political explanations of macroeconomic management: a survey

world Devefopmenr, Vol. 18, No. 8, pp. 113Sll46, 1990. 0305-750x/90 $3.00+0.00

Printed in Great Britain. 0 1990 Pergamon Press plc

Political Explanations of Macroeconomic Management: A Survey

LAURENCE WHITEHEAD Nufield College, Oxford

Summary. - This paper surveys eight overlapping types of political explanation for patterns of macroeconomic management in the Third World: (1) historical traditions; (2) socio-structural determinants; (3) the self-interest of politically powerful sectors; (4) entrenched characteristics of the political system; (5) formal properties of the political institutions; (6) the influence of economic ideologies; (7) vicious/virtuous circles; and (8) a residual category of conjunctural factors. It then considers the scope and limitations of such explanations, and reassesses the notion of “political constraints” on economic optimization.

1. INTRODUCTION

Political explanations of macroeconomic policy making almost invariably invoke one or more of the following considerations: (1) historical traditions; (2) socio-structural determinants; (3) the self-interest of politically powerful sectors; (4) entrenched characteristics of the political system; (5) formal properties of the political institutions; (6) the influence of particular economic ideologies or schools of thought; (7) the logic of particular sequential processes of the “vicious circle/virtuous circle” variety; and finally (8) a variety of ad hoc or conjunctural considerations (such as the wisdom or misjudgments of particular decision makers, accidents of good or bad timing) peculiar to the episode in question. In broad terms, all of these types of explanation can be classified as “political constraints” on the selection of optimal economic strategies, but of course the severity and durability of these constraints will vary greatly according to the type of explanation that is emphasized. Moreover, at least some of these explanations (differences of economic ideology, the entrenched traditions of particular societies) raise the question whether there is a single unam- biguously optimal strategy that could be chosen (theoretically, in the absence of all political constraints). In addition to the much discussed tensions between rival economic objectives (growth’ and distribution, etc.) some explanations would point to equally intractable conflicts between some basic political objectives (national security, social peace, etc.) and economic optimization. Those who adopt explanations of this type may have to refor- mulate the language of “political constraints,” per-

haps asking instead about the “economic constraints” on the achievement of fundamental political goals, or more generally - and more comprehensively - explaining how governments can reconcile, or maintain a balance between, economic and political objectives that are equally fundamental, and that require calculations to be made according to two quite separate and incommen- surable systems of calibration.

This paper first surveys the eight types of explanation listed above, offering examples of each drawn from recent Third World experience (Sec- tion 2). Those with economics training, and little interest in comparative history, are liable to sup- pose that in the absence of certain abstract categories that can be taken out ofcontext and theorized in isolation, no genuine international comparisons are possible. However, in other social sciences a different comparative strategy is often preferred. Section 2 provides a large number of examples in which a simplified and stylized account of a particular case is presented in a way designed to facilitate the identification of, and comparison with, analogous cases but with an emphasis on capturing, rather than abstracting from, the local context. The main task here is to “sum up” the essentials of a distinctive national situation in a brief and synoptic interpretation that has wider applicability. (There should be no attempt at a definitive history, for then all the supporting detail would obscure the potential for comparison. On the other hand, the brief capsule interpretation should try to reflect what a proper history would identify as the defining characteristics of an overall situation.) In short, the more fully a specific case is understood the better, even if adding more context

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undermines the apparent “generalizability” of the associated interpretation. The paper then considers the scope and limitations of such explanations, suggests some ways in which they might be combined, and comments on the notion of political constraints on economic optimization.

2. THE EIGHT TYPES OF EXPLANATION

(a) Historical traditions

Germany’s alleged profound aversion to inflation provides a classic example of this approach. Deeply scarred by the memories of hyper- inflationary collapse under the Weimar regime, the German people are said to react more quickly than others, and more firmly, against political leaders who run even very mild risks of stimu- lating inflation. This powerful historical tradition has been invoked as a major factor explaining the distinctive characteristics of macroeconomic management in postwar Germany. This is only the best known example of an approach which is in fact widespread. The French propensity for hoarding gold coins; the Japanese business tradition of close informal consultations (“market rigging”); the edifice of contract theory on which US political institutions and market conventions have been erected; the British specialization in international finance; all these national characteristics shaping the “style” of macroeconomic management in specific countries can be traced to, and perhaps explained by, their historical causes.

Many Third World countries only attained their independence after 1945, however. It may be doubted whether national traditions of economic management can be very binding in countries where the very framework of national sovereignty was elaborated within living memory. Even those countries with much larger histories of independent national government (the Latin American republics, Thailand and Turkey) mostly have relatively short histories of modern, autonomous, macroeconomic management (certainly as com- pared with the advanced industrial nations).

Even in the classic case of Germany it may be wondered how solid the evidence of unqualified popular opposition to inflation really is. This “tradition” may not in itself be a decisive cause of anything. To be more precise, it may not be capable of substantially affecting the prevailing style of macro management unless it is embodied in particular arrangements (e.g., a powerful and independent Bundesbank deliberately constructed as a bulwark against inflation), or unless it suits the purposes of currently dominant political interests to play up and reinforce this particular tradition.

Thus this type of explanation needs to be reinforced by others listed below, such as which current political interests are best served by stress- ing (or appropriating) the tradition in question, which institutional arrangements embody and interpret that tradition, and its place in current controversies over economic ideology.

(b) Social structure

This heading covers a vast and often dis- couraging literature, most notably in the areas of class analysis and dependency theories. More often than not these writings appear unconvincing in their own terms of reference.

If we are to consider scores of different countries we are, of course, faced with a very wide variety of possible “socio-structural determinants.” Not only social class factors, but also ethnic and reli- gious divisions, and other distributions of social power arising from a country’s mode of insertion into the international economy demand attention. However, the aim here is not to provide a comprehensive analysis of all aspects of national society. Indeed what frequently defeats authors of class analyses and dependency theories is the overly ambitious scope of their programs. In order to account for differences in macroeconomic management in different countries it is better to con- centrate on just those aspects of social structure (broadly conceived) that operate more or less directly on the formulation of macroeconomic policy.

Consider the case of macroeconomic management in contemporary Israel. For geopolitical reasons, even in the best moments of peacetime, the minimum conceivable defense budget (and resulting claims on labor for military purposes) is extraordinarily high in relation to the size of the economy. Moreover, the Israeli government considers that its national security requires a con- tinuous flow of new Jewish immigrants. This almost precludes resorting to recession and unemployment as an instrument of economic stabilization for fear that unemployed Israeli workers would emigrate. Thanks to support in the US Con- gress, Israel’s economic managers have been spared the need for highly conditioned credit from the International Monetary Fund (IMF), which would almost inevitably require some cuts in defense expenditure, and at least temporary inter- ludes of recession and unemployment. Here, then, we have a very clear case in which an unusual social structure (a highly mobile immigrant society), deep ethnic divisions (between Jews and Arabs, and also potentially within the Jewish community itself), and an exceptional geopolitical setting (as the

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United States’ privileged ally in the Middle East) all come together to produce a most distinctive style of macroeconomic management. These factors also create a unique set of opportunities and constraints for economic policy makers. Israel’s social structure (broadly defined) powerfully and directly affects its range of economic options.

Israel is a very special case, of course, but the same approach may also apply elsewhere. Argen- tina, for example, also has a very distinctive social structure and an unusual geopolitical location, that together give rise to some marked peculiarities of economic management.

In the Argentine case, we need to explain why policies have for so long been so unstable and erratic; why each successive policy package has been not only abandoned but spectacularly reversed; or to put the same point a different way, why it has so frequently been possible to assemble blocking coalitions capable of vetoing policies that threaten their interests, but subsequently incapable of holding together to implement some positive alternative. What characteristics of the Argentine social structure might help to explain this national peculiarity?

One might begin by emphasizing the geo- graphical endowments that attracted so many European immigrants before 1914, and that under- pinned Argentina’s exceptional prosperity in the first half of this century. From this starting point one might single out some very distinctive features of Argentina’s social structure: a sense of privilege and a loss of economic realism attributable to the extraordinary resource endowment; a series of social groups each too weak to impose its own will, but each strong enough to resist the sectional projects of rival groups; a geographically isolated immigrant culture, insecure in its national identity and therefore alternately arrogant and despairing. One aspect of this is particularly significant when comparing Argentina with other Latin American societies-the immigrant majority came with high expectations of economic prosperity and social mobility; if these expectations were disappointed they would quickly become dissatisfied, rebellious and perhaps even willing to emigrate. The “resig- nation to misfortune” which many argue has been provided by the indigenous, peasant, and slave traditions in other Latin American societies was notably absent from Argentina. Moreover, each group in Argentine society is extremely alert to the implications of public policy for its particular interest. All policies are immediately evaluated in terms of who benefits and who loses. There are no “unwitting” targets of economic policy, and sectional reactions are correspondingly swift and forceful. To give one example, of particular significance to those who manage macroeconomic

policy, there is a much lower political threshold of tolerance for unemployment in Argentina than in, say, Brazil or Mexico. This was also a very important difference between Argentina and Chile in the late 1970s when both were engaged in neo- conservative experiments in stabilization and restructuring.

The examples of Israel and Argentina are both unusual, of course. Moreover, these two attempts at socio-structural explanation have both strayed beyond the limits of social structure per se into areas of interest group politics that will receive more attention below. Nevertheless, perhaps enough has been said to show the significance and potential of this type of explanation. In some African countries, such as the CBte d’Ivoire and Kenya, for example, it may be appropriate to consider the constraints on policy making that arise from the need to retain the confidence of a white, expatriate, property-owning minority that might otherwise be tempted to leave these countries. It may be that a similar socio-structural constraint on policy making may exist in Indonesia, in relation to the Chinese business community. In Zambia there is a potential veto group (which is also regionally and ethnically distinct) composed of copperbelt mineworkers. A study of Sri Lankan macroeconomic policy would have to consider the way in which Sinhala nationalism progressively dis- criminated against the Tamils, giving rise to internal and international tensions that have in turn fed back more and more powerfully onto the country’s macroeconomic policy options. Pakistan appears to be at the opposite extreme from Israel and Argentina - a very poor country heavily dependent upon emigrants’ remittances. Economic policy making is no doubt strongly affected by this politically sensitive form of dependence.

(c) The seljlinterest of politically powerful sectors

The starkest instance of this is where the economy is run as if it were the personal property of the ruler and his immediate circle (Whitehead, 1989a). Macroeconomic policy can be grossly distorted by political considerations in these “kleptocratic” or “sultanistic” regimes. The Dominican Republic under Trujillo (1930-61), and Nicaragua under the Somozas (1933-79) are celebrated historical examples. The Philippines under Marcos, Haiti under the Duvaliers, and Paraguay under Stroessner are more recent cases. Mobutu’s Zaire may be the most conspicuous instance currently in existence. What must be clear is that in the more extreme cases there can be a sharp disjunction between the public interest criteria that are supposed to shape economic policy making and the private accumulation


motives that are actually dominant in the minds of the key powerholders. A particularly stark illustration of this is provided by the Somoza regime’s official external borrowing (including resource to IMF facilities) to finance capital flight as the collapse of the dynasty drew near.

Pinochet’s Chile provides a very different example. Here we have a much more sophisticated society than say the Dominican Republic or Nica- ragua under their dictatorships. The Chilean economy was certainly not run as Pinochet’s personal fiefdom, or even as a system of spoils for the military high command. Although the arbitrary and repressive features of the regime were well known, Chile still possessed an impressive - and essen- tially uncorrupt - administrative structure, and in large areas of public life an impersonal “rule of law” was scrupulously maintained. This was especially true in economic matters, where the liberal principles of noninterference in the func- tioning of markets were almost religiously observed. Thus Pinochet’s Chile presents a para- dox that few outside observers have been able to resolve. The critics see a despotic personalist regime which used the most ruthless methods to block the natural talent of the people for democratic self-expression. The admirers see the Third World’s most consistent and sustained effort to promote social stability through market freedom. In my opinion, the only way to integrate these two images into a coherent whole is by analyzing the very distinctive characteristics of Chile’s dominant classes. Such an analysis should shed light on the special political constraints within which the Pino- chet regime operated its macroeconomic policies.

Over a period of 40-odd years prior to 1973, the propertied classes of Chile operated in a highly regulated economic environment, and within an unusually broad and vigorous political democracy. They had adapted, in other words, to exactly the opposite combination of economic and political arrangements from that prevailing since 1973. But although they had grown accustomed to (even dependent on) this democratic-interventionist regime, this accommodation was not happy or secure. For one thing, the Chilean economy per- formed badly under this regime, and was characterized by stagnation, periodic inflationary crises, and endemic balance-of-payments weak- ness. For another, the vigorous democracy generated insecurity about the realm of activities reserved to the private sector. Even before Allende was elected in 1970, laws on land reform, the “Chileanization” of the copper industry and so forth highlighted these uncertainties. After 1970, democratic institutions were used to promote a much more frontal assault on the ownership and management rights of landowners, industrialists,

bankers and even some shopkeepers, truckers and house owners.

By the time Pinochet took power, Chile’s propertied classes were in an exceptional state of dis- array and demoralization. To restore their confidence and to reestablish their ascendancy would require a very strong government that would have to remain in power for a very long time. The firmest guarantees would be needed against any relapse into the political insecurities of the early 1970s. At the same time, very strong economic incen- tives would be needed to reconstitute a private enterprise system after so many entrepreneurs, managers, and rentiers had been dispossessed. The old habits of dependence on state regulation and protection would also have to be broken, partly because of their association with poor economic performance, but equally because they were thought to have undermined property owners’ resistance to creeping socialization. Both the military and the old upper classes could agree on this diagnosis (forcefully articulated through the pages of the major conservative newspaper, the Mer- curio), but only the former possessed the power to implement the resulting prescriptions. The private sector came to depend on the authoritarian regime (and on its doctrinaire team of economic managers - the so-called Chicago Boys) to design and execute a long-term strategy for the restoration of capitalism, with remarkably little consultation and feedback from most of the prospective capitalists themselves. This exceptional background helps to account for the durability and intransigence of the Pinochet regime; for the unusually clearcut sep- aration in Chile between the sphere of political repression (to guarantee against any relapse into the old insecurities) and the sphere of economic liberalization (to optimize the conditions for private accumulation); and for various features that distinguished the style of Chilean macroeconomic management. What was this distinctive style that characterized the Pinochet regime? One might single out its emphasis on the long run, with remarkably few modifications in the light of short- and even medium-term setbacks to the plan; its disregard for distributional consequences and its lack of responsiveness to social protest (even from its “natural” constituency); its emphasis on “global” rather than sectoral policies; and its preference for “root and branch” restructuring (often on several fronts at the same time) rather than on incrementalism.

The three examples cited so far in this section concern conservative or even reactionary regimes. However, the same principle applies when con- sidering the style of economic management likely to characterize a regime in which, say, trade unionists or small farmers exercise a degree of political

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dominance. In Zambia, for example, it is safe to assert that the capacity of organized mineworkers on the copperbelt to resist has imparted a distinctive bias to President Kaunda’s economic strategies. In Costa Rica, a commitment to the welfare state and deference to the perceived self-interest of politically influential public-sector employees have powerfully affected the balance of macroeconomic policy over the long run. But these examples concern more pluralist political systems in which there is not so much dominant sector shaping state policy as a multiplicity of relatively influential groups.

One school of interpretation seeks to provide a general political economy explanation of economic policy choices, based on the assumption that all influential groups (including elected politicians, civil servants, etc.) are self-regarding sectional interests unconcerned about the collective good (Krueger, 1974; Lindbeck, 1976; Srinivasan 1985; Ames, 1987; Findlay, 1988). The view adopted here is that although such arguments offer a healthy corrective to earlier idealism, they should not be pushed too far. In certain cases the evidence may vindicate this type of interpretation, but several other forms of political explanation are equally likely to prove appropriate (Grindle, 1989).

(d) Entrenched characteristics of the political system

Clearly there is some overlap between this type of explanation and the preceding ones. Interpre- tations have already been offered concerning the political systems of Israel, Argentina, and Chile that include some suggestions about their entrenched characteristics. This is hardly surprising, since it will normally be either through historical tradition, social structure, or the self-interested action of dominant groups that particular characteristics of a political system become entrenched. Nevertheless, there is a separate category of explanation here, if only because the consequences for the regime may live on long after the precipitating conditions have faded from view. The United States, for example, has a political regime with many entrenched characteristics that date from the 18th century.

Some of them still operate quite powerfully to constrain the contents of current macroeconomic policy, even though the circumstances in which they developed are just a distant memory.

As mentioned above, few Third World countries can trace an independent existence before 1945. Presumably, entrenched characteristics are more likely to exert a major influence on these regimes which have experienced a century or more of autonomous political development. (However,

there is the case of India. It may be that the critical variable is not so much the date of formal independence as the degree of discontinuity in development.) At any rate, Colombia and Costa Rica may be taken as relatively clearcut examples of what might be said under this heading.

In Colombia, the two-party system (Liberals versus Conservatives) dates back well over a century. Powerful party allegiances were generated by a succession of civil wars, in which those identified with the “other side” could expect lasting discrimination, and perhaps expulsion from their lands. The most destructive round of partisan violence took place between 1946 and 1957. Thereafter the leaders of the two parties (who often seem to outsiders remarkably similar in outlook and social origin) arrived at a pact. The presidency would alternate every four years (regardless of the fact that in free elections the Liberals could almost always collect more votes than the Conservatives) and positions in cabinets, public agencies and local administrations would be shared among nominees of the two parties. This arrangement lasted for 20 years, and even now its legacy persists in many aspects of government and public administration. The consequences for the style of economic policy making in Colombia can best be indicated by contrast with what has just been said about Chile. Consultation and compromise between potentially opposing groups is the essence of the policy- making process. However the wheels of compromise are well oiled in Colombia, as both parties have so much in common, and have developed such a lengthy (if wary) tradition of working together. More disruptive veto groups, such as might sabo- tage the process of orderly incremental policy for- mation in other multiparty regimes, are largely excluded or domesticated by the Liberal/ Conservative near monopoly on public office. The result is that economic policies are imple- mented gradually and by widespread consent. They are subject to periodic revision under a process of trial and error. Policies are more likely to be sectoral than global, with medium-term goals (reflecting the four-year cycles of public office) much in view. A substantial range of interests must be consulted, and may be entitled to claim some compensation if public policies hurt them. Individual ministers are subject to judgment and dismissal according to the acceptability of their specific policies, rather than on the basis of any strong ideological or group loyalty test. These are all fairly deeply entrenched characteristics of the present Colombian political system.

Costa Rica is another coffee-growing economy with a longstanding and vigorous electoral system. Traditions of interparty accommodation and compromise date back much further in Costa Rica than


in Colombia. (The so-called Civil War of 1948 was the last serious instance of internal political violence. It was mild by Colombian or Central American standards, and was resolved by an armistice after only a few days of fighting.) Another well-known peculiarity of Costa Rica’s democracy is the constitutional bar against the maintenance of a permanent military estab- lishment. Lawyers and educators are exceptionally favored by public policy, whereas soldiers and policemen are not. The management of macroeconomic policy is fairly similar to that of Co- lombia, but without the .problems of military restiveness, agrarian insecurity, or acute regional rivalries. Domestic pressure groups are thus more orderly and less threatening to constitutional authority than in Colombia. (On the other hand, some political problems are currently more serious in Costa Rica than in Colombia - not only because of the climate of regional insecurity, but also because it is difficult to retain some autonomy and authenticity while depending heavily on infusions of US aid. Also, in a less polarized society elite discipline may be weaker; it may be harder to resist the granting of welfare benefits that exceed the productive capacity of the economy.)

Once again, these examples are intended to be illustrative of an approach, not definitive or exhaustive. There are, no doubt, some rather different entrenched political characteristics shared by Islamic regimes (i.e., Indonesia, Morocco, Pak- istan and Turkey), which presumably affect their macro policy options, and so forth. A closely related set of considerations may arise from what may be termed the formal properties of political institutions in such entrenched regimes.

(e) The formal properties of political institutions

Here Mexico provides an unusually vivid example. In this case, the key formal property of the system is simply that the president exercises a very large array of powers, but can serve for only one six-year term, after which his political influence becomes very small. This gives rise to a six-year political cycle, under which austerity measures are to be expected in year one of each presidency (197 I, 1977, 1983). However, it is one thing for a new president to axe the uncompleted projects of his predecessor and adopt politically unpopular measures that can be presented as a “fresh start” purg- ing previous excesses. It is far more difficult, in years two and three of a Mexican presidency, to continue with austerity or to hold back from launch- ing new spending initiatives to bring patronage and popularity to the new incumbent. Thus 1972-73, 1977-78 and 1984-85 saw programs of eco-

nomic reactivation (weaker and more delayed in the third case because of the severity of the debt crisis, but noticeable nonetheless). The fifth year of each presidency is a moment of exceptional political delicacy, when the incumbent must win acceptance of his nominee for the succession. At this point his power may begin to wane (particularly in relation to those collaborators who harbor hopes of emerging as the newly appointed leader) and the process of closed door bargaining within the ruling elite m.ay make rational economic policy making unusually difficult to sustain (certainly in 1975 and 1981).

The final year of each presidency is likely to be one of growing administrative and financial dis- order, as the ruling party’s official candidate tours every corner of the nation, trying to win support for his (preordained) election, and as many of the outgoing president’s supporters prepare to “switch horses” in order to gain good positions in the next administration. In 1976 and 1982 it was extremely difficult to implement overdue measures of economic correction, since the credibility and coherence of the outgoing administration were beyond rescue. Fear of a power vacuum in the last year of each of the presidencies offered an irresistible incentive to speculate against the currency; it also helps to explain the flamboyant acts of assertion that characterized the last months of these presidencies (a spectacular land seizure in the name of agrarian reform in 1976; the nationalization of the banks in 1982). Since the sixth year of each presidential cycle tends to have this disorderly character (1952, 1958, 1964, and 1970 all presented indi- cators of stress, although not as severe as 1976 and 1982), the first year of the following presidency is likely to witness austerity again. The cycle is thus completed.

A few words of caution are, of course, in order here. The formal characteristics of the presidential system do not explain everything about the course of a presidency. The tendencies just outlined are well known, and therefore in principle actions can be taken to prevent any further repetition (e.g., to reduce the risks of a power vacuum in 1988, President de la Madrid shortened by two months the interval between the presidential election and the handover of power). The Economic Solidarity Pact of December 1987 can be regarded as a supreme effort to break the negative expectations of the sexennial cycle. It appears to have worked - though at a cost in electoral credibility that remains to be assessed. Political cycles are no more mech- anical than business cycles - but at least in the Mexican system they occur as reliably as business cycles, and they obey a distinctive logic of their own. Moreover, economic management in Mexico is greatly affected by the fact that the timing of the


political cycle is rigid and invariable - it cannot be modified to adjust to the rhythm of economic fluctuations.

The Mexican system is an extreme example of how formal characteristics of political organization may affect macroeconomic management. The recent transition to democracy in Brazil illus- trates how a very different set of formal characteristics may also affect macroeconomic management (Kaufman, 1988).

President Samey was the first civilian ruler of Brazil since 1964, and,hoped to be remembered as the first democratic president of the “New Repu- blic.” But he rose to prominence as a civilian col- laborator under the preceding military regime. He was chosen as vice presidential running mate to the popular Tancredo Neves, whose democratic credentials were much clearer. Sarney was seen as some guarantee that the democratic regime would not constitute a complete break with the past. Moreover, Neves and Sarney were indirectly elected to office, after a massive campaign for direct elections had been thwarted. Then Neves died before he could assume the presidency. Thus Sar- ney’s democratic legitimacy was very open to question. Moreover, he lacked even a fixed term of office. Not until the Constituent Assembly was elected in November 1986 was there a legitimate authority to limit Sarney’s term of office (five years was decided). These formal characteristics of the political situation are of great significance for any- one seeking to explain the history of the Cruzado Plan (Baer and Beckerman, 1989), or the reasons why one year later Brazil unilaterally suspended interest payments on its external debt. When the Cruzado Plan was launched in February 1986, Sarney was suddenly converted from the least- regarded president of Brazil into the country’s greatest hero. His version of the transition to democracy seemed to promise an almost miracu- lous resolution of both the economic and the political problems of the nation at a single stroke.

Whatever his personal ideology, or his under- standing of the economic issues at play, Sarney occupied such a precarious formal position that he was bound to exploit this economic opportunity to secure desperately needed political legitimacy. It was politically almost impossible for an administration placed in this formal position to take adequate corrective measures before the November Constituent Assembly elections. By then it was too late in economic terms. either to resume the Cruzado Plan or to reverse the overheating of the Brazilian economy before foreign exchange reserves and international creditworthiness were exhausted.

The argument is not that either the rigidity of the Mexican presidential timetable or the inde-

terminacy of Brazil’s democratic calendar made gross economic mismanagement inevitable. But these formal characteristics of the two political systems do require full and systematic attention in order to understand the strength and pattern of the political pressures shaping macroeconomic decision making.

Electoral timing is not the only formal property requiring consideration (Ames, 1987). In Brazil, the division of economic functions between federal and state levels of government also requires precise analysis. (For example, one of Samey’s problems was that politically popular, directly elected, state governors were potentially serious rivals who con- trolled a substantial range of economic policy instruments. Samey’s Cruzado Plan could use only those powers that were reserved for the federal authorities - price controls, indexation laws, etc. It could not diiectly control the substantial areas of public spending, taxing and credit provision managed by state governments.) No doubt similar considerations affect the management of macroeconomic policies in such federal polities as India and Nigeria.

(f) The infuence of economic ideologies and schools of thought

This is a rather different type of explanation from the previous five, and it may not seem self- evidently “political.” Economists are naturally interested, first and foremost, in the quality of the economic analysis in question, and in the strength of the evidence adduced in its favor. In my opinion, political scientists should only give this type of explanation separate attention if the underlying economic analysis passes muster as reasonably rig- orous and well founded. (An insubstantial economic argument, or a theory lacking empirical support, may often be used by politicians to justify policies that have been chosen exclusively for non- economic reasons. What concerns us here are economic arguments of sufficient weight to make a real contribution to policy choices.) However, there are several schools of thought that meet this test, but that have been used to endorse quite divergent macroeconomic strategies.

For example, the Pinochet regime’s choice of economic strategy is often attributed to the influence of the so-called Chicago Boys, and direct con- nections have been traced to the teaching and advice provided by Friedman, Harberger, and Mundell. Similarly, the expansionary and interventionist policies adopted by Lopez Portillo have been attributed to the advice and influence of the “New Cambridge” school. In both cases, very


influential .economic decision makers received training in prestigious foreign universities, and subsequently claimed to be implementing the economic principles learned abroad. Brazil’s Cruzado Plan was a more homegrown product, but once again reputable sources of economic advice can be invoked as its inspiration. (Lopes published a well- regarded article on the theory of heterodox shock, and Brazil has some world-class economists who have researched inertial inflation.) Finally, Pre- bisch and the Economic Commission for Latin America (ECLA) school have a long history of conducting economic analysis (again within a particular intellectual framework) and of deriving from it policy recommendations which are said to have influenced the decisions of many Latin American governments. Needless to say, the World Bank’s own economic research and advice can also be included here. Although not all ‘these schools of thought (or “ideologies”) may be equally reputable or coherent, this list confirms that reasonably serious sources of independent economic advice are quite numerous and quite varied in their prescriptions.

This type of explanation becomes “political” when one asks why one school of thought rather than another gained influence with a particular set of policy makers. Why, for example, did the Chilean military regime - whose leaders had a very scant grasp of economic principles - whole- heartedly embrace the Chicago school, and cate- gorically screen out the equally reputable advice from highly articulate Christian Democratic economists? Of course, the technical quality of the advice will often be a consideration, affecting not only whether it is adopted, but also how long it is pursued. But from a comparative politics perspective one would expect only a rather loose fit between the professional soundness of an economic argument and the probability that a given administration will either adopt it, or will fully implement its recommendations, or will stick with it long enough to verify its accuracy. It is equally possible that the exponents of a particular ecq- nomic viewpoint may be constrained to overstate its virtues, and to conceal some of its politically less attractive features, in order to secure official acceptance and to defeat their professional rivals. The policy makers may have their own non- economic motives for embracing a particular school of thought - to lend academic respect- ability to policies they are determined to adopt in any case. (In my view this was what happened to New Cambridge in Mexico.) In any case. as is well known, the time horizon of a politician or a government, whether democratically elected or imposed, seldom coincides with the time horizon that an all-powerful economic advisor would

choose in order for his or her policies to reach fruition.

Let us take Brazil’s recent Cruzado plan as an illustration of how a political analyst might tackle the influence of a particular school of economic thought as a determinant of macroeconomic policy. As already indicated, President Sarney desperately needed a counterinflation policy that would bring him very high political dividends within a very short time horizon. His own grasp of the economic issues was probably quite limited, but the Brazilian presidency has at its disposal the advice of a wide range of very sophisticated and experienced economic counselors. Since the outgoing military regime had made it a point of principle not to “succumb to the dictates” of the IMF, any precarious civilian president of Brazil would have to eschew that source of assistance, at least in public. Politically it would be far easier to implement a jarring series of new policy measures if their authorship was seen as purely Brazilian. No foreign university or school of economic thought was held in such high regard that its endorsement would be seen as a source of political strength.

The restoration of democracy involved the return to Brazil of various prestigious economists who had been out of favor with the authorities during the period of military rule. It also implied more consultation with domestic currents of opinion, and a higher profile for Brazil’s own universities and research centers. Thus, locally generated research on inertial inflation and its treatment through heterodox shock enjoyed a series of political advantages which weighed quite as heavily with the authorities as its intellectual and analytical merits. It is hardly surprising if the authors of this research became slightly intoxicated by their sudden success, and even apparent power. In strict rigor, they should have insisted that their prescription would only work if its impact were dis- tributionally cautious, and if the difficult task of “re-entry” into a market-determined pattern of relative prices were promptly initiated. To vary- ing extents, they did salve their consciences by entering these reservations, but that was not how their apparent political power (their “technical influence”) prospered.

No doubt an international agency like the IMF can lean against the pressures emanating from the Brazilian administration and from Brazilian public opinion. Perhaps even the University of Chicago can partly counteract such pressures. But Brazilian universities and research institutes that were only just emerging from a long period at the margin of policy making were very poorly placed to resist “politically-motivated” misapplication of their ideas. This. at least, is the sort of contention that


a political analyst ought to explore when assessing the influence of this particular school of thought on the Brazilian government’s choice of economic strategy.

It may be that such contending schools of economic thought have a more important influence on macroeconomic policy making in Latin America then elsewhere in the Third World. Perhaps in Africa and Asia the available range of alternative economic viewpoints is narrower. Possibly former British and French colonies have inherited some- thing like a “Treasury viewpoint” which persists although governments come and go. Or perhaps the locally available alternatives to a conventional economic analysis are so rudimentary that they can be dismissed as purely political choices lacking any serious economic rationale.

(g) “Vicious” (or “virfuous”) cirles

This broad category of interpretations can be applied equally well both to economic and to political processes. The Cruzado Plan, for example, was a dramatic effort to halt a vicious circle of economic developments (in which accelerating inflation causes a shift of resources into short- term speculation, with all economic agents under mounting pressure to abandon their other priorities and devote all their energies to catching up) and to substitute a virtuous circle (in which price stability causes interest rates to plummet, wage levels to stabilize and confidence to remain, crea- ting the conditions for a sustained expansion). President Alfonsin’s administration in Argentina (1983389) engaged in a comparable effort in the political sphere but postponed attention to the economy. Before 1983, Argentine politics seemed locked in a downward spiral, in which authoritarian excesses created bitter polarization, which stimulated fear of violent resistance, which called forth still greater authoritarian excesses. Since 1983 a sustained effort has been made to create a reverse dynamic, with increased commitment to the role of law providing a framework for compromise, tolerance and mutual accommodation. (A particularly notable difficulty with explanations of this kind is that they leave it so unclear how long the process is expected to take and whar kindof resistance it is likely to encounter.)

Cumulative and circular causation may be at work in both the political and the economic spheres simultaneously. For example, if Alfonsin was engaged since 1983 in restoring Argentina’s political institutions, at the time of the Austral Plan of 1985 he also attempted to reverse longstanding economic deterioration. The two projects may be conceptually distinct. obeying separate logics and

moving at different rhythms. But they clearly impinged on each other. It would therefore be a poor interpretation of the macroeconomic policies that ignored the ways in which they interacted with (perhaps conflicted with) the at least equally urgent priorities of redemocratization.

It is one thing to argue that redemocratization must have an impact on the course of macroeconomic policy, but quite another to specify exactly how the two processes interact (Nelson, 1989; Kaufman 1988; Stallings and Kaufman, 1989). If it is hard to specifiy how they interact in a specific historical instance, it is even harder to specify the range of interactions that are theoretically plausible, or that may emerge from a comparative survey. Nevertheless, the difficulties of specification should not cause us to overlook processes that powerfully affect the perceptions and priorities of policy makers. One way of narrowing the focus is by asking whether a newly established democratic administration with a limited range of policy instruments at its disposal, and with two potentially conflicting but equally indispensable objectives in view (democratic consolidation and sustainable macroeconomic reconstruction), can find a “critical path” that will keep up the momen- tum on both points. This can be broken down into several questions that are still very large, but slightly more manageable. In principle, is there such a critical path, or indeed can a plausible case be made for identifying more than one? Whatever the outside observer may think about this, did the policy makers think in terms of the pursuit of a single critical path, or did they simply com- partmentalize the two issues, addressing economic or political problems as they arose without consideration for the interactions? Even if a unified and well-designed strategy was in place, did the new administration possess the support, the authority, or the power resources required to execute such a strategy?

These are useful issues to explore when analyzing the Austral and Cruzado Plans. Similar questions are worth asking about Colombia in the 1960s and Costa Rica in the 1950s (two cases where - through luck or design - relatively virtuous circles of redemocratization and economic recovery were established). This particular variety of interaction between economies and politics may be peculiar to a relatively few Latin American countries. It can also be found in various newly established democracies in southern Europe. Both the vicious and virtuous cycles can be clearly identified in the recent history of Turkey.

It is in relation to question of timing and se- quencing that some reasonably clear conclusions are most likely to emerge. Just as analysts of macroeconomic policy use the comparative method to


assess whether trade liberalization and financial liberalization work better when introduced together or when tackled in sequence, so we might consider whether democratic consolidation and macroeconomic reform are best tackled simultaneously. For the sake of illustration it could be argued that the best (least bad) critical path for a new democratic regime may be to initially con- centrate its attention very largely on questions of political organization (legalizing parties, organ- izing elections, establishing civilian control over the military, writing a constitution, negotiating pacts with major social forces). The economic situation may have to deteriorate for a while. At a certain point, the democratic regime may have acquired sufficient political stability to address the economic issues more effectively. It may actually require a period of growing economic difficulties to shift public opinion back from exclusive pre- occupation with the character of the new democratic institutions to a more routine concern with the need for coherent economic policies and the restoration of social discipline. A key determinant of the new regime’s economic and political success (its capacity to sustain two virtuous circles) may be whether it can get the timing right for this shift of gear.

(h) “Conjunctural” explanations

This all-inclusive list of eight somewhat overlapping types of political explanation has pro- ceeded from the most long-term and structural considerations through relatively stable, short- term and predictable factors of a much more specific nature, to the relatively short-term and ad hoc. The eighth heading is really a residual category of “conjunctural” explanations that do not entirely fit under any of the earlier headings. and that show relatively little regularity or predictability. But just as some economic explanations invoke the notion of “exogenous shocks,” so some political economy explanations may require discussion of political conjunctures.

The most straightforward example is provided by the outbreak of a war. Here we have a sudden political event, which may indeed be completely unexpected, and is in any case not closely linked to the course of peacetime macroeconomic policy. It will probably require an abrupt change in budget allocations, redeployment of manpower, the post- ponement or cancellation of some development projects and so forth. War acts more immediately and more powerfully than any other factor (including the strongest of exogenous shocks) to reshape economic priorities and procedures. During the past 20 years many Third World countries have

fought limited wars (e.g., Argentina, Egypt. India, Iran, Iraq, Israel, Morocco, Nigeria, Pakistan, Turkey, etc.) Quite a few others have experienced conditions of near war (Angola, Chile. El Sal- vador. Ethiopia. Indonesia, Mozambique, Nigeria, Sri Lanka, Sudan. Uganda, Zimbabwe. etc.). In some cases the impact on economic policy may have been brief and superficial, but in many others there has been a more profound and lasting effect. War scares are more frequent than actual wars. but they too can exercise a relatively strong effect on economic policy. (For example, the Peruvian government’s difficulties with economic management after 1973 have sometimes been attributed to exogenous shocks from the world economy; possibly of equal importance, however, was a more political conjuncture - the arms race with Chile that arose after Pinochet’s military takeover.)

Another kind of sudden shock - often entirely unrelated to the economic policy process - which may very well compel a sharp reallocation of resources is a military coup, or perhaps just a coup scare. The effects are weaker and less certain than in the case of war, but such events may also under- mine the confidence of economic agents in the stability of public policy. In particular, control over the level and pattern of public expenditure may shift or weaken. Coup threats belong within the broader category of attempts to intimidate the public authorities through threat of violence. Although the armed forces are particularly well placed to exert such pressure, they are not necessarily the only ones to do so. A celebrated example of how violent civilian protest may force a major change in economic policy is provided by the so- called Cordobazo of 1969 - a student- and worker- led uprising in Argentina which brought the Krieger Vasena stabilization plan to an abrupt conclusion. Student protests in Mexico City in 1968 led to a massacre, the longer-term consequence of which was to help derail economic management for more than a decade.

In addition to wars, coups and riots, the category of political conjunctures includes a medley of other factors that defy general treatment. One particular type of conjunctural explanation should be singled out for consideration, however. This concerns the personal idiosyncrasies of certain powerful leaders. It would be very difficult adequately to account for the course of macroeconomic management in Indonesia between independence and 1965 without taking into consideration President Sukarno’s strange beliefs and erratic practices. Similarly. the personal convictions and political calculations of the “father of the nation” may also have much to do with the choice of economic policy made after independence in such countries as Cote d’Ivoire, Kenya, Tanzania and Zambia (Bates, 1981:


Gulhati, 1987). What would the economy of C&e d’Ivoire look like today if Nkrumah had led the independence movement there? What if someone with Nyerere’s views had been the founder of Kenya?

Consider Argentina. Many features of the Argentine economy and political life can be traced back to decisions taken during the first presidency of Juan Peron (1946-55). Peron adopted an extremely personalistic style of political and economic management, and drew guidance from a range of theories and calculations that non- specialists might find hard to understand. (The inevitability of a third World War was one important belief that may help to explain his preference for “inward looking” development.) Thus a good explanation of Argentine macroeconomic policy has to include some discussion of the extraordinary biography of Peron, but of course not everything can be explained in that way. In fact, despite his distinctive personal style and beliefs, the force of events (or the logic of economic necessity) com- pelled Peron to adopt very different economic policies after 1951 from those he espoused in the first five years. However, it would be an inadequate summary merely to say that through ignorance he committed errors which he then lived to regret. The policies adopted between 1951 and 1955 were very different not only from what preceded them, but also from what took place thereafter. The evidence that the second set of policies was not just an outright failure comes from the fact that even after 1955 Peron’s achievements retained a powerful following in Argentina - mostly among trade unionists, but also in other strategic sectors of society. Thus in contrast to, say, Nkrumah, or Sukarno, who left no following, Peron’s idio- syncratic legacy lived on after he was ousted, and his ideas-even his advice from exile-continued to exert a significant influence on the course of Argentine politics and economic policy. So much so that after 18 years of prescription, Peron returned to the presidency in 1973-76, once again exercising a large degree of personal discretion.

It was Peron’s choice, and his alone, to adopt a rigid “Social Pact” on his return to office in 1973. There is no way to explain the contents or rationale of that policy without giving detailed attention to the complex personal history of its principal author. Two points must suffice here. Even his enemies had come to agree that “only Peron” could bring together the broad array of social forces that united around the 1973 Social Pact; he was allowed to return on the assumption that he would thereby “settle his unfinished business” with the civic forces of Argentine society before he died. His complete disregard for the “sustainability” of that economic pact after his death (which was thought to be inno-

cent) was demonstrated by his insistence that the vice president must be his wife. Personalist to the end, he preferred to marginalize political rivals while he lived, rather than to prepare any succession capable of continuing where he would leave Off.

Of course the timing of Peron’s death was unknown in advance, although its near-term probability was included in all political calculations. This introduces a final category of political conjunctures that may sometimes (as in the Argentine case) have profound effects on the conduct of economic policy. Such “accidents of timing” would include the assassination of Mr. Bandara- naike and Mrs. Gandhi, General Suharto’s escape from assassination. and a host of other less sensa- tional political contingencies with macro-policy implications.

To conclude, the claim of this section is that all “political explanations” of economic policy can be fitted into one (or more than one) of the eight types of explanation laid out above. The question remains, of course, how comprehensive and convincing an explanation of economic policy choices can be elaborated on the basis of these “political” categories. Section 3 discusses how the various types of explanation may be combined, and what they might then explain, and proceeds from there to reassess the notion that political constraints limit economic optimization.

3. THE SCOPE (AND LIMITS) OF “POLITICAL” EXPLANATIONS

In principle it should be possible to synthesize these eight categories of political explanation in a more aggregative manner. A small number of different types of relationship between the state and civil society can probably be identified (strong state, extremely well insulated from feedback; stable but less authoritarian state which dedicates considerable effort to sounding out and responding to social groups’ reaction to its policies; weak state, parcelled up or buffeted among unconstrained social groups, lacking the means to effectively co- ordinate and sustain macroeconomic policy). There should be some kind of fit between the speed, flexibility and appropriateness of policy responses in particular countries and their location within this classification schema.

Another key issue is whether governmental decisions preceding or following an economic crisis were based on reasonable expectations, given the information and experience available at the time. This formulation is much preferable to “did governments practice ‘rational expectations’?” since the looser wording draws attention to the


element of judgment, rather than precise calcu- lation, that necessarily characterizes most macroeconomic decision making. Although this is to a considerable extent a technical question, it also has a political dimension. A satisfactory answer might have to take into account the issues raised in Sec- tion 2(f). Information and experience may be fil- tered through an ideological or doctrinal lens, so that what would seem a reasonable expectation to a well-informed Keynesian, for example, might be judged quite differently by an equally knowledge- able and professional monetarist. This can be a political, and not merely a technical, issue for reasons covered in part by Section 2(f), and in part by Section 2(c). The reasons why one particular school of economic thought may enjoy privileged access to policy-making circles are not solely con- nected with the analytical merits of that particular viewpoint. Section 2(c) suggests how the self-interest of politically powerful sectors may sometimes have a major role to play here. More ad hoc or “conjunctural” factors, such as a particular leadership style, may also require attention, as indicated in Section 2(h).

There is also the question of the political will to implement unpopular policies that are known to be necessary for economic reasons (Nelson, 1984). Lack of will is often recast in the language of political constraints. This recasting has the merit of shifting attention from an extremely imprecise and subjective notion to external factors that may be somewhat more verifiable. But such a shift of perspectives does not abolish the need for relatively subjective judgment. There is a tendency to reduce the issue of political will to a single, narrow, political motivation, such as the government’s wish to avoid being unseated because of its responsibility for unpopular measures (Ames, 1987). While that may well be an important motivation for some governments to delay or resist the adoption of recommended economic policies, there is a serious risk that the true political motivation may be obscured by such prejudgment. The categories of explanations suggested in Sections 2(c), 2(e) and 2(h) above could be more fruitful alternatives.

The different types of political explanation can be combined in various ways, according to the purpose one has in mind. This article has not attempted to define clearcut limits between one type of explanation and the next, because the aim was to display the fullest range of possible explanatory approaches, and to indicate how they might all work. Individual cases would have to be analyzed eclectically, drawing on whichever of the possibili- ties seem most promising. That is why this article has considered eight types of political explanation and accepts so much diversity within each type. For any particular task several different types

may be required in combination. In fact there will be rather few instances where the process is so clearcut and unmediated that a single type of political explanation used in isolation will exhaust the issue. Almost all the illustrations given above are highly stylized in order to demonstrate the possi- bilities of a particular approach. They each rep- resent the beginning, rather than the end. of a process of political interpretation.

Assuming that these alternative types of political explanation are applied in appropriate combina- tions, it remains to be determined howl much can be explained in this way, or how much would be lost by failing to consider these political variables. What are the uses to which such explanations can properly be put, and what are their limitations? Although these political types of explanation can be helpful, more should not be expected of them than they can deliver.

The manner of decision making has received little attention here, although many political scientists and administrative theorists would argue that this too can powerfully affect the results of policy making in ways unforeseen by the central authorities (Kaufman, 1988; Grindle, 1989). Adminis- trative structures do not always operate with much regard for their formal purposes - a problem for statists, but also one that can afflict programs of economic liberalization, privatization and “debu- reaucratization.”

Explanation is not justification. Many professional economists will have heard “political” explanations of why desirable economic policies were not adopted, which they justifiably considered to be really alibis or excuses - selective interpretations designed to exempt a particular government from blame or responsibility, or to persuade technical advisors that objectively desirable policies were unviable for nontechnical reasons. In reality the “political explanations” that work best may not even have been considered by those concerned with political justification. In- evitably some explanations that truly illuminate the course of events will also appear persuasive as justifications of government decisions (e.g., if a government has a well-founded fear that its terri- tory may be invaded, that may both explain and justify an unplanned upsurge in defense spending). Other convincing political explanations may ines- capably carry a certain charge of discredit (e.g., if a president contracted large new loans, and drew down on the IMF quota, in order to finance his anticipated flight in the face of an insurrectionary challenge). But most explanations will occupy a gray area in between, where it is difficult to decide how much of an excuse is involved, and how much the quality of the explanation is undermined by special pleading. The comparative approach can

be of some importance here. If, for example, we allow some weight to the political timing explanation of why President Alfonsin had to con- solidate his position before embarking on the Aus- tral Plan, the same weight should be allowed to President Sarney over timing of the Cruzado Plan. Comparison of the two cases may enable us to arrive at a more objective assessment of the worth of this explanation than if we had only the polemics generated by a single instance from which to work.

There are major limitations not just to the pre- scriptive value of these political explanations, but also to their explanatory quality. The thrust of this article has been to emphasize how much they might explain, rather than to assess how well these explanations work. In fact, fairly incomplete and even quite ambiguous explanations are about the most we should expect. This is not an area in which clearcut, high probability, causal models can be developed - far from it. A good political explanation will be one which stands up well under cross-examination and which enriches the quali- tative judgments about why certain crises arose (or were avoided) and how they were handled.

Most of the political explanations outlined in this article take the form X characteristic of the political system leads to probability of Y bias in macroeconomic policy making. The X charac-


teristic mighr be an interaction between the socially maximizing goals of the government and the sec- tionally maximizing goals of some veto groups, but there is no presumption of that. Indeed most of the political explanations offered in Section 2 concern processes in which the structure of the inherited situation imposed some form of constraint on the discretionary freedom of goal-oriented actors. This suggests that the major kind of political constraint which helps explain why non-optimal policies are sometimes adopted and crises are often mis- managed may have little to do with second-best bargaining among rival goal maximizers. Insofar as the explanation is political (and it is suggested here that that will seldom be more than a part of the story), the main sources of constraint are more likely to be systemic. If so, then a model of rational economic policy makers frustrated by political constraints would be not only misleading but also potentially damaging. A good and successful economic policy maker would then become not one who circumvented or overrode the political constraints on sound economic policy, but one who understood both the economic issues and the systemic characteristics of the policy. and who therefore learned to adapt economic objectives to the requirements of national politics, as well as the reverse.

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political explanations of macroeconomic management: a survey

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