Schamis: Distributional coalitions and the politics of economic reform in Latin America

Schamis. 1999. Distributional coalitions and the politics of economic reform in Latin America. World Politics 51 (January): 236-68.

Brief Overview

Turns the usual argument around. Liberalization does not eliminate opportunities for rents. Financial sectors especially can really profit from liberalization. Often, Latin American states fostered these societal groups' support. For Schamis, societal interests bring about liberalization, not an insulated finance ministry heroically resisting popular protectionist pressures.

Implications of Schamis's argument: (1) States are not always the autonomous actors that neoclassical theories of liberalization often assume them to be (contrast this with Stallings 1992). The state is merely a forum in which societal interests compete. Thus, we must examine society's interests--not governmental institutions--if we wish to understand policy changes. (2) Liberalization does not always eliminate rent-seeking opportunities. Sometimes it even creates them--there are societal interests (especially financiers) that favor liberalization (b/c they can get rents).

Main Argument

Much of the literature on economic liberalization assumes that an autonomous state must somehow neutralize the societal interests that stand to lose from liberalization. A small group of heroic leaders introduces liberalization, even though it is not popular. Schamis approaches the problem from a different angle. Instead of looking at how governments neutralize losers (i.e. those who don't want liberalization), he looks at how reformist governments mobilize winners (i.e. those who stand to benefit from liberalization.

Rents are excess profits that you earn through imperfect distribution. Neoclassical theories say that rents only occur in relation to the size of the public sector. But the act of liberalization also entails specific rents (because there are benefits that can be directed to small groups even though the costs are borne by society as a whole). Balance of payments crises favor groups with high asset mobility (i.e. finance sectors, not manufacturing). Privatization has obvious rent opportunities, especially because cash-strapped regimes facing economic crisis are likely to sell state-owned enterprises as monopolies.

(Potential criticsm: Is Schamis really talking about liberalization? Has a state really liberalized if it sells off state monopolies as private monopolies? And wouldn't true mobilization have required open bidding during privatization? Just because you've transferred government monopolies to private monopolies doesn't mean you've liberalized. These cases that Schamis is looking at might not actually be cases of liberalizing reform.)

Case Studies

Chile: Macroeconomic reforms favored financial sectors, not the manufacturing/mining sectors that prospered under import substitution. Privatization (including banks, utilities, and monopolies) also benefited only small groups (despite incurring societal costs). The first (1970s) wave of reforms occurred because Pinochet came to power with the support of the anti-Allende (socialist) financial sectors; the second (1980s) wave of reforms occurred because leaders of financial conglomerates got control of the ministries of finance and economy. In both cases, then, a pro-reform coalition pressed for liberalization, and over time, the government and the financial elites got cozier and cozier.

Mexico: The government provided liberalization in exchange for support from financial bigwigs. "The strategic quality of this alliance became rather explicit in February 1993, when at a dinner with twenty-seven of the country's wealthiest men (most of them beneficiaries of privatization), Salinas asked each of them to donate $25 million for the 1994 electoral campaign. At this point, it became evident that this distributional coalition--a plutocracy, in the words of one observer--had sustained a decade of economic policy reform."

Argentina: After several sporadic events, liberalization finally set in when the government decided to make a permanent deal with the industrialists favoring liberalization. Privatization was the "political foundation of the reform program" because it "allowed the government finally to secure a lasting deal with the captains of industry: the former replenished state coffers and the latter made up for lost rents."

What to Learn from the Case Studies

"In fact, the evidence presented in this paper demonstrates that collusion between political and economic power and the formation of small distributional coalitions have been the driving forces behind the policy reform process in Latin America. Frequently, such a collusion was made explicit by revolving-door relationships between corporate and executive posts, as in Chile during the expansion of the grupos, or by direct channels of access enjoyed by a reduced number of firms, as revealed by the leaders of the Mexican cce. Uniformly, these relationships translated into the preservation of market reserves, as most clearly expressed by the Argentine captains of industry, first state contractors and later privatizers."

The Problem with Neoclassical and Institutional Explanations

"Theoretically, these claims are based on a profoundly negative view of politics characteristic of neoclassical economics (that is why whenever societal groups engage in political organization, protectionism is invariably expected to follow) and on what appears to be an increasingly prevalent tendency in the field of political economy: to view political institutions--particularly the state--as autonomous structures with their own distinctive configurations, ideas, and interests, and take them as the independent variable that explains various socioeconomic outcomes, government policy among them." We need to look at society, not just institutions. "If institutions are delinked (insulated) from the preferences and strategies of societal groups, crucial factors that account for the process of institutional creation and change are missed." That's why this paper focuses on group preferences.