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The Politics of Market Reform in Fragile Democracies:
Argentina, Brazil, Peru, and Venezuela
Kurt Weyland

Book Description | Reviews | Table of Contents

COPYRIGHT NOTICE: Published by Princeton University Press and copyrighted, © 2002, by Princeton University Press. All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher, except for reading and browsing via the World Wide Web. Users are not permitted to mount this file on any network servers. Follow links for Class Use and other Permissions. For more information, send e-mail to permissions@press.princeton.edu

Chapter 1

THE PUZZLE OF RISKY REFORMS IN UNSTABLE DEMOCRACIES

What explains the surprising willingness of several Latin American democracies to enact harsh neoliberal reforms? What accounts for the high level of approval that these costly measures initially elicited in some countries, especially Argentina, Peru, and Brazil, whereas similar policies provoked rejection and protest in Venezuela? And why did structural reforms advance quickly in Argentina and Peru, but much more haltingly in Brazil and especially in Venezuela? My study explores these important and intriguing questions by analyzing the politics of economic policy-making in Argentina, Brazil, Peru, and Venezuela, the major Latin American democracies that enacted market reforms in the late 1980s and 1990s.

Many observers had assumed that democratic governments would avoid implementing painful adjustment measures for fear of massive popular disapproval. In this view, only dictatorships--such as the Pinochet regime in Chile (1973-90)--had the power to impose draconian neoliberal reforms (Foxley 1983: 16, 102; Pion-Berlin 1983; Sheahan 1987: 319-23). The refusal of new democracies in Argentina, Brazil, and Peru to enact orthodox adjustment policies in the second half of the 1980s seemed to confirm this argument.

Yet contrary to these expectations, several democratic governments initiated and successfully implemented neoliberal shock programs in Latin America during the last decade. After their predecessors had hesitated for years, the governments of Carlos Saúl Menem in Argentina (1989-99), Fernando Collor de Mello in Brazil (1990-92), Alberto Fujimori in Peru (1990-2000), and Carlos Andrés Pérez in Venezuela (1989-93) imposed drastic stabilization plans shortly after taking office. Unexpectedly, these painful policies aroused little protest and much support--or at least acquiescence--in Argentina, Brazil, and Peru, while triggering unprecedented riots in Venezuela. And despite the hardships that orthodox adjustment caused, presidents Menem and Fujimori managed to win convincing reelection victories in fairly open, democratic contests, whereas presidents Collor and Pérez faced widespread opposition and suffered impeachment on corruption charges.1 The politically successful adoption of market reform in some Latin American countries, but not in others, constitutes one of the most important puzzles currently facing the field of comparative politics (Remmer 1995: 114). What accounts for this surprising turn of events? And what explains the divergence in outcomes, especially the political triumph of market reformers Menem and Fujimori compared to the political failure of their counterparts Collor and Pérez?

To what extent democracy and capitalism--and the processes of instituting them--are compatible represents a crucial question for political science (Almond 1991; Offe 1991; Armijo, Biersteker and Lowenthal 1994; Oxhorn and Starr 1999). Some observers emphasize the commonalities between democracy and a capitalist market economy, which are both based on individual liberty and unfettered initiative. Theoretically, the main classes nurtured by modern capitalism--private business, industrial workers, and middle sectors--arguably have a stronger interest in democracy than the classes that predominated before, especially traditional landowners (Johnson 1958; Lipset 1981; Rueschemeyer, Stephens, and Stephens 1992). In fact, the two systems have successfully coexisted for decades in the advanced industrialized countries of the North Atlantic region.

Other theorists stress the tensions between democracy, which grants equal political rights to all citizens, and market capitalism, which allows for--and perhaps requires--considerable socioeconomic inequality.2 This discrepancy may be particularly consequential in less developed countries that suffer from large-scale poverty and severe social inequality. In addition, democracy makes drastic change difficult because it institutes a separation of powers and thus deconcentrates political authority. Furthermore, by allowing for widespread political participation, it gives the sectors who lose from market reform political voice and potentially the capacity to hinder or block further change. In these ways, democracy may impede marketization, that is, the political process of instituting a capitalist market economy.

By examining how--and how successfully--fragile democracies in major Latin American countries instituted neoliberal programs, this book analyzes the preconditions for a convergence of democracy and free-market capitalism in a less developed region. What has allowed market reform to proceed under democracy in several Latin American nations at certain historical conjunctures, but not in other countries or at other points in time? Are the institutional powers of the government and its organizational mechanisms for garnering support, such as political parties, decisive (Haggard and Kaufman 1995)? Do deep economic crises paradoxically provide a golden opportunity for imposing painful adjustment measures (Drazen and Grilli 1993)? Or are the political skills of individual leaders more important (cf. Grindle and Thomas 1991)?

To answer these and other important questions, the book assesses a variety of theoretical arguments derived from economic-structural, political-institutional, ideational ("cultural"), rational-choice, and cognitive-psychological theories. Economic arguments emphasize that severe economic problems resulting from external dependency and strong pressures from international financial institutions forced Latin American governments to adopt orthodox adjustment (Stallings 1992). Political-institutional theories argue that the successful enactment of neoliberal reform depended on the institutional powers of chief executives and the support provided by strong political parties (Haggard and Kaufman 1995). Ideational accounts stress that political elites and citizens learned from the economic failure of state interventionism and therefore embraced neoliberal ideas (Kahler 1992: 123-31). Rational-choice arguments claim that, given severe economic crises, politicians rationally chose drastic shock programs over gradual market reform in order to minimize the political costs of structural adjustment and to reap political benefits by using neoliberal measures to weaken their adversaries (Przeworski 1991: 162-80; Geddes 1994a). Finally, cognitive-psychological findings suggest that severe economic crises induced political leaders to initiate--and common people to support--neoliberal shock programs despite their tremendous economic and political risks and despite the feasibility of more prudent, less painful adjustment policies (Weyland 1996d).

In examining these divergent theories, the study addresses some of the paradigmatic debates in political science, especially the discussion about the relative importance of structural and institutional constraints vs. political agency and choice, and the question of rationality in politics. As regards the debate about structure vs. choice, the current predominance of institutionalist approaches and the legacies of economic-structural theories leave little room for leadership. These constraint-oriented arguments account fairly well for normal politics, which tends to proceed in regular, consolidated patterns. But are they fully convincing in crises, when the existing parameters of politics are up for grabs? In such extreme situations, can leaders take advantage of severe challenges to evade, override, or even reshape the constraints they are facing? Can they create a new institutional framework that sets lasting parameters for normal politics in the future? If so, crises constitute critical junctures (Collier and Collier 1991) that have enduring legacies in institutional structures and policy patterns, giving rise to a historical pattern of "punctuated equilibrium" (Krasner 1984: 240-43).

As regards the issue of rationality, do leaders and their followers or opponents among the citizenry act in line with strict cost-benefit assessments and expected utility calculations in their decision-making? Or do they display some of the deviations from conventional rationality postulates that cognitive psychologists have consistently found? By exploring the extent to which rationality principles or psychological regularities are reflected in the politics of market reform, this study speaks to the emerging debate between adherents of rational choice and cognitive-psychological theorists of decision-making (Hogarth and Reder 1987; Cook and Levi 1990; Wittman 1991; Levy 1992: 296-99; Morrow 1995; Friedman 1996; Levy 1997; Kahneman and Tversky 2000). Whereas rational-choice approaches deliberately start from simplifying, ideal-typical assumptions about decision-making and strategic interaction, psychological theories are based on empirical findings about human cognition and action. Rational-choice approaches have been on the advance in political science during the last two decades, but they are facing new challenges from cognitive-psychological decision theories. Ironically, the latter theories have had a particularly strong impact on economics, the field from which political scientists borrowed the principles of rational choice. The rapid spread of this new "behavioral economics" in recent years (Economist 1999; McFadden 1999; Lowenstein 2001; Uchitelle 2001) may soon prompt the import of cognitive-psychological theories in political science, which has so far been infrequent. In fact, while those theories have attracted increasing attention in the field of international relations (Stein and Pauly 1993; Farnham 1994; Berejikian 1997; Levy 1997; McDermott 1998; Haas 2001), the present study is, to the best of my knowledge, the first book-length effort to apply some of these insights in the area of comparative politics.3

The Main Argument

My research suggests that economic-structural, political-institutional, ideational, and rational-choice theories alone cannot provide a satisfactory account of the puzzles under investigation, although they do offer many important insights. Structural, institutional, and ideational factors merely set the stage for leaders' choices and citizens' judgments. While guided to a considerable extent by self-interests, these choices and judgments in turn reflect some of the deviations from strict rationality that cognitive psychologists have found. Thus, my research suggests the need to design a new explanation for adjustment politics by drawing from cognitive-psychological insights.

This new explanation rests on the robust psychological finding of risk-seeking in the domain of losses and risk aversion in the domain of gains (Kahneman and Tversky 1979, 2000; Tversky and Kahneman 1992; Payne, Bettman, and Johnson 1992: 96-97, 122): Whereas people who face the danger of losses prefer risky choices, people who can choose between different options of gains tend toward great--often excessive--caution. Accordingly, severe problems that pose grave threats of further deterioration tend to induce people to take particularly bold countermeasures. In politics, however, incumbents whose earlier policy choices contributed to the economic deterioration tend to persist in these courses of action even when they prove unpromising, thus "throwing good money after bad." With few exceptions, only new chief executives, who are untainted by past mistakes, escape from this "status quo bias" (Samuelson and Zeckhauser 1988; Arkes and Blumer 1985: 130-32; Thaler 1992: 63-78) and display unfettered risk-seeking in the domain of losses.

Thus, the intersection of two conditions--the assumption of power by a new leader and the eruption of severe problems that put this leader in the domain of losses--is crucial for the initiation of drastic adjustment. Since severe problems often trigger elite renovation, the crisis factor appears as the main cause for the adoption of drastic market reform. Cognitive-psychological results thus provide a microfoundation for crisis arguments, which scholars commonly advance in order to account for bold policy reform (Bates and Krueger 1993: 452-54, 457; Callaghy 1990: 263, 317; Grindle and Thomas 1991: chap. 4; Haggard and Kaufman 1995: 199-201; Waterbury 1993: 35, 67, 138, 157-58, 192, 265-66).4

Specifically, grave economic crises that threatened to cause rapid further deterioration motivated new political leaders to abandon the caution displayed by their predecessors and to enact tough, bold, and risky neoliberal programs of stabilization and restructuring. These drastic, daring adjustment plans held the uncertain promise of ending the crisis and turning the country around, but they also risked further disorganizing the economy, unleashing a full-scale collapse of production and consumption, and triggering social unrest and political turmoil, especially in politically unstable less developed countries. Where acute open crises prevailed, however, clear prospects of losses induced many citizens to endorse the painful, risky policies imposed by their new leaders. By contrast, where the predecessor government had hidden severe imminent problems from the citizenry and many people therefore did not see themselves in the domain of losses, preemptive adjustment measures elicited rejection and protest (Weyland 1996d).

The cognitive-psychological findings of risk-seeking in the domain of losses and risk aversion in the domain of gains also help account for the political fate of neoliberal reform in the medium run. Where drastic adjustment to a deep, open crisis eventually produced stabilization and recovery, political leaders entered the domain of gains, became more cautious and risk-averse, and therefore shied away from completing the program of drastic reforms recommended by their neoliberal advisers and the international financial institutions (IFIs). Similarly, more and more citizens turned risk-averse and accepted the new status quo, that is, the core of the market model instituted so far (but not additional neoliberal reforms). This widespread acquiescence prevailed despite persistent economic and social problems, which structural adjustment often exacerbated. This turn to risk aversion also induced a majority of people to vote for the experienced incumbent--e.g., presidents Menem and Fujimori--rather than making a risky electoral choice by supporting the untested opposition.

My research thus suggests that cognitive-psychological findings provide the core of a new explanation for the politics of neoliberal reform. As an account of political decision-making, however, this argument cannot stand alone. Indeed, the hypothesized shifts in leaders' and citizens' propensities toward risk depend on changes in the context of choice, which can put people from the domain of gains into the domain of losses, and vice versa. These contextual changes are conditioned by economic-structural, political-institutional, and ideational factors and developments. Thus, the cognitive-psychological arguments invoked in this study necessarily call for an integration of "choice" and "structure" (cf. Berejikian 1992: 652-55).

How did economic-structural, ideational, and political-institutional factors shape the context of leaders' and citizens' choices? As regards economic factors, the external debt problem and flawed domestic policies eventually caused deep economic crises, which culminated in hyper-inflation in Argentina, Brazil, and Peru, but not in Venezuela. Depending on their severity, these economic crises put new political leaders and a larger or smaller fraction of common citizens in the domain of losses. As for ideational factors, learning from the failed heterodox adjustment efforts undertaken in Argentina, Brazil, and Peru--and pressures from IFIs--foreclosed some potential responses to these crises and put a premium on neoliberal recipes. And as regards political factors, presidents' institutional powers conditioned the ways and means through which they sought to enact adjustment measures despite opposition. Furthermore, the structure of the party system, combined with the severity of the crisis, influenced the political support that leaders could muster. Finally, democratization strengthened the responsiveness of politicians to the large mass of voters, who were concerned about deep, open economic crises, and weakened the political stranglehold of vested interest groups with a strong stake in the established development model.

In these ways, economic-structural, ideational, and political-institutional factors set the stage for the choices of leaders and citizens and conditioned the impact of these choices. My project therefore embeds cognitive-psychological findings in elements of those approaches. It thus designs a complex yet systematically integrated explanation for the initiation and political fate of market reform in contemporary Latin America.

As is obvious, the central argument of this book stresses the role of grave, acute problems--crises--in triggering bold reforms. By demonstrating how these situational conditions affect individual choices, my prospect-theory interpretation provides a firm microfoundation for widely used crisis arguments (see citations above). While those accounts have great plausibility and ample empirical support, they do not systematically specify the mechanisms through which worsening problems prompt reform attempts; in particular, they are rarely grounded in theories of individual choice. Thus, it often remains unclear why, exactly, leading decision-makers responded to crises with bold countermeasures and why the citizenry sometimes--but not always--supported these rescue efforts. Crisis arguments have therefore been criticized as insufficiently specified and functionalist (Rodrik 1996; Corrales 1996: chap. 4). By invoking the cognitive-psychological finding of risk acceptance in the domain of losses, the present study fills this lacuna and explains systematically how individuals--both political leaders and common citizens--respond to crises. It thus puts crisis arguments on a strong footing. In fact, since my prospect-theory explanation rests on well-established empirical findings, not on unrealistic ideal-typical postulates, it provides a more solid microfoundation for crisis arguments than rational choice, which has turned the demand for such microfoundations into a powerful weapon against competing approaches. Most of those frameworks, especially economic structuralism, culturalism, and historical institutionalism, do not start from methodological individualism; therefore, they lack microfoundations and remain exposed to criticism from rational choice. By contrast, this book fulfills the demand advanced by advocates of rational choice: its central argument starts from a theory of individual choice. Yet by drawing on the amply corroborated insights of prospect theory, this new microfoundation offers a firmer basis for empirical analysis than conventional rational-choice models.

Research Design

To assess the cognitive-psychological arguments that the present study elaborates, scholars could examine countries that differ starkly in historical background, cultural traditions, development level, economic structure, and political-institutional framework.5 Yet while an analysis that applies such a most different systems design promises to yield broadly generalizable results (Przeworski and Teune 1982: 34-39), it has some unavoidable limitations. Above all, such an investigation focuses on one set of variables only and necessarily neglects many other factors that influence the political success of neoliberal reform.

This book seeks to put flesh around these bare bones by embedding cognitive-psychological insights in a structural, institutional, and ideational context. Rather than pursuing a strictly analytical goal, the purpose of the present study is synthetic. The attention to causal complexity and to context factors, which differ widely across regions, requires a much narrower focus than a cross-regional comparison. By investigating countries that share many background factors and that actually initiated neoliberal reform, this study applies a most similar systems design. In this way, it seeks to elucidate the political conditions and repercussions of the specific market reforms enacted and implemented in four major Latin American countries. Thus, the current study is more case-oriented than variable-oriented (cf. Ragin 1987).

Argentina, Brazil, Peru, and Venezuela have many historical, cultural, economic, social, and political characteristics in common, such as Iberian colonization, predominance of Catholicism, significant import-substitution industrialization, advanced "social mobilization" (Deutsch 1961), serious problems of debt and dependency, similar constitutional structures (for instance, presidential systems), and exposure to common ideational trends (for instance, the temporary attraction and later rejection of heterodox recipes). These commonalities make it easier to assess the causal impact of the remaining differences--such as the severity of economic problems, or the strength of party systems--on the political processes and outcomes of market reform. It is also reasonable to assume causal homogeneity among the four countries: Causal factors are likely to have the same type of effect in these similar settings. Statistical analyses of large samples of different cases, by contrast, make this assumption of causal homogeneity with much less justification (Ragin 1987: chap. 4).

Small-N comparison among most similar cases is especially well-suited for the fine-tuned causal analysis required for investigating the reasons for the political success of market reforms in some countries and their (at least temporary) failure in others (see in general Ragin 1987: chap. 3; Collier 1998; Collier, Brady, and Seawright 2002). In particular, it is attentive to context factors from which statistical analysis tends to abstract. Yet the capacity of small-N comparison to isolate the causal impact of specific variables is hampered by potential interaction effects among the factors shaping the few cases under investigation. This high level of complexity makes analytical controls precarious (Ragin 1987: 42-44, 49-51; Lieberson 1991). As a result, causal inferences cannot be as rigorous and scientific as in statistical analysis--which, however, in its abstraction of variables from their context also suffers from serious problems (Ragin 1987: 61-67; McKeown 1999).

In compensation for this analytical problem, small-N analysis can directly analyze and reconstruct the process of political decision-making, which statistical studies infer by correlating "inputs" and "outputs." By contrast, in-depth qualitative research provides evidence for the operation of different causal factors. For instance, if government officials report that they watered down a draft bill because business leaders expressed their opposition in a meeting with the chief executive, interest group pressure most likely had substantial influence on policy-making. Or if decision-makers justify their abandonment of a policy by referring to its failure in another country, learning seems to play an important role. Thus, field researchers can ascertain causal mechanisms more directly than can scholars who apply the logic of statistical analysis (cf. King, Keohane, and Verba 1994).

The present study, by resorting to process tracing (George 1979; Collier, Brady, and Seawright 2002), therefore complements the combinatorial logic that underlies the scientific effort to isolate causal factors. Based on extensive field research that included interviews with key decision-makers, the book provides a longitudinal analysis of the unfolding of neoliberal reform efforts. By accounting for the twists and turns of reform politics, this approach focuses on the operation of specific causal factors at certain points in time and thus permits a tentative sequential isolation of these factors.6 Also, process tracing is particularly attuned to the path dependency that characterizes contextually embedded political processes: earlier decisions delimit later choice options, and prior experiences influence the content of later decisions through political learning. Statistical analysis, which assumes independence among cases and therefore has difficulty dealing with learning--which causes problematic autocorrelation--seeks to abstract from sequential causation. Case-oriented examination, by contrast, better captures factors such as learning, which result from conscious efforts at improving problem solving and which are among the most interesting features of politics. For all of these reasons, the present study relies primarily on small-N comparison.

Case Selection

What cases are most promising and useful for a small-N investigation of the politics of neoliberal reform under democracy? Most African countries are excluded because they moved to democracy only recently, if at all. Ghana, for instance, the showcase of neoliberal adjustment on the continent (Herbst 1993; Callaghy 1990: 271-86), initiated orthodox policy changes in 1983 but held its first reasonably free, honest, and fair presidential election only in 1992--and even this contest was rejected by the opposition as tainted (see Jeffries and Thomas 1993 vs. Oquaye 1995). Asian countries do not qualify because--despite their export-oriented development strategies--they have never enacted anything resembling neoliberal reform (see Wade 1990), at least until the financial crisis of late 1997. Only Latin America or Eastern Europe could therefore be the focus of the small-N investigation conducted in this book. The stark differences between these regions make it impossible to use a cross-regional sample for the similar systems design applied in this study (cf. Lijphart and Waisman 1996: 3-6; Offe 1991; Bartlett 1997: 5-13). Arguably, Latin American nations share more similarities than East European countries, which differ starkly in the salience of ethnic cleavages and the push and pull caused by international political and economic factors, as evident in their different relations with Russia,7 NATO, and the European Union (Baer and Love 2000). By contrast, Latin America provides a better sample of cases for a most similar systems design.

Among Latin American countries, Argentina, Brazil, Peru, and Venezuela constitute the most similar cases for the purposes of this investigation. Mexico and Chile were not democratic at the time their governments initiated and enacted most neoliberal reforms. Colombia had since 1967 pursued a much more export-oriented development strategy than the rest of Latin America (Urrutia 1994; Juarez 1993). Therefore, the neoliberal reforms adopted since 1990 have had lower costs, triggered weaker opposition, and elicited stronger support. Consequently, they carried much less political risk and unleashed a different political dynamic than the more comprehensive, drastic, and painful adjustment measures decreed in the rest of the continent. Finally, Ecuador and especially Bolivia are at lower development levels and have less complex economies than the countries under investigation. Therefore, they do not form part of the group of most similar cases constituted by Argentina, Brazil, Peru, and Venezuela.

For the questions addressed in this study, those four countries are most similar inside Latin America. But they also differ along some important dimensions. It is precisely this combination of similarities and differences that facilitates causal inference. In addition to many common historical and cultural background characteristics, all four countries underwent considerable import-substitution industrialization between the 1930s and the 1970s; suffered severe economic problems in the 1980s; were democratic for at least five years before the time of reform initiation; had an institutionalized state apparatus, important nonpersonalistic parties, and a large number of interest organizations and social movements; and experienced broad mass participation in politics.

The differences among these countries concern factors that are often seen as crucial for explaining the initiation of determined policy reform, namely, the depth and severity of the economic crisis; the strength and configuration of the party system; and leadership strategies (see, e.g., Grindle and Thomas 1991; Haggard and Kaufman 1995). First, Argentina, Brazil, and Peru suffered from graver economic problems than Venezuela; above all, hyperinflation erupted in the former three countries, whereas Venezuela never experienced a price explosion, despite strong repressed inflation. Among the three hyperinflationary cases, Argentina and Peru experienced economic stagnation or decline during the 1980s, whereas Brazil achieved some net growth. Second, two strong parties long predominated in Argentina and Venezuela, whereas a host of mostly weak parties prevailed in Brazil and Peru.8 Third, presidents Fujimori and Menem placated and allied with some crucial powers-that-be, especially big business groups and the military, whereas President Collor kept these actors at bay in a quest for complete personal autonomy. The following investigation assesses the extent to which these differences account for the dissimilar processes and outcomes of market reform in the four countries.

Central Concepts

Democracy

Following the literature on transitions from authoritarian rule, especially O'Donnell and Schmitter (1986: 7-14), Mainwaring (1992: 295-98), and Przeworski (1997), this study uses a minimalist, procedural concept of democracy. Specifically, I define democracy as "a set of institutions that, in the context of guarantees for political freedom, permits the entire adult population to choose their leading decision-makers in competitive, honest, regularly scheduled elections and to advance their interests and ideas through peaceful individual or collective action" (Weyland 1996a: 8).

According to this definition, Argentina has been democratic since 1983, Brazil since 1985,9 and Venezuela since 1958. Democracy also prevailed in Peru from 1980 until President Fujimori's autogolpe of April 5, 1992. Scholars disagree on whether and when the country returned to democracy after this openly authoritarian measure (McClintock 1994b: 27-29; Tulchin and Bland 1994; LASA 1995; Palmer 1995; Conaghan 1996; Tuesta Soldevilla 1996; Cameron and Mauceri 1997). The Constituent Assembly election of November 1992 was fairly free and offered voters a wide range of choice. Certainly, several established parties refused to participate, but Peru's "political class" has been so discredited that their decision not to run may have helped, rather than hurt, the opposition, as the dismal showing of the traditional parties in the 1995 elections suggests. The 1992 election can thus be considered minimally democratic. President Fujimori's surprisingly narrow victory in the constitutional plebiscite of October 1993 provided further democratic legitimacy to the regime. Finally, the general elections of 1995 confirmed Peru's return to democracy. In this contest, voters had ample opportunities to cast their ballot for a variety of opposition parties and leaders, but a striking 64.3 percent chose the incumbent.

During the late 1990s, however, Peru suffered an involution that turned the regime ever less democratic. To prepare President Fujimori's second reelection, which the new constitution ruled out, the governmental majority in Congress trampled on institutional rules and democratic principles, especially with the destitution in mid-1997 of three Supreme Court judges who had upheld the 1993 charter (Cameron 1997b: 1-19). In addition, the congressional and presidential contests of 2000 were marred by many irregularities. Several authors therefore classified Peru at the end of the Fujimori government as semi-democratic or outright authoritarian (McClintock 1998; Levitsky 1999). While the freedom of speech, assembly, and press prevailing in Peru, the ample activities of the opposition, and the government's recognition of electoral defeat (as in the municipal contests of 1995 and 1998 in Lima) make the authoritarian label too harsh, the late 1990s certainly saw a political deterioration that threatened to drag Peru below the threshold of full democracy. The ample manipulation used to secure Fujimori's contested electoral victory in mid-2000 and the scandalous corruption discovered shortly thereafter jeopardized fundamental democratic principles. But the unexpected collapse of the Fujimori government interrupted this transition to authoritarian rule, and the clean elections held in mid-2001 restored full democracy.

In sum, the four countries analyzed in this study have been democracies for the period under investigation, with the exception of a nine-month hiatus in Peru in 1992 and a renewed involution at the end of the decade. For most of this time, however, the four democracies were not very stable. Besides the troubles and travails plaguing Peruvian democracy, Argentina's new civilian regime was rocked by several military rebellions in the late 1980s, by large-scale riots in 1989, and by presidential disrespect for institutional rules during the 1990s; Brazil's fledgling democracy suffered dangerous polarization in late 1989, a traumatic presidential impeachment in 1992, and a worrisome power vacuum caused by presidential incompetence in 1993-94; and even Venezuela's seemingly consolidated democracy was shaken by a massive popular uprising in early 1989 and two bloody coup attempts in 1992. Thus, by standard definitions (Linz and Stepan 1996: 5-6), the four countries' democracies were not consolidated during the late 1980s and early 1990s, when chief executives initiated neoliberal reforms. As political actors worried about the survival of competitive politics, democracy remained fragile in Argentina, Brazil, and Peru and became vulnerable again in Venezuela.

Neoliberalism and Market Reform

"Market reform" refers to measures that reduce state intervention in the economy, especially by eliminating or loosening different types of regulations and restrictions (such as import prohibitions and tariffs, labor laws, and rules on foreign investment), by privatizing public enterprises, and by shrinking the public bureaucracy. Market reform thus moves an economy closer to the ideal-type of capitalism, which is characterized by two main dimensions: private ownership of the means of production and decentralized coordination of economic activities, that is, free-market allocation of goods and services. The broad term "market reform," however, specifies only the direction of change, not the end point. A government that enacts market reform does not necessarily intend to install a full-scale free-market economy; it may merely seek to strengthen substantially the market elements in a mixed economy while preserving significant state intervention. By contrast, the narrower term "neoliberal reform" does imply the radical goal of creating a free-market economy.

According to this conceptual distinction, a Communist country that moves toward a Swedish-style social democracy undergoes market reform, but not neoliberal reform. In Latin America, Argentina, Chile, Mexico, and Peru enacted neoliberal reform, and President Collor attempted to do so in Brazil during the early 1990s. Brazil's current president Fernando Henrique Cardoso (1995-present), by contrast, is not trying to establish a full-scale free-market system but is instituting pragmatic market reform that preserves substantial state intervention, including, for instance, governmental support for the automobile industry.

Even in countries that enact neoliberal reform, the state does not abandon all of its earlier responsibilities in economy and society and give the market completely free rein. For instance, in Chile and Mexico--two prototypical cases of Latin American neoliberalism--the state has continued to own and run the enterprise producing the country's most important export--copper and petroleum, respectively. Also, the drastic reduction of state interventionism that neoliberal reform does entail need not weaken the state's strength. Instead, the state may gain political clout by retreating from excessive interventionism and by concentrating on its core attributions. Above all, budget austerity and tax reforms may well strengthen the fiscal resources of the state and thus allow it to reassert its authority, which had declined greatly during the crisis preceding market reform. In sum, by becoming leaner, the state may turn "meaner," that is, more powerful (Acuña and Smith 1994: 20-22; Mauceri 1995; Weyland 1996b: 16-17).

Market and neoliberal reforms have, in principle, different phases, especially stabilization and structural reform. Stabilization measures are efforts to rectify macroeconomic disequilibria, such as skyrocketing inflation, spiralling fiscal deficits, or exploding imbalances in a country's external accounts. These measures combat immediate, acute problems and seek to attain success in the short or medium run. Structural reforms, by contrast, seek to transform a country's development model by reshaping major economic, social, and political institutions. Important examples include the privatization of state firms; legal changes to make the central bank independent from governmental interference; the "flexibilization" of labor laws that used to guarantee ample social rights; reforms of tax laws and fiscal administration; and efforts to combat political corruption and guarantee the rule of law. Structural reforms are expected to have a long-term impact.

While stabilization and structural reform constitute logically distinct phases of market reform, they often overlap in practice. Indeed, governments commonly use structural reforms for purposes of stabilization. In Latin America, for instance, several governments intensified trade liberalization in order to allow for the influx of cheap imports and thus force domestic prices down. As another example, the Menem government justified its partially successful effort to reduce labor regulations with the need to stimulate job creation and thus reduce skyrocketing unemployment. Thus, in political reality, the distinction between stabilization and structural reform is much less clear than in the scholarly literature.

Authors have further differentiated structural reforms into two phases, namely, the dismantling of the old, nationalist, state-interventionist, inward-looking development model and the establishment of the necessary institutional framework for a market economy (see especially Naím 1995; Nelson 1997). Whereas the former task involved drastic acts of destruction, the latter requires patient efforts at reconstruction, especially at institution building. And whereas the first stage of structural reform centers on the economy, the second phase has a broader reach, affecting social and political-institutional spheres as well, for instance through pension privatization and the restructuring of the public administration. Thus, neoliberalism first resurrects the predominance of private property and the market in the economy and then seeks to extend these principles to other areas in order to create propitious social and political-institutional parameters for the new market-capitalist system.

While these two steps thus constitute a logical progression, the new emphasis on institution building that characterizes the second generation of market reforms also reflects some rethinking among academic experts and international financial institutions. Whereas initially the hope prevailed that the installation of a free-market economy would guarantee economic stability and renewed growth, a decade of experience has confirmed the earlier argument that in order to function properly, the market needs to be embedded in economic, social, and political institutions (see World Bank 1997; IADB 2000: 23-29, 163-95; cf. Polanyi 1957). The unfettered pursuit of private self-interest and completely free initiative--coordinated only by market competition--are not sufficient for creating outcomes that are acceptable to society. Instead, the market itself requires cultural, social, and institutional foundations and guidance, for instance guarantees of property rights, the fair adjudication of conflicting claims, and--perhaps--a sense of trust. Due to this rethinking, issues such as the rule of law, crime and violence, corruption, and "social capital" have attracted increasing attention in the development community (e.g., World Bank 1997; IADB 2000). The discussion about the second stage of reforms embodies this renewed attention to the institutional, cultural, and social preconditions of a market economy.

Organization of the Volume

Chapter 2 demonstrates that existing arguments do not provide a fully convincing account of market reform under democracy. To complement the extant economic-structural, political-institutional, ideational, and rational-choice theories, chapter 3 designs a novel explanation based on cognitive-psychological theories of decision-making, especially prospect theory. The chapter embeds this new model of choice in an economic-structural, political-institutional, and ideational context, thus acknowledging the contributions made by the theories that chapter 2 criticized.

Chapters 4 through 8 use this new argument to elucidate the politics of economic policy in Argentina, Brazil, Peru, and Venezuela during the 1980s and 1990s. Chapter 4 provides the necessary background for the analysis of neoliberal reform by examining the emergence of severe economic problems at the beginning of the 1980s; the failed adjustment efforts--both of an orthodox and of a heterodox nature--that governments undertook in the early and middle parts of the decade; and the notable postponement of determined stabilization measures despite the significant economic deterioration at the end of the decade.

Chapter 5 focuses on the eventual enactment of neoliberal reform. It first explains the rise of political outsiders who were willing to discard established policy patterns, embark on drastic stabilization, and initiate radical market reform. An in-depth investigation of the perceptions, risk propensities, and decisions of the new chief executives follows. Finally, the chapter analyzes in a similar perspective the reactions of common citizens to these painful, risky adjustment programs. Chapter 6 examines the next step in the reform sequence, namely, the efforts to restructure the established development model, which were undergirded by a populist political strategy. The discussion shows how market reforms serve to weaken opponents of personalistic leaders and to strengthen their mass support, thus boosting their plebiscitarian leadership. The chapter also documents that structural reforms advanced much farther in Argentina and Peru than in Brazil and Venezuela; this uneven progress was due to the differential severity of the structural problems facing the four countries, not to institutional characteristics, as many authors claim.

Chapter 7 analyzes the reasons for the political sustainability of the new market model in the two cases of relative success, Argentina and Peru. It explains how presidents Menem and Fujimori engineered their own reelection; how the basic outline of the new development scheme attained relatively firm support, despite renewed economic difficulties; and how Menem's and Fujimori's populist leadership weakened and decayed in the second half of the 1990s. Chapter 8 examines the stop-and-go process of market reform among the two laggards, Brazil and Venezuela. After the initial push for neoliberalism failed politically in the early 1990s, Brazil experienced a slowdown and Venezuela a drastic reversal of efforts to restructure the old development model. But continued economic deterioration prompted the resumption of market reform in the middle of the decade. Determined stabilization measures were followed by only half-hearted structural reforms, however. The Brazilian and Venezuelan economies therefore remained vulnerable, and external shocks in the late 1990s caused a new round of serious economic difficulties. Especially in Venezuela, the future of the market model therefore remained unclear.

Chapter 9 draws theoretical conclusions from the extensive empirical investigation. The first part comments on the usefulness of prospect theory for political analysis; shows how this cognitive-psychological theory can strengthen crisis arguments and helps to reformulate the valid yet too rashly discarded insights of functionalism; and discusses under what conditions its arguments are analytically preferable to those of rational choice. An extensive second part demonstrates the applicability of my prospect-theory argument to a much wider range of cases, drawn from Latin America, Africa, and Eastern Europe. While economic-structural, political-institutional, and ideational context factors would obviously have to be considered for a comprehensive analysis of reform politics in those nations, the novel insights developed in this book seem to have more general validity far beyond the four cases studied in-depth below.

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File created: 8/7/2007

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