Stabilization tactics in Latin America Menem, Cardoso, and the politics of low inflation

Comparative Politics

Volumn 36, Issue 4, 2004, Pages

  Treisman, Daniel ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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[No Author keywords available]

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EID: 3543031030     PISSN: 00104159     EISSN: None     Source Type: Journal    
DOI: 10.2307/4150168     Document Type: Review

References (104)

1. Insightful previous analyses of political tactics include Paul Pierson, Dismantling the Welfare State? Reagan, Thatcher, and the Politics of Retrenchment (New York: Cambridge University Press, 1994); Javier Corrales, "Why Argentines Followed Cavallo: A Technocrat between Democracy and Economic Reform," in Jorge Dominguez, ed., Technopols: Freeing Politics and Markets in Latin America in the 1990s (University Park: Penn State Press, 1997), pp. 49-94; Javier Corrales, "Coalitions and Corporate Choices in Argentina, 1976-1994: The Recent Private Sector Support of Privatization," Studies in Comparative International Development, 32 (1998), 24-51; Hector Schamis, "Distributional Coalitions and the Politics of Economic Reform in Latin America," World Politics, 51 (1999), 236-68.
2. Insightful previous analyses of political tactics include Paul Pierson, Dismantling the Welfare State? Reagan, Thatcher, and the Politics of Retrenchment (New York: Cambridge University Press, 1994); Javier Corrales, "Why Argentines Followed Cavallo: A Technocrat between Democracy and Economic Reform," in Jorge Dominguez, ed., Technopols: Freeing Politics and Markets in Latin America in the 1990s (University Park: Penn State Press, 1997), pp. 49-94; Javier Corrales, "Coalitions and Corporate Choices in Argentina, 1976-1994: The Recent Private Sector Support of Privatization," Studies in Comparative International Development, 32 (1998), 24-51; Hector Schamis, "Distributional Coalitions and the Politics of Economic Reform in Latin America," World Politics, 51 (1999), 236-68.
3. Insightful previous analyses of political tactics include Paul Pierson, Dismantling the Welfare State? Reagan, Thatcher, and the Politics of Retrenchment (New York: Cambridge University Press, 1994); Javier Corrales, "Why Argentines Followed Cavallo: A Technocrat between Democracy and Economic Reform," in Jorge Dominguez, ed., Technopols: Freeing Politics and Markets in Latin America in the 1990s (University Park: Penn State Press, 1997), pp. 49-94; Javier Corrales, "Coalitions and Corporate Choices in Argentina, 1976-1994: The Recent Private Sector Support of Privatization," Studies in Comparative International Development, 32 (1998), 24-51; Hector Schamis, "Distributional Coalitions and the Politics of Economic Reform in Latin America," World Politics, 51 (1999), 236-68.
4. Insightful previous analyses of political tactics include Paul Pierson, Dismantling the Welfare State? Reagan, Thatcher, and the Politics of Retrenchment (New York: Cambridge University Press, 1994); Javier Corrales, "Why Argentines Followed Cavallo: A Technocrat between Democracy and Economic Reform," in Jorge Dominguez, ed., Technopols: Freeing Politics and Markets in Latin America in the 1990s (University Park: Penn State Press, 1997), pp. 49-94; Javier Corrales, "Coalitions and Corporate Choices in Argentina, 1976-1994: The Recent Private Sector Support of Privatization," Studies in Comparative International Development, 32 (1998), 24-51; Hector Schamis, "Distributional Coalitions and the Politics of Economic Reform in Latin America," World Politics, 51 (1999), 236-68.
5. Donald Goes, Macroeconomic Crises, Policies, and Growth in Brazil, 1964-90 (Washington, D.C.: World Bank, 1995), p. 91.
6. Brazilian monetary authorities define M2 to include currency outside banks, demand deposits, liquid investment accounts, and government securities.
7. Alfredo Filho, Currency Stabilisation under Conditions of International Capital Mobility: The Case of Brazil (London: South Bank University, 1998).
8. Eliana Cardoso, "From Inertia to Megainflation: Brazil in the 1980s" (Cambridge: NBER, 1991).
9. Filho, p. 6.
10. World Bank, Argentina: The Convertibility Plan, Assessment and Potential Prospects (Washington, D.C.: World Bank, 1996).
11. Provincial budget deficits increased later. However, they appear not to have exceeded 1.6 percent of GDP until at least 2000.
12. Thomas Havrilesky, "A Public Choice Perspective on the Cycle in Monetary Policy," Cato Journal, 9 (1990), 709-18.
13. Allan Drazen and Vittorio Grilli, "The Benefit of Crises for Economic Reform," American Economic Review, 83 (1993), 598-607.
14. Stephan Haggard and Steven Webb, "What Do We Know about the Political Economy of Economic Policy Reform?," World Bank Research Observer, 8 (1993), 143-68.
15. Alberto Alesina and Allan Drazen, "Why Are Stabilizations Delayed?" American Economic Review, 81 (1991), 1170-88.
16. Alex Cukierman and Mariano Tommasi, "Credibility of Policymakers and of Economic Reforms," in Federico Sturzenegger and Mariano Tommasi, eds., The Political Economy of Reform (Cambridge, Mass.: MIT Press, 1998), p. 329.
17. Ricardo Lopez Murphy and Federico Sturzenegger, "The Feasibility of Low Inflation: Theory with an Application to the Argentine Case," in Sturzenegger and Tommasi, eds.
18. George Tsebelis, Veto Players: How Political Institutions Work (Princeton: Princeton University Press, 2002); Susanne Lohmann, "Federalism and Central Bank Independence: The Politics of German Monetary Policy, 1957-92," World Politics, 50 (1998), 401-46.
19. George Tsebelis, Veto Players: How Political Institutions Work (Princeton: Princeton University Press, 2002); Susanne Lohmann, "Federalism and Central Bank Independence: The Politics of German Monetary Policy, 1957-92," World Politics, 50 (1998), 401-46.
20. Karen Remmer, "The Political Economy of Elections in Latin America, 1980-91," American Political Science Review, 87 (1993), 393-407, studied whether inflation followed the electoral cycle in Latin American countries in the 1980s and found mixed evidence.
21. Menem certainly did not think that traditional left-wing constituencies would support neoliberal policies and so deliberately dissembled about his plans before the 1989 election. Susan Stokes, "What Do Policy Switches Tell Us about Democracy?," in Adam Przeworski, Susan Stokes, and Bernard Manin, eds., Democracy, Accountability, and Representation (New York: Cambridge University Press, 1999), pp. 98-130.
22. James McGuire, "Strikes in Argentina: Data Sources and Recent Trends," Latin American Research Review, 31 (1996), 127-50.
23. Ibid.; the number of general strikes did decline from early in Menem's first term. This decline might suggest he was more credible in selling neoliberalism to top union leaders, or just that his tactical maneuvers to demobilize organized labor were effective.
24. Ibid.; the number of general strikes did decline from early in Menem's first term. This decline might suggest he was more credible in selling neoliberalism to top union leaders, or just that his tactical maneuvers to demobilize organized labor were effective.
25. Latin American Weekly Report, Feb. 21, 1991.
26. New York Times, Oct. 14, 1990.
27. João Resende-Santos, "Fernando Henrique Cardoso: Social and Institutional Rebuilding in Brazil," in Domínguez, ed., pp. 145-94.
28. Peter Kingstone, Grafting Coalitions for Reform: Business Preferences, Political Institutions, and Neoliberal Reform in Brazil (University Park: Penn State Press, 1999), p. 217.
29. Even within a hegemonic military regime, conflict between military factions may create additional veto players. I thank Karen Remmer for this point.
30. Given weak party discipline in Brazil and the multiplicity of parties, coalitions must be painstakingly constructed. See Barry Ames, The Deadlock of Democracy in Brazil (Ann Arbor: University of Michigan Press, 2001).
31. Carlos Acuña, "Business Interests, Dictatorship, and Democracy in Argentina," in Ernest Bartell and Leigh Payne, eds., Business and Democracy in Latin America (Pittsburgh: University of Pittsburgh Press, 1995), pp. 3-48.
32. Kingstone, p. 199.
33. In 1998 the refusal of Governor Itamar Franco of Minas Geraís to pay his state's federal debt triggered a devaluation.
34. In 1990 Collor canceled almost half of Brazil's domestic treasury debt, worth about 10 percent of GDP.
35. Alfred Montero, "Devolving Democracy? Political Decentralization and the New Brazilian Federalism," in Peter Kingstone and Timothy Power, eds., Democratic Brazil: Actors, Institutions, and Processes (Pittsburgh: University of Pittsburgh Press, 2000), p. 64.
36. See Kurt Weyland, "The Brazilian State in the New Democracy," in Kingstone and Power, eds., pp. 36-57. For an excellent summary of Collor's tactics, see Kingstone, eh. 5.
37. The Real Plan also included a sophisticated method of coordinating expectations around a common index of value, the unidade real de valor, thus avoiding the need for a price freeze.
38. Weyland, p. 50.
39. IMF, Brazil: Selected Issues and Statistical Appendix (Washington, D.C.: IMF, 2001), p. 155.
40. Kingstone, p. 205.
41. Armando Pinheiro, The Brazilian Privatization Experience: What's Next? (Rio de Janeiro: BNDES, 2000).
42. Cardoso denounced congress's preoccupation with patronage but provided such patronage himself when necessary.
43. Kingstone, p. 202.
44. For instance, Sarney could draw separate pensions as a former president, governor, senator, and deputy. Fleischer, p. 131.
45. This alliance of Cardoso's social democratic party with clientelistic bosses from the poorer provinces recalls the "metropolitan" and "peripheral" subcoalitions in the Peronist movement under Menem and Perón himself and a similar cross-linkage in Mexico's PRI. The "peripheral" coalition in each case enabled a "left-wing" party to engage in neoliberal reform without damaging its electoral prospects. Edward Gibson, "The Populist Road to Market Reform: Policy and Electoral Coalitions in Mexico and Argentina," World Politics, 49 (1997).
46. Wayne Selcher, "The Politics of Decentralized Federalism, National Diversification, and Regionalism in Brazil," Journal of Inter-American Studies and World Affairs, 40 (1998), 25-50; Timothy Power, "Brazilian Politicians and Neoliberalism: Mapping Support for the Cardoso Reforms, 1995-97," Journal of Inter-American Studies and World Affairs, 40 (1998), 51-72.
47. Wayne Selcher, "The Politics of Decentralized Federalism, National Diversification, and Regionalism in Brazil," Journal of Inter-American Studies and World Affairs, 40 (1998), 25-50; Timothy Power, "Brazilian Politicians and Neoliberalism: Mapping Support for the Cardoso Reforms, 1995-97," Journal of Inter-American Studies and World Affairs, 40 (1998), 51-72.
48. Mainwaring, p. 317.
49. Wendy Dobson and Pierre Jacquet, Financial Services Liberalization in the WTO (Washington, D.C.: Institute for International Economics, 1998). The constitutional decentralization of revenues appeared impossible then to reverse; Cardoso concentrated instead on devolving matching spending responsibilities.
50. IMF, p. 156.
51. In part, the states' debts were written off; in part, states were to repay the federal government at subsidized interest rates.
52. IMF, p. 167.
53. Werner Baer, The Brazilian Economy: Growth and Development (Westport: Praeger, 2001), p. 313.
54. It was also his first; he never even consulted the leading business association, FIESP, when drafting the 1990 stabilization plan. Weyland, p. 45.
55. Peter Kingstone, "Muddling through Gridlock: Economic Policy Performance, Business Responses, and Democratic Sustainability," in Kingstone and Power, eds., p. 200.
56. Ibid., p. 197.
57. Kingstone, Crofting Coalitions.
58. Baer, pp. 306-7.
59. Required reserves rose from an average of 26 percent of deposits in early 1994 to 64 percent in early 1995. Eliana Cardoso, "Virtual Deficits and the Patinkin Effect," IMF Staff Papers, 45 (1998), p. 632.
60. IBGE estimates, from Cardoso, "Virtual Deficits," p. 633.
61. Dobson and Jacquet.
62. Filho, pp. 14-15.
63. Baer, p. 315.
64. Filho, p. 13.
65. There was a significant fiscal adjustment in 1993-94, but in 1995 the operational public sector borrowing requirement jumped from -1.1 to 5.0 percent of GDP. Armando Pinheiro, Fabio Giambagi, and Joana Gostkorzewicz, "Brazil's Macroeconomic Performance in the 1990s" (Rio de Janeiro: BNDES, 2000), p. 19.
66. Kingstone, Crofting Coalitions, p. 218.
67. Victoria Murillo, "From Populism to Neoliberalism: Labor Unions and Market Reforms in Latin America," World Politics, 52 (2000), 135-74.
68. The military might be considered a fifth stakeholder. It wanted continued funding and could threaten coups.
69. See William Smith, "Hyperinflation, Macroeconomic Instability, and Neoliberal Restructuring in Democratic Argentina," and David Pion-Berlin and Ernesto López, "A House Divided: Crisis, Cleavage, and Conflict in the Argentine Army," both in Edward Epstein, ed., The New Argentine Democracy: The Search for a Successful Formula (Westport: Praeger, 1992), pp. 20-60, 63-96. My point is not that these measures were undesirable, just that pursuing them simultaneously was bound to fail.
70. Increasing tensions with the army further complicated matters. Fearing they would be tried along with the junta leaders, junior officers rebelled three times. Alfonsín essentially conceded, raising military wages and passing a law presuming innocence for those who had committed crimes while following orders.
71. Edward Epstein, "Democracy in Argentina," in Epstein, ed., pp. 3-19.
72. Gibson.
73. Consolidated public sector spending on defense and security dropped from 2.4 percent of GDP in 1988 to 2.1 percent in 1993. IMF, Argentina: Recent Economic Developments (Washington, D.C.: IMF, 1998), p. 30.
74. Monica Peralta-Ramos, The Political Economy of Argentina: Power and Class since 1930 (Boulder: Westview, 1992), p. 110.
75. Acuña, p. 30.
76. In fact, the grain companies paid only $370 million of the promised $2.5 billion loan. Peralta-Ramos, p. 153.
77. Manuel Pastor, Jr. and Carol Wise, "Stabilization and Its Discontents: Argentina's Economic Restructuring in the 1990s," World Development, 27 (1999), 487.
78. Corrales, "Coalitions and Corporate Choices."
79. In 1989 private businesses overcharged the government by about $2.5 billion and received an additional S2.2 billion in tax breaks. Ibid., p. 34.
80. Wall street Journal, Aug. 31, 1990, quoted in Peralta-Ramos, p. 117.
81. Juliana Bambaci, Tamara Saront, and Mariano Tommasi. "The Political Economy of Economic Reforms in Argentina" (Buenos Aires: CEDI, 2000), p. 35; Myrna Alexander and Carlos Corti, Argentina's Privatization Program (Washington, D.C.: World Bank, 1993), p. 2.
82. Juliana Bambaci, Tamara Saront, and Mariano Tommasi. "The Political Economy of Economic Reforms in Argentina" (Buenos Aires: CEDI, 2000), p. 35; Myrna Alexander and Carlos Corti, Argentina's Privatization Program (Washington, D.C.: World Bank, 1993), p. 2.
83. This was not true of some electricity companies, whose privatization contracts pegged prices to the dollar. But demand for electricity would have declined as the peso price rose, squeezing profits.
84. In December 1989 one Peronist congressman accused the engineering conglomerate Techint and the Banco General de Negocies of being among the leading speculators. Latin American Weekly Report, Dec. 7, 1989. The next year Techint became deeply involved in privatization, acquiring stakes in transportation companies and utilities. Banco General was among three chosen in 1991 to manage privatization of the electricity company SEGBA.
85. Luis Majul, quoted in Luigi Manzetti, Privatization South American Style (New York: Oxford University Press, 1999), pp. 83-84.
86. UNCTAD, World Investment Report 2001 (New York: United Nations, 2001), p. 302.
87. Llanos, p. 78.
88. I am not suggesting that investors would throw money away by betting on a falling currency or even that major investors engaged directly in currency trading. But their deep involvement in the market and interest in stability helped create confidence among other investors. In late 1996 international banks extended a $6.1 billion contingent repurchase facility to the Argentine central bank to provide emergency liquidity. IMF, Argentina; Recent Economic Developments, p. 6.
89. In late 2001 each held about $2 billion worth of Argentine government debt. Argentina's default in late 2001 was believed likely to cost SCH $4.6 billion and BBVA $3.6 billion. The Economist, Jan. 5, 2002, p. 64.
90. Wall Street Journal, Nov. 8, 2001, p. A16.
91. Morgan Stanley, Global Economic Forum Briefing, Aug. 8, 2001.
92. The Economist, Jan. 5, 2002, p. 64.
93. Menem initially coopted the domestic banking sector with continued protections; he began a more stringent liberalization after the 1994-95 Tequila crisis.
94. World Bank and Argentine Ministry of Economy.
95. IMF, Government Finance Statistics Yearbook, various years.
96. William Dillinger and Steven Webb, Fiscal Management in Federal Democracies: Argentina and Brazil (Washington, D.C.: World Bank, 1999). Poor provinces, with 20 percent of the population, had 58 percent of senate seats. These provinces, along with Buenos Aires province, had a majority in the lower house. Bambaci, Saront, and Tommasi.
97. World Bank, Argentina: The Fiscal Dimension of the Convertibility Plan: A Background Report, vol. 1 (Washington: World Bank, 1998), pp. 53, 57.
98. World Bank, Argentina: Provincial Finances Study, vol. 1 (Washington, D.C.: World Bank, 1996), p.ii.
99. Juan Nicolini et al., "Decentralization, Fiscal Discipline in Sub-National Governments, and the Bailout Problem: The Case of Argentina" (Washington, D.C.: IADB, 2000), p. 8.
100. Ibid., p. 13.
101. Some commentators imply that the laws themselves, for example, the Argentine convertibility law or the 1992 central bank charter, entrenched the commitment to low inflation. However, parliament can repeal laws as well as pass them. In fact, it amended the central bank's charter in 1995 to permit it to provide discretionary advances to banks, precisely what the 1992 version prohibited. In any case, most of the money supply (for example, bank demand deposits) was not covered by hard currency reserve requirements, and up to 20 percent of the peso's backing could consist of the government's own bonds.
102. In Argentina public spending rose from 17.7 to 26.7 percent of GDP in 1989-98.
103. Obviously, governments can not run deficits indefinitely. But sometimes the only feasible path to low inflation may be to incur temporary deficits to buy political support. This path can at times stimulate a virtuous cycle, increasing confidence, investment, growth, and ultimately revenues. Even if it does not, the alternative may be even worse: immediate surrender to hyperinflation, stagnation, and political unrest.
104. Sarney failed by making too many compromises that were not strategically useful. Menem may also have rewarded allies through privatization more generously than strictly necessary.