1999 Fiscal Conference - Sustainable Public Sector Finance in Latin America: Weyland - Political Constraints on Sustainable Public Sector Development in Latin America
Professor Graham’s excellent paper provides a wealth of insights and interesting arguments about threats to the political sustainability of Latin America’s new market systems. Given my limited time, I want to comment on five of his most important points: the considerable cross-country variation in the processes and outcomes of market reform; the need to enhance state capacity in order to make markets work right; the importance of social policies for keeping the new market systems politically viable; the dangers of a traditional-populist backlash against market reforms and, perhaps, democracy; and the general question of the survival of democracy and its compatibility with a market system.
One of the most important contributions of Professor Graham’s paper is his emphasis on and careful analysis of the great variation in the processes and outcomes of “neoliberalism” in Latin America. The processes of market reform differed, ranging from top-down imposition in Peru to negotiation in Brazil. The outcomes of market reform also differ: Argentina and Peru instituted much more radical versions of neoliberalism than Brazil. Since the “neoliberal revolution” in Latin America has not had the same endpoint, the conditions for the political sustainability of the new market system also differ considerably across countries.
These cross-country differences stem partly from long-standing institutional developments, as Professor Graham convincingly demonstrates. This path dependence suggests that markets are always conditioned by their institutional contexts. Specifically, effective state institutions are crucial for making markets work. Public sector reform is therefore very important. By stressing this point, Professor Graham shows that the “orthodox paradox” noted by Miles Kahler is not a transitional issue, but a permanent one (1990, 55). Kahler argued that, paradoxically, the main agent of market reform and state retrenchment must be the state itself. But the need for an effective state exists not only during the process of market reform but also after the market system has been instituted. For instance, it is crucial to have effective governmental regulation of privatized enterprises, reliable guarantees of property rights, an efficient judiciary, and so forth.
In the area of state reform, Latin America confronts two important problems. First, states have too little autonomy from private sector groups. There is too much collusion, and too little transparency and control. This problem becomes evident in the frequent corruption scandals and also in the relaxation of extractive efforts. An important part of the neoliberal package was a recuperation of taxation, which included unprecedented efforts to crack down on tax evasion, especially in Argentina and Peru. But in the last few years, these efforts have weakened, tax evasion has grown again, and fiscal problems have intensified. Thus, there has been some backsliding on fiscal issues that results from diminished state autonomy and that in turn weakens the public sector.
The second problem is states’ low capacity for policy implementation, which results from the clientelist machinations stressed by Professor Graham. Another contributing factor is the exodus of qualified personnel, which was exacerbated by neoliberal austerity measures such as salary compression. Furthermore, there are technical difficulties in designing performance-enhancing reforms, as the sobering experiences of Chile in the 1990s suggest. The Aylwin and Frei governments substantially increased public sector salaries, but with little effect on performance. Frei then introduced incentives for greater “productivity,” but those are difficult to define and implement. Clearly defined incentives may have perverse consequences: for example, measuring the productivity of a surgeon by the number of operations she performs may stimulate an explosion of unnecessary surgeries. By contrast, more qualitative performance evaluations by superiors keep the door open for clientelism and political manipulation. So, in addition to the political difficulties correctly stressed by Professor Graham, there are also serious technical problems that hinder state reform. Even when there is political will to reform the state, the task is exceedingly complicated.
State performance is usually weakest in the social sectors, which have always been misused for political patronage. The contribution of social policy to alleviating poverty is therefore woefully low, even in countries that engage in substantial social spending, such as Brazil. For this reason, social policy reform is imperative. In fact, market reforms often included innovative social programs that were designed to avoid or remedy some of these problems, especially through the targeting of benefits to the very poor and through demand-driven decision-making procedures. To what extent these new antipoverty programs have been effective remains to be investigated in a thorough and systematic fashion. But some of these programs—for instance, in Peru—did for the first time provide benefits to the urban and especially rural poor who had previously been neglected completely. So there have been some initiatives in this area.
Nevertheless, I fully agree with Professor Graham’s call for much greater attention to the tremendous social problems created—or at least not resolved—by market reforms. But I am not sure whether more effective social programs would greatly enhance political support for market reforms. This skepticism is inspired by the Chilean case: the Aylwin and Frei governments increased social spending enormously and seriously sought to improve social policies; in fact, poverty diminished considerably in the 1990s. Nevertheless, there is a widespread sense of malaise in Chile. If we can trust opinion surveys, popular support for the principles and realities of the new market system is surprisingly low. So even if social policies improved in other countries, I am not sure whether political backing for the new market system would solidify.
Where social policies do not improve, could festering social discontent threaten the new market system with a traditional-populist backlash, as in present-day Venezuela? Here, I see less of a risk than Professor Graham does. In most countries, the market system has some strong supporters, and even people who do not really like it acquiesce in it, for several reasons. For instance, international pressures and constraints make a reversal very costly. Domestically, many of the losers have diminishing socioeconomic clout and political influence; for instance, business sectors that cannot withstand foreign competition go bankrupt or sell to foreign investors and thus lose control over their main resource, investment capital. By contrast, winning sectors expand and gain greater political weight. Furthermore, the transitional costs of market reform hinder a reversal. They constitute a sunk “investment” that seems to induce many people to give the new market system a try and reject another round of risky experimentation. Obviously, the absence of a global, realistic alternative to the market system also favors its continued predominance. For all of these reasons, I do not see a high risk of reform reversal or traditional-populist backlash.
In fact, the great variation among country experiences that Professor Graham stresses makes a wave of reform reversals unlikely. The resurgence of traditional populism in Venezuela has very specific Venezuelan roots. This backlash is directed not only against market reform but also—and maybe more so—against discredited, corrupt, ossified, oligarchical party elites. Also, in comparative perspective, Venezuela is one of the Latin American countries where market reform has advanced most haltingly and has always confronted particularly strong opposition. In my view, the election of current president Hugo Chávez reflects less rejection of the new market system than longstanding refusal to enact the market reform program. Since other Latin American countries have overcome this resistance, the resurgence of anti-neoliberal populism in Venezuela does not foreshadow the future of Latin America. Instead, it is a remnant of the past.
Also, President Chávez has not yet defined the economic orientation of his government; he has actually maintained contact with some of the neoliberal experts who had collaborated with market reformer Carlos Andrés Pérez (whom Chávez tried to overthrow in the coup attempt of February 1992). I would not be surprised if after firmly consolidating political power, Chávez decided to embrace determined market reform. A similar turnaround occurred in Ghana in the early 1980s: Jerry Rawlings initially spouted radical-populist rhetoric, but when he noticed that radical populism did not improve the economy, he made a drastic turnaround and adopted orthodox adjustment. Maybe Chávez will act in a similar way and turn into the protagonist of belated market reform in Venezuela.
In general, I see Latin America’s new democracies as more resilient and more compatible with neoliberalism than Professor Graham considers it to be. These new democracies have survived severe economic and political crises as well as brutal adjustment measures that according to most observers in the 1980s would undermine democracy. Also, in most cases, market reforms have elicited much less popular rejection and protest than most scholars expected, making the recourse to authoritarian imposition “unnecessary.” In fact, contemporary Latin America has seen the emergence of a sizable new force, namely, comprehensive, consistent liberalism. As Professor Graham shows in his interesting historical analysis, economic and political liberalism traditionally diverged in the region. Economic liberalism used to be an elite project associated with authoritarian, antiliberal politics; and political liberals were always critical of economic liberalism. But in recent years, economic and political liberalism have converged. For the first time, there are significant party forces that are both economically and politically liberal, for example, the Chilean Concertación and the liberal wing of Renovación Nacional; the Partido da Social Democracia Brasileira and sectors of the Partido da Frente Liberal in Brazil; parts of the Partido Revolucionario Institucional and Partido de Acción Nacional in Mexico and of the Argentine Unión Cívica Radical. The emergence of this unprecedented combination of economic and political liberalism favors both the survival of democracy and the sustainability of market reform.
In sum, I am more optimistic about the future than Professor Graham. His paper correctly stresses the repeated cycles of democratic transition and democratic breakdown, of the adoption and rejection of the market model in Latin American history. But during the last three decades, this historical dynamic has—in my view—changed somewhat, due to the striking failures of the last round of authoritarian regimes and the tremendous problems of the decaying statist, protectionist economic systems. Specifically, there has been a revaluation of liberal democracy and of liberal economics that is unlikely to erode quickly. This value change holds promising prospects for the foreseeable future.
KAHLER, MILES. 1990. “Orthodoxy and Its Alternatives: Explaining Approaches to Stabilization and Adjustment.” In Economic Crisis and Policy Choice, edited by Joan M. Nelson. Princeton, NJ: Princeton University Press.