one side, there is the by now standard argument that with the reduction of the role of the state, particularly with privatization, public policy more in tune with public interests will emerge because public bodies will now be far less permeated by corruption, rent-seeking behavior, and political manipulation (Savas 1987, 3–4; Van de Walle 1989, 606–16). In addition, there was considerable optimism that as state streamlining reduced the power of corrupt bureaucratic agencies and trade unions, the role of other, more autonomous and representative organizations would increase, allowing previously politically inactive groups a role in the political process (Williamson 1994, 13; Hausman 1994, 174). Moreover, as state intervention declines and as monopolistic state companies are eliminated, the ensuing wider array of economic actors provides a check on state power (Butler 1987). Probably the best argument on this side of the ledger is the contention that in setting the stage for future economic growth, market reforms provide the basis for democratic political stability (Remmer 1995, 115).

On the other hand, a growing number of works have argued that economic crises and market reforms are undermining the quality of democracy because both are held responsible for the increase in inequality and the rise in the numbers of people facing abject misery. Market reforms involving a dramatic cutback in state expenditures and functions—the elimination of subsidies to the poor, reduction in spending on health and education—have seriously undermined the ability of the state to protect its most vulnerable citizens. As the lives of people do not improve or, even worse, deteriorate further, there is the real danger that democracy may cease to be regarded as legitimate among those who have been economically marginalized (Borón 1998, 46). Moreover, the political instability generated by economic inequality not only threatens the continuation of democracy but also undermines business confidence and therefore economic prosperity (Vilas 1997, 21; Castañeda 1996, 55). Redistributive measures are seen as imperative and elite resistance the key obstacle (Castañeda 1996, 55). Philip Oxhorn and Graciela Ducatenzeiler believe that the inequality linked to market reforms has dangerously weakened civil society, rendering lower-class groups increasingly powerless against the middle and upper classes, a situation that militates against class compromise while encouraging elites to respond rigidly (even violently) to pressures for change (1999, 27, 35).

Inequality and the heightened vulnerability it brings are viewed as having important implications for authoritarian forms of political control: patron clientelism, “a tie between two parties of unequal wealth and influence” that “depends upon the exchange of goods and services” (Powell 1970, 412–13), and bureaucratic patrimonialism, political authority based on personalistic relationships and the distribution of material rewards, in which the property of the individual ruler and the state are indistinguishable (Lewellen 1995, 141), are likely to persist, mutate, or even strengthen under conditions of large-scale poverty and inequality (Alvarez, Dagnino, and Escobar 1998b, 22; Vilas 1997, 19; Vellinga 1998, 12). The persistence or growth of such features is regarded as an impediment to democratization because such arrangements contravene equality of access to the state and the resources it dispenses, equality of treatment by the state on the basis of rational bureaucratic criteria, and political representation based on a legal order—assumptions at the core of the democratic notion of citizenship. Moreover, clientelism is often reinforced by another hierarchical arrangement: corporatism. Like clientelism, corporatism, which provides for the incorporation of organized groups into the party or state apparatus, has operated as a mechanism of political control in Latin America, tending to contain dissent and potential dissent (Schmitter 1974, 108). Further, the mitigation of clientelism and corporatist political arrangements is important in the transition toward a more democratic ideal because both inhibit the autonomy of societal groups.⁷ A concept of “civil society” involving the existence of a public life and freedom of association and political choice independent of the state exists in tension with such hierarchical principles.

Moreover, despite the expansion of democratic practices, many examining the first phase of market reform from the angle of policy formulation have emphasized the top-down, exclusionary aspects of the process, lending support to arguments emphasizing the negative implications of market reform for questions of substantive democracy, particularly public influence on policy and accountability. The ascendancy of a technocratic elite, individuals with graduate degrees in subjects such as economics, to policy predominance is widely seen as a key ingredient in the successful implementation of market reform (Williamson and Haggard 1994, 578; Haggard and Webb 1994, 13; Haggard and Kaufman 1995, 9; Pastor and Wise 1992, 91; Teichman 1997a, 37–48; Díaz 1997, 38). According to one analysis, the successful implementation of market reform requires this elite to reduce the size of its support coalition so as to exclude groups such as labor and the noncompetitive private sector that are affected negatively by the new policies and therefore can be expected to oppose them (Waterbury 1989, 40). Indeed, political difficulties can be expected at the beginning of the process because the big losers are powerful vested interests with a great deal of political clout while the beneficiaries are a diffuse, unorganized cross section of the public who lack the incentive and political resources to organize in support of market reform. The imposition of market reform through executive fiat, quickly and by surprise, often overriding democratic deliberative mechanisms, has been widely recognized as a necessary and integral part of the reform experience (Grindle 1996, 35; Morales 1996, 16; Conaghan and Malloy 1994, 145–48). According to this perspective, most Latin American governments carrying out market reform have featured formal democratic procedures alongside highly authoritarian decision-making styles in which there is neither public input nor accountability.

One key point of contention revolves around the implications of the behaviors of technocratic policy makers for the development of democracy over the longer term. On the one hand, there are those who see no necessarily negative implications springing from the concentration of political power in the hands of technocrats. Indeed, their leadership is believed to guarantee coherent, efficient, and rational economic programs laying the groundwork for economic growth, political stability, and, ultimately, democracy over the long term (Williamson 1994, 12; Galjart and Silva 1995, 273). In fact, one recent work argues that technocrats, recognizing the need to take on a political role (hence the use of the term “technopol”), have obtained public support for their economic policies and have shown a commitment to democratic values and, in some cases, social justice (Domínguez 1997, 5, 35).⁸ Electoral victories won by governments that have carried out market reforms are frequently seen as evidence of the presence of a public consensual support of such programs.⁹ Others, however, express growing concern for both the immediate and longer-term negative implications for democracy of economic crisis and market reform owing to the presence of a variety of features considered inimical to democratic consolidation. These features, in addition to economic inequality, include the concentration of decision-making authority in the hands of technocrats who monopolize the policy agenda combined with the increased role and policy influence of powerful economic conglomerates (Centeno and Silva 1998, 10–12; Przeworski et al. 1995, 73, 83; Haggard and Kaufman 1995, 340–41; O’Donnell 1994b, 252).

The persistence of a variety of nondemocratic features combined with a high degree of social inequality, with its attendant social problems, may threaten the state’s capacity to continue carrying forward a market reform agenda in the second phase of reform. A tendency to bypass or manipulate democratic deliberative mechanisms may eventually translate into opposition that can no longer be ignored, especially if sustained economic prosperity is not in the offing. The legitimacy of market reform and of the regime that implements it becomes vulnerable especially if the public perception is that certain groups have privileged access to the policy process and have benefited inordinately from reforms in a context widely viewed as permeated by cronyism. According to Peter Evans, the state must have links of a certain type with societal groups for it to be able to transform society successfully. Evans speaks of the importance of the “embedded autonomy” of the state, involving a combination of internal coherence and external connectednes...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Tables
• Preface
• Acronyms and Abbreviations
• 1. Politics and Market Reform in Latin America
• 2. Setting The Stage: Historical Legacies
• 3. The International Context: Policy-Based Lending, Policy Dialogue, and International Policy Networks
• 4. Market Reform in Chile: From Military Rule to Concertación
• 5. Market Reform and Political Transition in Argentina: From Military Rule to Menemismo
• 6. Mexico Market Reform in an Authoritarian Liberalizing Regime
• 7. Managing The Politics of Market Reform
• 8. Freeing Markets and Facing The Challenges of Second-Stage Reform
• Appendix 1. Breakdown of Interviews
• Appendix 2. Economic Indicators
• Appendix 3. World Bank OfficialsWorking on Chile, Argentina, and Mexico, 1985–1995
• Notes
• References
• Index