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Session 5
William C. Smith et al., eds., Latin American Political Economy in the Age of
Neoliberal Reform, 1994, pp. 121-208
“Economic Reforms in New Democracies: A Social-Democratic Approach”
by Pereira, Maravall, Przeworksi
Summary:
Newly formed democracies confront the double challenge of seeking economic reform while supporting
nascent democratic institutions: economic reforms inevitably lead to social costs in the short term, which
in turn may lead to social discontent that undermines democratic institutions. The authors advocate a
“social-democratic” approach to market-oriented reforms, as the strategy by which left-wing governments
can achieve resumed economic growth under democratic conditions.
Introduction
The success of economic reform should be judged only in terms of :
 sustained economic growth
 consolidation of democratic institutions
The authors rely on three central hypotheses:
1. stabilization and liberalization are necessary but not sufficient for success
2. social policies must accompany reforms
3. representative institutions must take part in shaping and implementing reforms
Growth and Democracy as the Goal of Reforms
In many countries in Europe and Latin America that have been transitioning to democracy since 1970, the
collapse of authoritarian regimes was accompanied by economic crises, themselves a product of the size
and nature of the state which created economic inefficiency and impotence.
 Democratic transitions must address how to resume economic growth and consolidate new
democratic institutions at the same time
 Capacity of new democracies to address economic reforms (stabilization, structural changes) is
hampered by expectations for economic improvement and by new vulnerability to popular
pressures
Economic reforms have three objectives:
o stabilize economy – slow down inflation and improve financial position of state
o change structure of economy – increase efficiency of resource allocation
o sell public assets – privatize, though aim is often unclear
The first two objectives will lead to negative growth in the short run, so interim evaluations of reform
programs are inconsistent and controversial.
What is economic success?
 Nelson: success judged by degree of implementation over outcomes
o Based on assumption that reforms are appropriate, flawless to begin with
o Untenable approach because no one blueprint reform exists – don’t know what will work until you
try and see what the outcome is
 Haggard, Kaufman: stabilization and liberalization
o Based on assumption that stability and competition are sufficient for growth
o Causal links are flimsy – this approach says nothing about the nature of stability and competition,
which may not lead to growth (ex: sale of public assets increase state revenue, which may be
stolen by state officials)
 Authors: success of reform must be evaluated by actual economic growth – not just by process of
implementation. However, distributional conflicts will occur with reforms, so:
o Affected groups must be able to channel discontent through representative institutions,
o
Groups need to buy into democratic ideal – to have sustainable democracy, need stable
democratic framework in which groups have faith they can process their demands through it
Neoliberal vs Social-Democratic Approach
Evidence for success (Spain, Portugal, Uruguay, S Korea, Mexico, Hugary) regarding resumed economic
growth is thin, and so varied that it is hard to judge whether success was due to policies or to
circumstances. On the other hand, policies often fail because they do not “correct the fundamentals”:
o restructure flows of government expenditures
o reduce stocks of foreign and domestic debt
Authors go through each their three central hypotheses (from Intro):
1. Market oriented reforms of stabilization and liberalization are insufficient to generate growth
Stabilization programs
o Tend to induce recessions because they reduce demand and raise interest rates to excessive
levels, discouraging investment and hampering growth
o Cuts in expenditure necessary to handling fiscal crises do not distinguish between government
consumption and public investment.
Markets
o Orient individual to allocate resources efficiently, but aren’t sufficient to coordinate individual
actions toward collective prosperity.
o Neoclassical dependence on market is not best – concerned with static efficiency, but other types
of efficiency (ie, dynamic) are necessary for growth, which static doesn’t measure
Certain degree of state intervention is necessary for growth
2. Social policy is necessary to protect those whose subsistence is threatened by reforms.
Inevitable period after stabilization before growth takes place
o Can be long
o Consumption will not grow, incomes may fall to below poverty
Social rights
o If people must make intermediate trade-offs, they must have confidence that temporary sacrifices
will eventual lead to improvement of material conditions.
o New democracies working toward economic reforms are often unable to provide the social
policies (provision of health, education, income maintenance) that respond to social rights under
democracy
o Spain: social policy was extensive such that despite widespread unemployment, people learned
that political democracy brings social rights – no serious social upheavals
o Extensive social policy may not be doable during fiscal crisis
Social protection and income insurance
o Loss of employment means loss of livelihood without government social net
o Active labor-market policy essential, because markets do not “emerge” out of competition but
must be created
o If fears of (perceived) impending unemployment are not addressed through income insurance
policies, social resistance to reforms may be explosive
Political impact
o Affected by income distribution – less egalitarian country will have less resistance
o Universalist policies more popular but more expensive are cheaper but politically unpopular
because perceived as gifts to those who do not want to work
The technocratic style of policy making weakens nascent democratic institutions.
Reforms done through consultations with groups may lead to foot dragging on any real changes, but
imposed reforms may lead to resistance. Policy styles matter:
1. Decretism – executive forces reform measures on society through decree powers
2. Mandatism – executive enjoys majority in legislature and has mandate to do what it believes is
appropriate, without consultation with opposing forces
3. Parliamentarism – coalitions and compromises necessary due to lack of majority or deliberate
pursuit of negotiation by majority, creating political support
4. Corporatism – aka, concertation, negotiations not only with opposing political forces but with
unions and other interest groups
What do consultation and concertation do?
o Improves technical quality of reform programs, because logic or design is not obvious
o Builds political bases of support, creating political conditions for continuation of reform
o Consolidates democratic institutions by channeling political conflicts
Obstacles to consultation
o Strategy of opposition may be not to collaborate, but to let government make its mistakes
o Too much collaboration takes away watchdog role of government oppositional forces
o Disproportionate political influence will skew intent of reforms
Technocratic policy style
o Initiated from above, launched by surprise, independent of public opinion, without participation of
other political forces
o Undermines functioning of democratic institutions
o Interest groups resist reforms because they don’t have buy in; consequently, they will not easily
accept temporary hardships of economic reforms