In this selection, Stephan Haggard seeks to explain why some developing countries have been more successful than others in promoting stable macroeconomic policies. Blending domestic societal and state-centered approaches, he argues that both the density and composition of social groups and how they express their interests through state institutions shape policy outcomes. Haggard’s analysis of middle-income Latin American and East Asian countries suggests that a combination of interest-group pressure and the nature and design of particular institutions determines the incentives faced by state leaders to pursue stable macroeconomic policies. The developing countries with the highest inflation, he finds, have been those featuring urban labor movements mobilized into populist parties within relatively polarized party systems.
Why have some middle-income developing countries had histories of high inflation over the past two decades, while others have pursued stable macroeconomic policies? Among countries experiencing inflation, why do some governments move to stabilize with alacrity, while others postpone the adjustment decision, often with disastrous costs? Once the decision to stabilize is taken, why are some countries capable of sustaining stabilization policies while others falter and reverse course?
A wide array of economic factors is important in understanding particular national experiences with inflation, including the severity of exogenous shocks. Nonetheless, inflation often has political roots, and whatever its causes, stabilization poses profound political dilemmas.
This chapter reviews some current thinking about the political economy of fiscal policy and advances some hypotheses about differences in inflation and stabilization efforts among middle-income developing countries. The rent- and revenue-seeking approach of the new political economy is useful for understanding the political incentives to government spending and explains why subsidies and state-owned enterprises become politically entrenched. This approach, however, does not explain cross-national differences in fiscal performance and inflation. Such variation can be accounted for in part by pressures for government spending that result from interest group and partisan conflict. The organization of urban labor and its incorporation into the party system appear to be important factors. The developing countries with histories of high inflation, mostly in Latin America, have been those in which urban “popular sector” and labor groups have been mobilized into populist parties within relatively polarized party systems. Such high-conflict countries also had the greatest difficulties stabilizing in the 1980s, particularly where stabilization episodes overlapped with transitions to democratic rule. It is difficult to disentangle lines of causality because the size of external shocks and initial disequilibria posed greater difficulties for the large Latin American debtors, but the vulnerability to external shocks was itself partly the result of previous policy choices.
The structure of interest groups and the nature of the political regime are, of course, not easily changed. Other political factors affecting fiscal outcomes may offer greater scope for reform, though. The political difficulties of macroeconomic adjustment appear to be less severe where decision making is relatively centralized within the government and insulated from rent-seeking pressures. This suggests the importance of institutional reform for sustaining credible macroeconomic policy.
THE POLITICAL ECONOMY OF INFLATION AND STABILIZATION
Albert Hirschman has pointed out that “the explanation of inflation in terms of social conflict between groups, each aspiring to a greater share of the social product, has become the sociologist’s monotonous equivalent of the economist’s untiring stress on the undue expansion of the money supply.” To construct a political theory of inflation and stabilization demands an explication of the precise mechanisms through which political variables contribute to increases in the price level and difficulties in stabilization.
In studies of the advanced industrial states, cross-national variations in inflation have been traced to differences in wage-setting institutions and relations among business, organized labor, and government. Wage policy has played a role in efforts to control inflation in the developing world, but a growing body of evidence suggests that fiscal policy is a more appropriate focus for an examination of the political economy of inflation in developing countries. Since developing country governments generally have limited scope for domestic borrowing, financing fiscal deficits usually involves recourse to foreign borrowing and the inflation tax. There appear to be few cases of severe and prolonged inflation in the developing world that were not associated with fiscal deficits financed by money creation.
Fiscal policy also helps explain the accumulation of debt and the subsequent vulnerability of debtor countries to external shocks. When net capital inflows ceased abruptly in the early 1980s, debtors were unable to cut expenditures and raise revenues quickly. They thus relied on instruments that constituted implicit taxes on financial intermediation, with adverse consequences for investment.
Not surprisingly, fiscal policy has been central to stabilization efforts. International Monetary Fund stabilization programs invariably target some monetary indicator as the key performance criterion, but the focus on monetary policy reflects the availability of data and the political problems of appearing to interfere in sensitive allocational decisions rather than a belief in the primacy of monetary measures. The actions required to meet monetary targets are usually fiscal: some combination of increased taxes or nontax revenues and cuts in expenditures. The principal political dilemma is that no matter how beneficial these measures may be in the long run for the country as a whole, they entail the imposition of short-term costs and have distributional implications for particular groups.
CONTRIBUTIONS AND LIMITS OF THE NEW POLITICAL ECONOMY
The new, or neoclassical, political economy relies heavily on interest group models that seek to explain policy, including taxation and expenditure, as the result of political exchanges between welfare-maximizing constituents and support-maximizing politicians. On the demand side of the political market are constituents, conceptualized as individual voters, interest groups, or even bureaucratic groups within the state itself. The political process consists of spending by these constituents to influence the size and direction of fiscal redistribution. Rational constituents will expend resources—on lobbying, political contributions, demonstrations, and so forth—until the marginal cost of their influence efforts equals the expected marginal return from securing their desired policy outcome. Where rival constituencies have conflicting interests, groups expending the most on the influence attempt will prevail.
Politicians constitute the supply side of the market, though the real “suppliers” are those groups from whom income and wealth transfers are ultimately sought. The key insight of the new political economy into fiscal policy is that politicians view expenditures to their constituents not as costs, but as benefits. They will thus seek to increase expenditures to constituents to the point at which the political return is offset by the economic and political costs, including the inflationary consequences of high budget deficits. The lure of deficits is strengthened by fundamental asymmetries between spending and taxing decisions: the means of financing deficits—inflation and borrowing—are less visible than taxation, spread more widely across the population (inflation), or pushed onto future generations (borrowing).
The new political economy underlines the incentives facing politicians to spend and explains puzzles such as the bias against least-cost alternatives and the tendency for projects to assume unnecessary scale. Ultimately, however, this rent-seeking approach cannot predict whether central government accounts will be in surplus, balance, or deficit. Put differently, there is a problem in getting from the microlevel of a particular expenditure or tax to the macrolevel of aggregate fiscal outcomes.
Discussions of subsidies and state-owned enterprises that draw on rent-seeking models illustrate this difficulty. Subsidies give politicians an instrument for building electoral or clientele support. Because they can grow into virtually open-ended government commitments and are seen as entitlements by their recipients, subsidies have been a major factor contributing to fiscal deficits in a number of middle income countries. Their reduction or elimination has been a central component of most stabilization plans and is one of the most difficult to carry through because of the vulnerability of most governments to urban consumer groups. Yet not all governments have fallen into the subsidy trap, and some have managed to reduce subsidies.
A related example is provided by the growing literature on state-owned enterprises (SOEs). SOEs played a major role in contributing to fiscal deficits and external borrowing in a number of developing countries over the 1970s and 1980s. Some of this expenditure was no doubt for legitimate purposes; viewed politically, however, SOEs represent powerful constituencies within the government because of the resources under their control and their importance in generating employment. In many cases, SOEs are more powerful than the ministries that presumably oversee their activities; state-owned oil enterprises, such as Mexico’s PEMEX, are important examples. Governments have also been politically vulnerable to pressures from customers, contractors, and suppliers to maintain purchases of goods and services, limit price increases, raise wages, and retain employees. Again, the puzzle for the new political economy is in explaining variance. In some countries, SOEs have mushroomed and been a major drain on national treasuries, while in others their role has been limited or subject to effective control.
One way of bridging the gap between the micro- and macrolevels of political analysis is through the political business cycle. This literature argues that regardless of the party in power, economic policy will change over the electoral cycle as politicians seek to manipulate the short-run Phillips curve (showing the trade-off between unemployment and inflation) to electoral advantage. The evidence for a political business cycle remains weak for the advanced industrial states. The model assumes short voter memory concerning past performance and myopia concerning future inflation, or, as Brian Barry has put it, “a collection of rogues competing for the favors of a larger collection of dupes.”
Many of the political and institutional characteristics that mitigate political business cycles in the advanced industrial states are absent, however, in the developing countries. These include, among other things, informed publics; independent media coverage of economic policy; institutionalized forms of consultation between business, government, and labor; and welfare systems that cushion the costs of unemployment. Given lower levels of income, extensive poverty, and the insecurity of political tenure in a number of polities, it is plausible that politicians’ time horizons in the developing world are oriented toward the delivery of short-term benefits for electoral gain.
A second way of joining the micro- and macrolevels is through models emphasizing partisan conflict. In one such model, the economy is divided into two groups, “workers” and “capitalists,” each with its own political party. The party in power seeks to redistribute income in favor of its constituency: right-wing governments pursue policies that favor profits; left-wing governments, those that favor wages. In designing fiscal policy, each party will seek to tax its opponents to the maximum feasible extent, while redistributing to its own constituency. Governments in power have a strong incentive to borrow, knowing that the full cost of servicing current obligations will be borne by political successors.
Two hypotheses result from this line of inquiry. First, a high level of political instability, measured by frequent changes of government, is likely to generate higher fiscal deficits, since politicians will have particularly short time horizons. Second, a polarized political system in which the objectives of the competing parties are highly incompatible will generate higher fiscal deficits than those systems in which the objectives of the competing parties overlap and are less zero-sum in nature.
BRINGING INSTITUTIONS BACK IN
Economists who have branched into political economy tend to think of the polity in terms of economic cleavages. Workers have different interests than capitalists; holders of financial assets have different inflation preferences than debtors; urban consumers have different preferences regarding agricultural prices than rural producers. As the partisan-conflict model suggests, economists assume a close “mapping” between economic cleavages and political organization, and see the state and politicians as relatively passive registers of social demands. With this approach, every policy that has a distributional consequence could be explained on the grounds that it favored some group. The more demanding task is to explain why some polities are riddled with revenue seeking, while others have developed mechanisms of fiscal control.
Answering such questions requires greater attention to organizational and institutional factors. First, different types of economic activity may be more or less amenable to political organization and collective action. The agricultural sector may loom large in the economy, but peasants are difficult to organize and rural influence on policy can easily be offset by smaller, but better organized urban forces. It is therefore important to have information not only on economic cleavages, which provides good clues about policy preferences, but also on which social groups are in fact capable of effective organization.
Second, party organization can aggregate interests in different ways. In some polities, the party system reinforces societal and economic cleavages and conflicts, for example, pitting populist or labor parties against conservative and middle-class parties, or urban-based parties against rural-based ones. In other countries, broad, catchall parties cut across class or economic divisions and tend to mute them. These organizational differences can have profound influence on the political appeals parties make, on the demands on public finance, and consequently on the conduct of macroeconomic policy. Macroeconomic stability is more likely in two-party systems with broad, catchall parties than in those that pit class-based parties against one another or in multiparty systems that foster more ideological parties.
It is not enough to know how groups are organized for political action; equally, if not more, important is the question of how social demands are represented in the decision-making process. The new political economy has focused its attention on the advanced industrial states, and thus assumed the existence of political processes such as general elections. Elections are not relevant for policy making in authoritarian regimes, and may not be relevant for policy making in some arenas even under democratic conditions. For example, monetary policy and the details of budgeting may have more to do with internal bureaucratic politics or the independence of the central bank, than with electoral or party constraints.
The absence of democratic processes in the developing world may help explain the attraction of lobbying and rent-seeking models, which can presumably be applied to both democratic and authoritarian regimes. Democracy may not be ubiquitous, but lobbying is. Yet interest group pressures constrain authoritarian rulers less than they do democratic rulers. It is thus plausible that the political regime can be an important factor in explaining the ability to impose stabilization costs.
These observations suggest the importance of combining interest group and partisan explanations with an analysis of the overall institutional context: the nature of the party system, the budget process, and the type of regime. This analysis can be illustrated, though not definitively tested, by examining some hypotheses about the variation in inflation and stabilization efforts among the middle-income countries.
POLITICS AND INFLATION IN MIDDLE-INCOME COUNTRIES
Although the debt crisis of the 1980s has had global implications, its effects have been felt quite differently in various geographic regions. Among the middle-income countries, Latin America has been the hardest hit. Twelve of the seventeen countries designated by the World Bank as the most heavily indebted are in the Western Hemisphere. The most severe problems with inflation are found in that region as well. By contrast, the middle-income countries of East and Southeast Asia—South Korea, Taiwan, Indonesia, Thailand, Malaysia, and the Philippines—have largely been immune from devastating inflations.
… [Differences in inflation are not simply the result of recent events. Before the onset of the debt crisis, Latin America consistently had higher levels of inflation than other developing countries, though there are important contrasts within regions. Brazil, Chile, and Uruguay all have histories of comparatively high inflation. The current hyperinflations in Brazil and Argentina are outside the range of those countries’ historical experience, but both have experienced severe inflations before. Other Latin American countries, including Colombia, Venezuela, and Mexico, have not had chronically high levels of inflation, though all have suffered increasing inflationary pressures in recent times. Peru, historically a low-inflation country compared with the Southern Cone nations (Argentina, Chile, and Uruguay), is now veering toward hyperinflation.
In Asia, Thailand, Taiwan, and Malaysia have had histories of low inflation and all largely escaped the debt crisis of the 1980s. Indonesia had a near hyperinflation in the mid-1960s, but its fiscal and monetary policy have been conservative since. South Korea has had high levels of debt and inflation by Asian standards but adjusted relatively smoothly in the early 1980s. The Philippines, by contrast, had painful problems of adjustment in 1984, though by comparison to the Latin American debtors, that country’s difficulties appear relatively mild.
Recognizing that economic circumstances vary across cases as well, what political factors help account for these long-term patterns? The new political economy would suggest that differences in the density and composition of interest group organization should be a starting point. Through most of the postwar period, the Latin American countries can be differentiated from the Asian cases in terms of the size and organization of urban-industrial interest groups, including the so-called popular sector, which has played a crucial role in Latin American politics.
Mexico, Brazil, and particularly the countries of the Southern Cone had longer histories of industrialization, larger urban-industrial populations, and comparatively small agrarian sectors at the outset of the borrowing boom of the 1970s than the East and Southeast Asian countries. These conditions have implied denser and more established networks of unions, white-collar associations, and manufacturers’ groups linked to the import-substituting industrialization (ISI) process in Latin America.
This density of urban-industrial groups, in turn, had two implications for economic policy. The first concerns overall economic strategy. There have been important economic barriers to shifting the pattern of incentives toward export-oriented strategies in Latin America, including the problem of setting exchange rates where there is a strong comparative advantage in natural resource export. The number and extent of groups linked to import-substituting industrialization have also been significant factors. Even authoritarian governments with preferences for market-oriented policies, such as Brazil after 1964, faced constraints from groups linked to the ISI process. The well-known balance of payments problems associated with ISI were, in turn, one factor in the expansion of foreign borrowing during the 1970s and the subsequent macroeconomic policy problems.
In South Korea and Taiwan, by contrast, industrialization, and particularly ISI, were of shorter duration, and there were consequently fewer interests opposed to the crucial exchange rate and trade reforms that launched export-led growth. Elite concern with rural incomes may also have had some effect on policy, constituting a political counterweight to ISI forces. This constellation of interest groups may help explain the ability of the Philippines, Thailand, Malaysia, and Indonesia to maintain realistic exchange rates and to shift, though to varying degrees, toward the promotion of manufactured exports.
The second consequence of the density of urban-industrial groups relates more immediately to macroeconomic policy. The political mobilization of urban groups and unions, particularly in a context of high income inequality, is an important factor in explaining the appeal of populist economic ideologies in Latin America…. [T]here is a remarkable similarity in populist economic programs across countries. Their main political objective is to reverse the loss in real income to urban groups that results from traditional stabilization policies or simply from the business cycle.
Populist prescriptions include fiscal expansion; a redistribution of income through real wage increases; and a program of structural reform designed to relieve productive bottlenecks and economize on foreign exchange. Populists reject the claim that deficit financing is inflationary, arguing that the mobilization of unused spare capacity, declining costs, and, if necessary, controls, will moderate inflation.
Populist experiments go through a typical cycle, usually triggered by orthodox stabilization efforts:
Phase 1. Policy makers enjoy a honeymoon as their prescriptions appear to be vindicated. Output grows and real wages and employment improve. Direct controls are used to manage inflation. The easing of the balance of payments constraint and the buildup of reserves under the previous orthodox program provide the populists a crucial cushion for meeting import demand.
Phase 2. Strong domestic demand starts to generate a foreign exchange constraint, but devaluation is rejected as inflationary and detrimental to maintaining real wage growth. External controls are instituted. The budget deficit widens because of the growth of subsidies on wage goods and on foreign exchange.
Phase 3. Growing disparity between official and black market exchange rates and general lack of confidence lead to capital flight. The budget deficit deteriorates because of continuing high levels of expenditure and lagging tax collections. Inflation soars.
Phase 4. Stabilization becomes a political priority, and the principal political debate concerns whether to pursue a more “orthodox” or “heterodox” policy mix.
Why do such cycles appear in one political setting and not in another? Stop-and-go macroeconomic policies themselves are partly to blame, since they carry particular costs for urban workers. One determinant of such populist cycles is the way urban political forces are initially organized—in other words whether historical partisan alignments mute or reinforce sectoral and class cleavages.
In Argentina, Peru, Chile, and Brazil, antioligarchical parties of the center and the left recurrently sought the support of urban workers and small manufacturers by appealing to class and sectoral interests. These appeals produced the kind of political polarization and macroeconomic policy outcomes predicted by the partisan-conflict model outlined above. In Colombia and Venezuela, by contrast, such conflicts were discouraged by the electoral dominance of broadly based patronage parties. In Uruguay, the traditional Colorado and Blanco parties also tended to discourage class and sectoral conflicts that lead to expansionary macroeconomic policies, though by the mid-1960s, the influence of these parties had come under challenge from a coalition of center-left parties with strong bases of support in Montevideo.
Mexico provides an important example of the significance of institutions in determining the ability of new urban-industrial groups to formulate effective demands on the state. Under the leadership of President Lázaro Cárdenas in the 1930s, the ruling Partido Revolucionario Institucional (PRI) encompassed peasant, middle-class, and working-class organizations. Mexico experienced structural changes comparable to those in Brazil and Argentina in the 1950s and 1960s, but under stable macroeconomic policies. This regime of “stabilizing development” was achieved following a painful devaluation in 1954. The government was able to withstand short-term protests to this crucial reform because of the special relationship it enjoyed with state-sanctioned unions. Not until the early 1970s did deepening social problems and the populist political strategy of President Luis Echeverría combine to break the pattern of stable monetary and fiscal policies. Nonetheless, Mexico still managed to pursue more “orthodox” stabilization policies in the 1980s under Presidents Miguel de la Madrid and Carlos Salinas than either of the other two large Latin American countries, Brazil and Argentina. This is due in large part to the PRI’s continuing ability to engineer political compromises and exercise discipline over urban workers.
Even when populist forces surfaced in East and Southeast Asian countries, they never succeeded in gaining a political foothold. A larger proportion of the population remained outside the framework of urban interest group politics altogether than in Latin America, and patterns of political organization also differed. Broad, anticolonial movements muted class and sectoral conflicts. Generally, the most serious political challenges came not from the urban areas, but from rural insurgencies. When and where urban working-class politics did emerge, it was either assimilated into corporatist structures or suppressed.
In the Philippines, two diffuse political machines dominated the electoral system before the announcement of martial law by Ferdinand Marcos in 1972. Pork-barrel conflicts were more important than programmatic differences, but elite domination of the political system resulted in extremely low levels of taxation. Beginning in the late 1960s, urban-based leftist organizations grew, but they were crushed following the declaration of martial law. Even when political liberalization provided new opportunities for the left to organize, its influence was counterbalanced by that of the old political machines and the new middle-class democratic political movement, headed finally by Corazon Aquino, which owed little to the left.
In Malaysia, politics was dominated by a single nationalist party and its minor coalition partners, but class and sectoral conflicts were secondary to ethnic rivalries. Indonesia remains a single-party system, with very limited pluralism. Thailand, despite periodic democratic openings, has shown a continuity in economic policy thanks to the central role of the bureaucracy and the continuing influence of the military.
South Korea and Taiwan once again provide sharp contrasts to the Latin American cases. Until the transition toward more pluralist politics in the two countries in the mid-1980s, both South Korea and Taiwan (beginning in 1972 and 1949, respectively) were ruled by strong, anticommunist, authoritarian regimes that limited the possibilities for interest group organization. Taiwan’s one-party system effectively organized and controlled the unions and disallowed opposition parties. The South Korean government combined informal penetration of the unions and periodic repression to keep labor and urban-based opposition forces in check. The recurrence of urban-based opposition among students and workers may explain the Korean government’s greater tolerance for an expansionist macroeconomic policy, but the opportunity for open political organization and populist appeals was severely limited. Both countries showed a continuity in government unparalleled in any of the Latin American governments except Chile.
This discussion suggests that the middle-income countries of Latin America and East and Southeast Asia can be arrayed on a continuum from very high to low levels of group and party conflict. Argentina, Chile, Brazil, Uruguay, and Peru appear at one extreme, with relatively large popular sectors and with political movements and party structures that historically tended to reinforce sectoral and class conflicts; these countries have historically also had higher levels of inflation. At the other pole are Indonesia, Taiwan, and Thailand, where the popular sectors were smaller and both political alliances and party structures less conducive to the emergence of populist movements; these countries have also generally had lower levels of inflation. The other Latin American and Asian countries fall between these two polar types, with varying degrees of urban and working-class mobilization and organization.
THE POLITICS OF STABILIZATION
These stylized patterns of political conflict also help explain variations in the political management of stabilization over time. Stabilization efforts have encountered the greatest difficulties in those countries where intense group conflicts and persistently high levels of inflation have fed on each other over long periods of time. In these circumstances, the capacity to impose stabilization has in the past been linked to the nature of the political regime, suggesting once again the importance of institutional variables in explaining policy outcomes.
There are examples of populist military governments: Bolivia in 1970–1971, the Peruvian experiment in the early 1970s, and the first year of South Korea’s military rule in 1961–1962. Typically, however, militaries have seized power in the midst of political-economic crises characteristic of the later stages of the populist cycle outlined above. They have initially pursued policies designed to impose discipline and rationalize the economic system, in part by limiting the demands of leftist, populist, and labor groups. This general pattern was followed, with varying constraints, in Brazil (1964), Argentina (1966, 1976), Indonesia (1965), Chile (1973), Uruguay (1973), and arguably South Korea (1980–1981).
As the initial crisis is brought under control, military regimes begin to face new problems of consolidation or transition. Old political forces resurface, and regimes face pressure to build support and moderate the militancy of the opposition. Brazil provides an example. The government’s decision to pursue high-growth policies during the oil shocks coincided closely with the military’s decisions concerning the opening of the political system.
The transition to democratic rule in such systems is likely to pose particular problems for stabilization efforts. The transition opens the way for well-organized and long-standing popular sector groups to reenter politics, groups that had been controlled or repressed under military rule. High inflation and erratic growth make the distributional and political costs of fiscal restraint appear particularly formidable, but these costs are compounded by the uncertainties associated with the transition itself. New political leaders are necessarily preoccupied with securing the transition, and thus have relatively short time horizons. Those political forces that have been in opposition, or simply suppressed, are eager to press new demands on the government. As political leaders attempt to accommodate these strongly conflicting demands, it becomes difficult to maintain macroeconomic stability.
It could be argued, however, that the transition process is less important in explaining macroeconomic policy than the nature of the economic problems these governments inherited from their authoritarian predecessors. First, in countries with chronically high inflation, both authoritarian and democratic governments have accommodated conflicts over income shares through indexing. Indexing itself generates inertial inflation and complicates the conduct of monetary and fiscal policy. Second, the severity and speed of external shocks, particularly the withdrawal of external lending, severely narrowed the range of economic policy choice. Economic legacies, rather than political constraints, matter; Argentina simply inherited greater difficulties than the Philippines or South Korea.
Yet in the transitional democracies that faced high inflations, political constraints do appear to be significant in the making of macroeconomic policy. The three experiments with heterodox adjustment strategies—Argentina, Brazil, and Peru—occurred in systems with a high level of popular sector mobilization. Brazil under José Sarney and Peru under Alán García responded to high inflation with heterodox policies in the mid-1980s that included wage-price controls and currency reforms. In contrast to Mexico, however, neither new democratic government placed a high priority on containing wage pressures, reducing subsidies, or controlling spending, and both experiments ran into difficulties. Raúl Alfonsín’s middle-class government in Argentina also pursued a heterodox shock policy to manage high inflation, but initially placed greater emphasis on negotiating wage restraint and bringing deficits under control. Nonetheless, fiscal policy remained a source of inflationary pressure, stabilization efforts faltered, and political competition with the Peronists and the anticipation of a change of government ultimately undermined the coherence of macroeconomic policy.
The interesting exception is Uruguay, one of the most economically successful of the new Latin American democracies. The return to constitutionalism in Uruguay restored the dominance of the two, broad-based centrist parties that had dominated political life until the coup in 1973, providing a framework for elite negotiation and accord much like that in more established democratic systems such as Colombia and Venezuela. Negotiations between the Blanco and Colorado parties led to an economic policy agreement in early 1985 that emphasized controlling budget deficits and inflation, promoting exports, and undertaking structural reforms.
The transition to democracy has played a less important role in explaining macroeconomic policy in countries with a lower level of popular sector mobilization and a greater institutional continuity in political and decision-making structures. Not coincidentally, these countries also faced less daunting economic problems, and it can once again be argued that economic circumstance rather than political factors account for the variance. It nonetheless appears plausible that politics had at least an intervening effect on policy choices and outcomes.
In Thailand, the new political order ushered in by parliamentary elections in 1979 might be labeled semidemocratic. In 1980, General Kriangsak was forced to resign over economic mismanagement in the face of rising protest and pressure from within the military. Another general, Prem Tinsulanon, was elected by a large majority in both houses to replace him. Prem moved to incorporate opposition parties into a broad-based coalition, yet to Thailand’s “bureaucratic polity,” power continued to reside in the army and bureaucracy. There were no fundamental discontinuities in business-government relations and technocrats even gained in influence.
In South Korea, General Chun Doo-hwan’s handpicked successor, Roh Taewoo, was forced to widen the scope of political liberalization and constitutional reforms in the wake of widespread urban protests in 1986 and 1987 that included students, workers, and middle-class elements. Running against a split opposition, Roh captured the presidency with just over one-third of the popular vote. Though the conservative ruling party subsequently lost control of the National Assembly and has been forced to make a number of economic concessions, including those to labor and farmers, the executive and bureaucracy maintain comparatively tight control over fiscal policy.
In the Philippines, Aquino was brought to power by massive middle-class demonstrations against fraudulent elections in February 1986. The “revolution” did not rest on popular sector mobilization; indeed, the left made the tactical error of not supporting Aquino’s presidential candidacy. Subsequent development planning focused greater attention on rural problems in an effort to counteract the insurgency, and the government pursued a mild Keynesian stimulus through a public works program. But Aquino also moved quickly to cement ties with those portions of the private sector disadvantaged by Marcos’ cronyism and Aquino’s economic cabinet was dominated by businessmen-turned-technocrats. The reconvening of Congress in 1987 provided new opportunities for pork-barrel politics, but as in Thailand and Korea, fundamental political and institutional continuities limited political pressures on macroeconomic policy.
More generally, in those countries where underlying class and sectoral cleavages are less intense, or where class and sectoral cleavages have been muted by integrative forms of party organization, the political stakes of stabilization appear lower. This has two further implications. First, the capacity to carry out stabilization programs in these cases is not closely influenced by the type of regime. Democratic governments in Venezuela and Colombia have done as well or better at maintaining fiscal discipline as systems dominated by one party such as Mexico.
Second, where the parties are less polarized and the process of political succession is institutionalized, changes of government should not be expected to produce major shifts in policy. In such crises, unlike in high-conflict societies, newly elected governments do not usually represent previously excluded groups that expect immediate material payoffs. The time horizons of political leaders are therefore likely to be longer.
Democratic governments of this sort may be subject to political business cycles, but they are also in a better position to capitalize on the honeymoon effect by imposing stabilization programs early in their terms. This, too, is related to the time horizons of politicians in more institutionalized systems. With greater expectations that they will be able to reap the political benefits of stable policies, politicians will be less tempted toward unsustainable expansionist policies….