CONFERENCE ON DEMOCRATIC TRANSITION AND CONSOLIDATION
Working Group 8: Economic and Social Conditions
Coordinator: Jose Maria Maravall
Some Comments On The Politics Of Economic Reform
Juan Carlos Torre
1. To examine the politics of economic reform, I will base my comments on the
recent Latin American experience of economic transformation. Since the mid 1980’s, a
surge of structural reforms has radically transformed the economic institutions established
in the region in the postwar era. Under the strain of the grave emergency provoked by the
foreign debt crisis, one after another countries began to implement far-reaching reform
packages, changing the development strategy from a state-led, inward-looking model to a
model that is more market-oriented and open to international competition.
Besides the depth of the policy changes, another feature deserves to be highlighted.
Reform initiatives were often undertaken by statist and nationalist parties that had
contributed in the past to shape those very institutions to be transformed. In the face of the
economic emergency and acting more out of necessity than conviction, old-time populist
parties in power - like the MNR (National Revolutionary Movement) in Bolivia, the
Peronism in Argentina, the PRI (Institutional Revolutionary Party) in México-
ended up
presiding over Latin American reform process.
Given the pragmatic attitude of these unexpected reformers, the politics of
transformation went as far and progressed as fast as the changing economic and political
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environment dictated. Thus, when the fiscal crisis was acute, privatization was rapid and
extensive, when it was more under control, privatization was parsimonious and limited.
Likewise, governments were torn between the divergent pressures from the international
financial community, on one hand and the members of their political coalitions, on the
other. Furthermore, Latin American countries remain vulnerable to short-term external
shocks (volatility of commodity prices and of capital movements) which, from time to time,
cast a shadow over the prospects of growth. Within this context, the actual dynamic of
economic transformation took form through the contingent solutions reformist governments
gave to their policy dilemmas.
2. To discuss the politics of economic reforms we should begin by making an
important distinction regarding the decision-making process. By economic reforms we
understand changing the economic institutions by means of, for instance, the privatization
of public enterprises, trade liberalization, social security reform, tax reform, etc. In a
democratic regime, most of these policy decisions are not within the constitutional powers
of the executive. Rather, they entail extensive legislative changes since they set the
institutional rules for the working of the economy in the long run. Thus, the decisionmaking process of these economic reforms is more complex than macroeconomic policies
aiming at stabilizing the economy.
While economic reforms involve legislative intervention, stabilization packages can
be pursued resorting to executive decrees. In line with the well-known assertion, policies
determine politics, it follows that stabilization packages can be imposed; instead, economic
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reforms will have to be more negotiated, beginning with the parties in Congress. An
overview of the Latin American experiences suggests that policy-makers chose a varying
mixture of two strategies: a general pattern of imposition of an initial stabilization program
and subsequent negotiations with political forces and established sectoral interests for a
variety of economic reforms.
3. As it was stated before, a first and crucial challenge to be addressed by reformist
governments is to secure the support of parties in Congress overcoming their veto power. In
short, they need to count on a legislative majority to translate their policy preferences into
institutional changes. In view of the policy turnabout made by Latin American popularbased governments when launching market-oriented reforms, a difficult scenario in the
relationship between the Executive and the ruling party in Congress should have been
expected. Indeed, that was the case at the onset of the reform programs in many countries.
However, as subsequent developments showed, the risk of gridlock between the Executive
and Congress was avoided in some of them.
Despite of what has often been said, this was not the outcome of Presidents
governing alone, resorting to their own legislative powers, such as executive decrees.
According to most constitutional regulations, in order to stand as permanent law,
presidential decrees require either an explicit or tacit approval of the legislative assembly.
Given this fact, it is hard to imagine that a determined executive could rule by decree
against legislative opposition on a regular basis. When the Executive carries out strategies
that neglect the ruling party, the cost is a decision-making stalemate, even a political crisis.
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The case of Andrés Pérez presidency in Venezuela is illustrative in this respect.
Elected in 1988 as the Acción Democrática (AD) candidate, Pérez started his
administration depriving ruling parties members of a prominent position in the cabinet: few
posts were filled with AD leaders and most of Pérez appointments went to personal friends
and non-partisan technocrats. The first major confrontation occurred when AD knew that
Pérez had secretly signed a compromise with the IMF which committed Venezuela to
market reforms. In response party leaders in Congress refuse to grant Pérez special powers
to handle the economic emergency; afterwards they joined the opposition parties to
challenge the reform program. The last chapter in this conflictive relationship came with
Pérez forced resignation to the presidency.
A lesson many Latin American presidents painfully learned was that to undertake
reforms sooner or later a compromise between Executive and Congress must be reached.
To make such compromise possible governments gave to their legislative followers voice in
the reform process taking into account their concerns and introducing partial amendments
to the initial policy proposals. More often than not when Presidents resorted to executive
the decrees – Carlos Menem of Argentina and Fernando Henrique Cardoso of Brazil are
relevant examples - they used it as instrument to bargain with legislators rather to impose
their will. Although it did not turn most legislators into free market believers, this strategy
produced all that was needed to adopt economic reforms: a working relationship which,
frequently through lengthy negotiations, paved the way to a convergence of purpose
between Executive and Congress around specific reform policies.
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Negotiating reforms with Congress is not only dictated by institutional rules, it
is also politically convenient because, when successful, it reinforces the capacity to
implement them and assures their sustainability.
4.
Pursuing market reforms entails building and crafting alliances beyond the
institutional arena. Prominent in the landscape of policy makers are also the main interest
groups whose opposition has to be neutralized and their support obtained. The negotiation
of reforms with interest groups may be justified on three grounds.
First, there are reasons of political expediency. Reforms affect negatively the
survival of the groups that profit under the previous economic institutions. Powerful losers,
like domestic business groups and labor unions, may have the resources to oppose, and in
some cases, to block the reform process. If the goal is to bolster the governability of the
reform program, it is understandable that policymakers would opt for negotiation over
confrontation. In other words, policymakers prefer full reform implementation but they
nonetheless may be willing to strike a compromise in order to avoid a worse alternative:
complete failure. Sustained policy changes will be more difficult to achieve when reform
initiatives had been announced, begun and then aborted.
Second, consultation and negotiation may improve the technical quality of reform
programs. Due to the weak bureaucratic capacities of developing countries governments
and the unstable environment in which they launch their initiatives, the interactions with
interests groups could provide the policymakers with useful information to fill up their
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knowledge gap about the institution being transformed and to calibrate the objectives of
the reform with the ongoing results. The idea that negotiations could undermine the
coherence of the reforms is based on the assumption that policymakers have perfect
knowledge about what to do when it is frequently the case that they only know that a
certain reform is necessary.
Third, negotiations may serve to build grounding political conditions for the
continuation of reforms. If a program is forged involving those affected by it, policymakers
are in a better position to shape their interests and to create pro reform constituencies out of
them. By widening the basis of support of the program through consultations and
negotiations, a reformist government enhances its long-term credibility and makes the
reforms more sustainable.
Thus, subjecting a reform strategy to consultation and negotiation
contributes to the governability of the reforms, improves policy, and builds support
for the continuity of the economic transformation.
5. Yet, the Latin American experience of the last decade tells us that the advantages
of the strategy of consultations and negotiations for implementing reforms may only be
achieved under certain conditions.
Frequently, advocates of cooperation tend to take for granted what in fact they
presuppose: the existence of a political center capable of organizing the concertation –or in
other words, an effective public authority. During the eighties, such condition was missing
throughout Latin America: in most of the countries we found “governments in a hurry”,
i.e., administrations trying to stay afloat in an adverse and unstable environment, struggling
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Juan Carlos Torre
with economic instability, social conflict and political turmoil. Given such a scenario, the
strategy of consultation and negotiation only becomes relevant after, and not before, the
acute emergency has been brought to a halt and the economy has been stabilized. That is to
say, only after, and not before, the government has regained control of key economic
variables and placed a firm hand on the helm of the state.
The reconstruction of state authority through an imperative and decisive action on
the part of the government serves to break away from a praetorian environment in which
the state stands in equal footing with a number of political forces and social actors.
Therefore, to open a process of negotiation and concertation in the absence of an
authoritative center able to process and filter economic and social demands may hinder and
derail the politics of economic transformation.
In addition to the existence of an authoritative center, the viability of a cooperation
strategy must meet another condition: a resolute and committed option in favor of structural
reforms on the part of the political leadership. Consultation and negotiations should be
carried out along the reforms guidelines set by the government. If they find it necessary,
policy-makers may yield on less fundamental aspects of the reform program during the
negotiation process but without losing sight of their ultimate objective: the changing of the
main economic institutions.
In Latin America, such a balancing act has proved to be a very taxing political
exercise for most governments. To prevent being forced to make undesirable concessions
and to enhance policy credibility, some governments have resorted to an effective political
device: they tied their own hands. Before entering into negotiations they signed loan
agreements with international finance agencies (IMF, World Bank) and pledged to fulfill
their attached conditions. In more general terms, this response may also take the form of an
act of delegation: the creation of institutions that reduce the chances of distributive politics
and enforce economic discipline. These arrangements –for instance, the establishment of an
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Juan Carlos Torre
independent central bank- can be viewed as enabling constraints since they contribute to
stabilizing expectations around the new set of rules and incentives.
In brief, the advantages of a cooperative strategy depend on the existence of a
strong public authority with a credible commitment to a program of structural
reforms.
6. When sectoral reforms are negotiated with political forces and interest groups, the result
is a limitation in the scope of the economic transformation. This frequent outcome
highlights an important issue. It refers to the environment in which policy changes take
place. The damaging effects of the debt crisis on the model of state-led and inward-looking
development created the impression of an empty stage ready for the introduction from
above of tailor-made market institutions. Yet a closer look at the actual process undergone
by Latin American countries reveals a different picture: reformist governments wrestling
with a number of political forces and interest groups over the ends and means of economic
change.
In this constrained scenario, the reform process becomes basically a task of political
craftsmanship. Policy-makers shape specific coalitions for each policy and choose to push
reforms to different degrees according to the strength of different sectoral power
configurations. Experience has shown that reforms can be radical, politically viable and
imposed in some areas because they are negotiated and incomplete in others.
The politics of trade liberalization provide a good example. Instead of opening the
economy across the board in Brazil, bilateral negotiations with different sectoral chambers
allowed the government to be more radical against weak actors and more accommodative
with stronger ones.
Similar strategies gave the Mexican and Argentine governments
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leverage to deal with small–business resistance at the launching of the trade liberalization
process while awarding to large business groups economic advantages like special tariff
regimes. The managing of the pace and scope of the economic transformations serves to
lower the costs of policy changes for key sociopolitical actors and to shift the burden of
structural adjustment at the beginning mainly onto the backs of less powerful actors. In this
way, they would be able to advance and to get some positive results, thus placing
themselves in a better bargaining position to renegotiate the initial terms of the economic
transformation.
It should also be noted that many exceptions and delays in the reform process are
related to patronage politics. Some resources have been used for essentially political
purposes, for instance, to enhance the electoral strength of ruling parties. The Mexican
president, Carlos Salinas de Gortari, a staunch reformer, launched a huge state program
nominally intended to fight poverty through public works but in fact a populist machine
targeted to urban and rural areas where the PRI was electorally needy. In Argentina, during
the early years of economic reform and with the same concern in mind, president Menem
maintained federal government subsides to provincial districts administered by the
Justicialista party.
Since public resources are scarce, such utilization can appear wasteful from an
efficiency point of view. However, it should not be forgotten that a government that cannot
count on an electorally competitive coalition would not be able to pursue and sustain any
reform process.
Two conclusions follow from the recent Latin American economic transformation.
First, the unfolding of the reform path is hardly a course of unidimensional change. Rather
it is full of midways, partial reforms and trade-offs. Second, while conventional wisdom
postulates an incompatibility between patronage politics and the economic rationality of
marked reform it seems that it is an integral component of its political rationality.
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7. Drawing from a number of Latin American experiences, we can sketch, with broad
strokes, some general considerations regarding the starting points and circumstances that
favor the undertaking of economic reforms.
(a) (a) Bundling reforms
Economic reforms are more likely to be undertaken when they are presented as an
essential part of a stabilization package aimed at overcoming a grave economic emergency.
After suffering the devastating effects of an inflationary crisis, the very prospect of
economic stability will generate a feeling of relief that may override the distributive costs
of specific reform policies. Thus, reformist governments may count on a substantial degree
of social tolerance when the change of the status quo, despite the sacrifices it entails, comes
to be perceived as the best alternative to stop further deterioration. In addition, resistance to
single policy changes is more easily neutralized when those changes are successfully
framed as key instruments to achieve a much sought-after economic stability. For instance,
obstacles to privatization could be bypassed if the sale of public assets is presented as a
means to reduce the fiscal deficit and its inflationary consequences. In short, reforms
become more acceptable when they are placed in the context of attaining a larger public
good.
Economic reforms are also likely to be undertaken when they are incorporated into
a more comprehensive reform package. In this case, reform bundling has the following
advantage: it makes possible a series of trade-offs which may help the crafting of reform
coalitions. For instance, firms that experience losses in one area, such as the reduction of
tariffs, may be compensated with concessions in other areas, such as exchange-rate
policies or lower labor costs. In short, bundling allows the transition from a logic of
bilateral games, sector by sector, and often weighted against policy makers, to a round of
multisectoral negotiations which gives the reformers a greater leeway to alter the calculus
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of interest groups.
(b) (b) Vesting New Interests
Economic reforms are more likely to be undertaken when policy makers give to a
section of key potential losers a stake in the new economic arrangements. Contrary to an
ordinary assumption, policy preferences are not fixed; in the real world they may be
changed through concessions or information. Thus, throughout the process of negotiation,
the design of a given policy reform may be modified so as to provide incentives for some
affected interests to join the reform coalition. Privatization programs in Latin America, for
example, have been crafted in such a way as to reward supporters and co-opt opponents.
That was the case in Bolivia, Mexico and Argentina, when national business groups were
given favorable treatment in the bid for public assets; also when employees of the former
state enterprises were granted shares in the new private companies. Another example was
the privatization of social security in Argentina. Obstacles to the reform proposal were
lifted when labor unions were allowed to set up their own pension funds. In short, by
vesting new interests, reformist governments can alter the initial balance of winners and
losers, thus gaining more political support to improve their ability to implement other
policies.
(c) (c) Timing Reform Initiatives
Economic reforms are more likely to be undertaken when they are launched by
governments at the point of their maximum political strength. This tends to happen when
they enjoy a fresh electoral mandate and may count on a large and disciplined legislative
majority. This is especially important given the fact that economic reforms take time to
bear fruit. Governments with solid political backing are best equipped to keep their sights
on the medium-term benefits of reforms while weathering the short-term difficulties of
transition.
(d) Spreading Reforms Over Time
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Economic reforms are more likely to be undertaken when they are spread over a
period of time, in order to prevent confronting all key groups simultaneously. Every
reformist government faces groups whose support or resistance is critical for political
stability. When launching the reform process, policy-makers should calculate how
initiatives would affect those key sectors, and attempt to avoid damaging all of them at the
same time. This tactic, however, may not always be available, because the depth of the
crisis may force the government to act quickly and across the board. But whenever
possible, spreading reforms over time is the way to go, for it enables a less-demanding
political management of policy changes. In addition, this tactic has a further advantage: it
allows governments a learning experience which may improve its capacity to handle reform
opposition.
(f) Negotiating reforms with Congress
Economic reforms are more likely to be undertaken when there is a working
relationship between Executive and Congress around the governmental agenda. To create
such a framework policy-makers should find ways to give voice to legislators concerns and
to get them involved in the decision making. However, they must prevent the risk of openended negotiations that might affect the consistency and timing of reform proposals.
Governments may have at their disposal a variety of institutional devices to retain control
over policy changes. For instance, legislative initiative, item veto, close-rule, urgency
procedures, the threat of decree power.
(g) Using Political Trust to Implement Reforms
Economic reforms are more likely to be undertaken when they are initiated by
political leaders with a broad base of popular support. Sectors of the population that may be
hurt by economic restructuring will nevertheless be willing to endure present sacrifices in
exchange for future benefits if they trust the reformist government. This trust is probably a
function of whether the leader in power is “one of us”, where “us” means populist, laborite,
social-democrat. It is often stated that because protection from foreign competition and
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state intervention had benefited the constituencies of popular-base parties, their leadership
will be reluctant to change course for fear of hostile reactions and power losses. However,
once they have endorsed and launched reform policies, they have a comparative advantage
to carry them out by comparison with politicians who have a limited popular support:
briefly, they are more credible because it is they that claim to have been forced by dire and
unwanted circumstances to implement these policies and they that promise a better future.
The above considerations are but an incomplete set of conditions and circumstances
that may favor the adoption of economic reforms. They benefit from hindsight and are
contingent on the margin of maneuver granted to reformist governments by the process of
economic and political change in which they are immersed. Then, it is quite possible that
some of them are more adequate for some countries than others and, within a specific
country, for different moments in time. Therefore, reformers should take into account the
actual measures of their polities and economies to fit reforms that can be economically
viable and politically agreed upon.
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EXECUTIVE SUMMARY
Reform of a country’s economic institutions is a complex political operation. To
meet this challenge political leaders should take advantage of propitious circumstances and
craft adequate strategies.
Identifying a favourable climate; two circumstances lend support for the initiation
of reforms. First, a government with a fresh electoral mandate and a large as well as a
disciplined legislative majority and, second, an economic emergency which opens a
window for bundling economic reforms and stabilization measures.
Choosing a reform strategy; although economic emergencies may force
governments to resort to unilateral measures a strategy of consultations and negotiations is
a better option. It improves the quality of the program and by involving those affected,
assures its governability and its continuation. However, the benefits of such a strategy
depends on the existence of a decisive public authority with a credible commitment to
reforms.
Building reform coalitions; as it is the case with any political enterprise, reforming
economic institutions is a task of coalition building. Therefore, governments should design
a distribution of benefits and costs of their policy initiatives so as to assemble a critical
mass of supporters. Consequently, compromises in the scope and pace of the reform
program might arise.
But what counts for a successful reform process is not policy
coherence -always difficult under complex and changing circumstances. It is rather the
ability of policy makers to project a determination to stay with the process.
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