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—Publisher’s Proposal— Merit or Luck?: Economic Performance and Democratic Accountability in Latin America Daniela Campello Cesar Zucco Jr. Fundação Getúlio Vargas Fundação Getúlio Vargas [email protected] [email protected] Carlos Andrés Perez governed oil-rich Venezuela for the first time between 1974 and 1979, presiding over an unprecedented oil boom. After leaving the presidency with very high popular approval, in the late 1980’s he won a second term on the promise to revive the “good times.” It turns out that his second government coincided with the lowest oil prices in modern history; not surprisingly, Perez could not match his original performance and was sacked before the end of his term. Even though fluctuations in oil prices explain much of the president’s success in the 1970s and failure in 1990s, Venezuelans did not seem to take that into consideration when rewarding Perez in the former or punishing him in the latter period. This phenomenon is not restricted to oil-rich countries. Most of Venezuela’s neighbors are subject to similar cycles of booms and crises that are beyond governments’ control, because they are essentially commodity exporters whose export prices are set in an international market, independently of any action taken by the presidents themselves. Moreover, commodity prices are not the only way in which presidents are at the mercy of external economic conditions. When the Federal Reserve Bank under Paul Volcker increased US interest rates sharply to deal with stagflation in the late 1970’s, capital flows to Latin America dried up, and all governments faced extreme duress in an inflationary crisis that lasted for a decade. Most military regimes in the 1 region ended, and elected presidents governing through the hard times that followed suffered from low popularity and had a dismal record electing their successors. In contrast, in the early 1990’s, when US interest rates hit their lowest point in decades, an abundance of capital flowed into the region seeking better returns. Presidents in countries as varied as Peru, Argentina, and Brazil were credited by their domestic constituents with ending inflation through the usage of ingenious stabilization plans. Throughout the region, leaders spearheaded constitutional changes to allow for immediate reelection, and were reelected. Voters did not discount the fact that international conditions beyond the president’s control were very auspicious, neither that inflation was brought under control in most countries at about the same time. Economic performance in South America is substantially determined by exogenous factors like commodity prices and international interest rates. Yet voters do not factor this in when evaluating governments. As a result, they tend to reelect presidents ruling in good times, and to vote out those leading during bad times. Put simply, electoral rewards and punishments are based on “luck” (i.e. factors beyond the president’s control) rather than on merit. If this is true, we argue, the main normative benefit of economic voting—to hold incumbents accountable to deliver the best economic performance—might be lost in the region. This book explores the nature of electoral accountability in Latin America, dwelling on the linkages between international economic factors, domestic economic performance, and political support. Our goal is to understand how voters chose and evaluate incumbents in contexts in which the state of the economy is mostly exogenously determined, as well as the incentives this vote produces for policymaking. Topics in this investigation include how countries’ economic and political characteristics influence voters’ capacity to identify merit from luck, whether political discourse reveals attempts by incumbents and opposition to attribute economic performance to external economic factors or government competence, what role the media plays in this process, and whether the pursuit of counter-cyclical fiscal policies such as the creation of sovereign wealth funds can mitigate the impact of international conditions on voters’ evaluation of governments’ performance. This project has direct and important implications for the literature on economic voting. By showing that voters systematically take luck for merit, it confronts the most recent findings of the literature on economic voting (Kayser & Peress 2012) and challenges its fundamental claim that even uniformed voters can hold politi- 2 cians accountable. At the same time, it advances the notion of blind retrospection (Achen & Bartels 2006), by explicitly determining the mechanisms through which luck affects governments’ performance. Besides students of economic voting, the book will also be of interest to students of Latin American political economy, and to those interested in the prospects for democratic accountability, particularly in presidential systems. Finally, it dialogues with a literature on natural resource curse, and has potential extensions to other economies oriented towards commodity exports, not only in less developed regions, but in countries like Australia and Canada. Rationale and Scope There are few—if any—reasons to believe that voters can distinguish merit from luck, even more so in less developed democracies. In the case of South America, for example, a tradition of inward-looking development, in addition to low levels of education and information, should all but prevent voters from making this distinction. This would not be a problem, however, in countries where economic performance is mainly determined by government decisions. Yet in countries in which exogenous factors are determinant, it implies that incumbents are punished and rewarded on the basis of luck rather than merit. In these cases, retrospective economic voting will not provide the incentives for responsiveness and accountability that theorists expect, challenging some of our deeply held beliefs about democratic systems of governments. The argument we put forth—that voters are unaware of factors that influence governments’ performance but are beyond incumbents’ control—can potentially apply and be tested in any democracy. However, South American countries provide the best possible testing ground in which to analyze the limits of retrospective economic voting as an accountability mechanism. First, because they share many institutional similarities—presidential systems, fixed terms, limited central bank independence—that favor comparative cross-national analyses. More importantly, though, not only the performance of South American economies is heavily dependent on exogenous factors, but these factors are well known and have been extensively studied by economists. Most countries in the region are essentially commodity exporters, therefore economic growth is very dependent on internationally-determined commodity prices, 3 over which no single government detains any control. South American countries have also in common very low rates of domestic savings, which makes them extremely reliant on foreign capital. Research has shown that inflows of capital to the region are largely driven by fluctuations in international interest rates. When these rates are low and international liquidity is high, capital is more likely to flow to emerging economies where returns are higher. When the opposite happens, capital flees to safer havens. Governments’ decisions have been shown to cause only marginal deviations in this trend. As a result, it is well established that economic performance in commodityexporting-low-savings South American countries1 is highly determined by the behavior of commodity prices and international interest rates. Economies suffer when commodity prices are low and international interest rates are high, and do particularly well when the opposite occurs. This is particularly important from a methodological standpoint, as it offers a great and rare opportunity in the social sciences to deal with a causal variable that is truly exogenous to the outcome being studied, allowing us to isolate causal effects quite neatly. It also allows us to contrast relatively similar countries in which our argument should hold (South America), with a group of countries where it should not hold (Mexico and Central America), providing additional causal leverage. Finally, differently from already established notions of blind retrospection that rely on random events such as shark attacks and draughts (Achen & Bartels 2006), presidents can anticipate commodity prices and US interest rates, and therefore adjust their strategies according to the state of the world. The power of a truly exogenous causal variable allows us to use an extremely simple setup to text the core of our argument. If voters discounted the exogenous state of the world economy (i.e. luck) in their assessments of incumbent’s performance, there would be no association between these factors and presidential evaluations.2 If, on the other hand, voters are unable or unwilling to discount luck, then the world conditions that strongly determine domestic economic performance should be directly related to voters’ assessment. The core of the book is centered on the test of this hypothesis. This is also the portion of the manuscript for which most research has already been completed. The strong results we already have in support of our argument will serve as the linchpin for the rest of the book. 4 Place in the Literature The book lies at the intersection of important strands in the political science and economics literature. In its simplest form, economic voting posits that “citizens vote for the government if the economy is doing all right; otherwise, the vote is against” (Lewis-Beck & Stegmeier 2000). Whereas the connection between economic performance and electoral success is widely accepted among voters, the media and also political scientists, though, empirical findings have been recognized as very unstable. They vary between samples, depending on measures and the period analyzed. Scholars have also extensively debated whether economic voting is sociotropic or egotropic and whether it is prospective or retrospective (Ashworth 2012). An institutionalist offshoot of the literature has examine how different political institutions mediate voters’ perceptions and how they assign of responsibility for the economy to different actors in government. Most of this research examines institutional characteristics of political systems, and how they concentrate or disperse responsibility for the economy among different branches of government. Samuels (2004), for example, shows that in presidential systems electoral sanctioning is stronger when presidential and legislative elections are concurrent; Johnson & Schwindt-Bayer (2009) reinforce these findings in a sample restricted to Central American countries. Benton (2005) argues that citizens punish incumbents when electoral laws are more restrictive, limiting party competition. Cutler (2004) contends that federalism and intergovernmental policymaking may reduce voters’ ability to hold their governments accountable. Less attention has been paid, however, to another vey important aspect of the assignment of responsibility problem: whether voters can identify and, if so, how they respond, to circumstances in which economic performance has an important exogenous component. This has become more problematic as economic integration advances and the share of economic performance determined by exogenous factors increases. Alesina & Rosenthal (1995) offer foundation for this analysis by proposing a model in which economic growth is established as a function of a natural rate plus unanticipated shocks that are caused by incumbents’ competence, and by an exogenous element. In this model, voters can not identify the components of economic shocks, but by observing the variance of these shocks over time they are able to identify the level of responsibility for the economy that should be attributed to incumbents. Scheve (2000) later used a similar framework to argue the opposite, 5 that because globalization diversifies the country’s risk exposure and reduces the variance of exogenous shocks, it should increase voters’ capacity to punish/reward governments’ competence. More recently, Duch & Stevenson (2008) proposed a modification to Alesina & Rosenthal’s (1995) model, which establishes two different types of decision-makers: electorally dependent (EDDs) and non-electorally dependent (NEDDs). The first one includes elected officials, and the second encompasses firms, interest groups, bureaucrats, foreign lenders, international institutions, and any other non-elected actors whose decisions have an impact in the economy. In this model, competency shocks are associated with the decisions of EDDs, and exogenous shocks with that of anyone else. The authors propose that fully rational voters can distinguish variations in competency shocks from variations in exogenous shocks, and do not punish or reward governments that are not responsible for economic performance. Since the variance in the overall competence shock should be larger in countries in which EDDs make most of the relevant economic decisions, in these countries the competence signal should be stronger, and so should the economic vote. Conversely, voters should be less likely to punish/reward governments in economies in which NEDDs make most of economic decisions. Duch & Stevenson (2008) find support for these claims in Europe, by showing that citizens who perceive domestic fluctuations as diverging from those in the overall European economy are more likely to register an economic vote. Ebeid & Rodden (2005) use data from gubernatorial elections in the United States to show that the connection between macroeconomic performance and incumbent success is weak in states dominated by natural resources and farming, but strong elsewhere. Kayser & Peress (2012) also find support for relative evaluations of European leaders, but note that voters’ capacity to discount exogenous sources of economic performance is higher when the media “benchmarks” international economic scenario. Our study addresses the very important topic of assignment of responsibility through a completely different setup. First, we focus on South America, a region with less democratic tradition than Europe and the US, with generally less well defined parties, lower levels of information in the electorate, and less globally or even regionally-integrated societies. South American countries offer the advantage of sharing a longer democratic history than other emerging regions, as well as many institutional similarities that 6 favor comparative analyses. All these countries have presidential systems which, with some variation, concentrate strong power in the executive branch. Not surprisingly, studies on economic voting in Latin America are mostly focused on presidential elections (Samuels 2004, Benton 2005, Johnson & Sooh-Rhee 2010, Baker & Greene 2011). Moreover, presidential terms are fixed in the whole region, which eliminates potential endogeneity on the timing of elections. Finally, and most importantly, we make use of the fact that the main exogenous factors that affect the economic performance are well known and can be easily observed. This puts us in the unusual position in which we can analyze the effects of factors not controlled by presidents on their reelection prospects and popularity, directly. Dependency theorists has extensively researched how the position that South American countries occupy in the world economy influences economic development in the region. The dependence on commodity prices and on foreign capital has been at the center of economic thinking about the region for decades. These theorists were primarily concerned with the (then seemingly secular) declining terms of trade, for which the natural remedy were inward growth policies to reduce exposure to the “unequal exchange” conditions facing commodity exporters (Prebisch 1949, Singer 1950). Even non-dependencistas, however, share the perception that the international economic flows of trade and investment were key to countries performance. Malan & Bonelli (1977), for instance, argued as early as the late 1970s that Brazilian “miracle” of ten years earlier had depended heavily on “an exception and elusively temporary international situation” (p. 21) that and been channeled through “two dimensions, one related to commodity trade and the other to net inflows of foreign capital” (p.4). The economic literature has shown that Latin American countries tend to do exceptionally well when international interest rates are low and commodity prices are high, and are likely to suffer when the opposite occurs (Maxfield 1998, Calvo, Leiderman & Reinhart 1996, Gavin, Hausmann & Leiderman 1995, Izquierdo, Romero & Talvo 2008). Izquierdo, Romero & Talvo (2008), especially, show that both capital flows and economic growth in Latin America are fundamentally determined by changes in the international interest rates and in commodity prices. This book revisits these themes that were dear to the previous generations of Latin Americanists, but with a focus on how they affect democratic consolidation 7 and practice in the region. Finally, our book also dialogues directly with the concept of accountability expost, according to which incumbents’ frequent breaking of electoral promises does not hinder democratic accountability. It has been argued that, because in Latin America voters’ ultimate concern is less with policymaking and more with its material results, accountability is maintained provided that they are able to reward or punish incumbents based on economic outcomes (Stokes 2001). Put simply, accountability ex-post hinges on the capacity of voters to link results to performance—it turns out that, if economic performance is mostly determined exogenously, the ex-post logic does not hold. Political and Policy Implications The fact that voters cannot distinguish merit from luck in their assessment of presidents’ performance in Latin America carries important consequences for the study of economic voting and democratic accountability. As the linkage between punishment/reward and performance is broken, governments’ electoral incentives to boost voters’ welfare diminish, and the connection between economic voting and democratic accountability is loosened. As summarized by Ashworth (2012), the building blocks of electoral accountability are an electorate that decides whether or not to retain an incumbent potentially on the basis of her performance, and an incumbent who has the opportunity to anticipate voters reactions and act accordingly (p. 184). Our preliminary results, and the book project as whole, cast a shadow on both of these pillars. First, the levels of information necessary to induce responsiveness might be very demanding, especially in less developed democracies. It does not follow that, if voters are aware of how well the economy is doing, they can correctly attribute responsibility for this performance. As a result, voters might not be able to extract meaningful information from past outcomes, and are therefore likely to not only reward incompetent incumbents in booming times, but also punish competent ones simply because their happened to lead during an unfavorable economic scenario. Perhaps even more importantly, voters’ behavior can create vicious incentives for governments, as their behavior will also be shaped the knowledge that voters’ evaluations will not depend on actions she might take. Although we leave the development of the full strategic interaction between voters and incumbents to future work, we posit that when the connection between electoral 8 success and “good” policymaking is broken, the incentives for the incumbent to promote good economic performance diminish. This happens as, in good times, rulers might find they can extract rents from office and still be reelected. Similarly, incumbents that find themselves doomed by the international scenario might be more prone to rent seeking and corruption, knowing that no matter what they do they will not be reelected. Examples from Latin America in support of both situations abound. After examining this process in depth, the final chapters of the book will be based on individual level experiments (to be conducted) that will seek to shed light on incumbents’ and voters’ behavior in a scenario where exogenous determinants of economic performance matter. First, we want to identify whether if provided with information about relative economic performance—a more realistic goal than to inform citizens about governments’ economic policymaking—voters can improve their assessment of luck and merit in presidents’ performance. We also plan to examine experimentally the effect of knowing one’s “fate” on effort exerted, to understand the conditions under which incumbents might still work hard to improve their position. Plan of the Book A previous version of this book project received a competitive grant from Princeton University’s Bobst Center for Peace and Justice in early 2013, which was forgone as Daniela Campello left Princeton University in July. Funding for the project was replaced by an intramural grant from Fundação Getúlio Vargas, and work is progressing swiftly. We anticipate the manuscript will be 85,000-95,000 words, and will be ready for review by the end of Fall 2014. This first paper in the project, which is in its final stages of preparation, has been presented and well received at the 2012 meeting of the International Political Economy society, at seminars at University of Florida, Princeton University, Brazilian Senate, Inter-American Development Bank, and at the Catholic University of Chile. It will serve as the basis for Chapters 1, 2, and 3, as detailed below. Chapter 1: International Economy, Blind Retrospection and The Limits of Democratic Accountability: In this introduction, we present several examples of episodes in which voters failed to consider how luck (i.e. exogenous economic conditions) affected the performance of presidents in latin America. We argue that 9 this behavior is particularly problematic in countries in which economic performance is particularly determined by factors that are beyond government’s control, and that this can create pernicious incentives for presidents. We highlight the fact that the international factors that affect the economies of South America’s low-savings commodity-exporting countries (commodity prices and US interest rates) happen to be well known and easily observable, which set the scope conditions for the rest of the book. Chapter 2: Economic Booms, Crises and Elections: This chapter investigates whether international conditions predict presidential reelection in Latin America, controlling for incumbents’ ideology and for measures of government competence. We show that results are strong and consistent in low-savings commodity exporting countries, but are null in the labor-intensive-exporting countries. Chapter 3: Economic Booms, Crises and Presidential Popularity: We examine how international conditions affect presidential popularity, higher frequency data which are at the same time more directly related to argument of the book. The quantitative analysis compares time-series of presidential popularity from Brazil, where scope conditions apply, with equivalent series for Mexico, where they do not. We also compare the case of Venezuela, where voters can easily observe international conditions represented by the price of oil that directly affects government’s account, with that of Chile, in which counter-cyclical funds provide a “cushion” against the impact of international economic factors. Finally, we compare the case of Uruguay, where relatively high party id should dampen the relevance of retrospective economic voting, with that Ecuador, where low party ID should have the opposite effect. Chapter 4: Relative performance in the political discourse: This chapter studies how incumbents and opposition frame/ emphasize luck and competence in their political discourse. We plan to focus on presidential campaigns on Brazilian TV (we already had these campaigns transcribed in Brazil for another project, and we need to check their availability in other countries). Ideally, we would like to compare campaigns in the same country in good and bad economic times, so that we could examine the extent to which incumbents emphasize international context in bad times, and opponents in good times and that, as well as how the media respond to exogenous booms and crises. 10 Chapter 5: Incentives for Presidents: Under what conditions will incumbents make an effort to improve performance? Given that voters do not discount luck, and given that incumbent can easily observe the state of the world economy, will they ever try to escape their fate? In this chapter we will address this issue by formally modeling the incentive structure facing incumbents. Our plan is to empirically test the implications of the model in an experimental setting in which we alter the extent to which subjects’ payoff for participating in the study is a function of their effort or of factors beyond their control. Chapter 6: What if voters had relative information? Here we present the results of lab and survey experiments aimed to identify the role of information about relative performance on voters’ assessment of presidents’ competence. Conclusion: Is accountability ex-post a satisfactory normative horizon? we conclude by exploring the normative implications of the findings to how we think about democratic accountability in Latin America and other less developed countries under similar scope conditions. Our claims are that (1) that best presidents are selected by evaluation based on performance, discounted luck (CEO analogy), and (2) if the only mechanism of accountability we have is retrospective economic voting, and this responds to exogenous factors, this has bad implications. If luck is not discounted, and it matters substantially, we risk reelecting lucky incompetent presidents and punishing lucky competent ones. This mechanism has a series of bad implications, among them: Intended Readership This is an academic book that explores a topic that is of interest to non-academics, and revisits the most classic of themes in political economy—electoral accountability. Because we have a truly exogenous indicator of the state of the world economy facing Latin American countries, we will be able to keep the complexity of the quantitative analysis to a minimum while preserving leverage over the causal claims. The result will be a utterly readable, meaningful, and interesting book. The book dialogues with recent and classical articles and books published in the leading journals and university presses (including Cambridge). As such, it will be part of undergraduate and graduate syllabi on political-economy and Latin American politics, and might even be used in discussions of contemporaneous democratic theory. Although the empirical content of the book is focuses on latin America, the 11 main claims are general, and will be of interest to scholars of other regions, especially developing democracies. The book is primarily geared towards the Anglo-American academic audience, and written with its academic standards in mind. However, the book will be of interest to a broader set of thinkers and policymakers in Latin America and beyond. As a strong indication of such widespread interest, the first paper in the project has been well received at a presentations in the Inter-American Development Bank, and was presented—by invitation—to policymakers in the Brazilian Senate. It has also received coverage in media outlets in the region, such as the Cları́n and Estado de São Paulo. The paper has triggered the attention of policy scholars in India, and will probably lead to collaborative work that will expand the scope of the argument beyond Latin America. Brief credentials Daniela Campello is an Assistant Professor at Fundação Getúlio Vargas’ Brazilian School of Business and Public Policy, and was formerly Assistant Professor in Princeton University’s Department of Politics and Woodrow Wilson School of Public and International Affairs. Her first book, “Globalization and Democracy, The Politics of Market Discipline in Latin America” is forthcoming by Cambridge University Press, and her work has also appeared or is forthcoming in Comparative Political Studies, in the Oxford Handbook of Latin American Political Economy, and in other edited volumes in the US, Europe, and South America. Cesar Zucco Jr. is also an Assistant Professor at the Brazilian School of Business and Public Policy, and is on leave from Rutgers, The State University of New Jersey. He has researched several aspects of Brazilian and Latin American politics, including electoral politics, legislative-executive relations, social policy, as well as the meaning and measurement of ideology. His work has been published in leading journals in Political Science, such as the American Journal of Political Science, and Journal of Politics, as well as in all of the main journals of Latin American Studies. References Achen, C.H. & L.M. Bartels. 2006. 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Johnson, Gregg B. & Ryuy Sooh-Rhee. 2010. “Repudiating or Rewarding Neoliberalism? How Broken Campaign Promises Condition Economic Voting in Latin America.” Latin American Politics and Society 52(4):1–24. Kayser, Mark & Michael Peress. 2012. “Benchmarking across borders: electoral accountability and the necessity of comparison.” American Political Science Review 106(3):661–684. Lewis-Beck, Michael & Mary Stegmeier. 2000. “Economic Determinants of Electoral Outcomes.” Annual Review of Political Science 3(2). Malan, Pedro S & Regis Bonelli. 1977. “The Brazilian economy in the seventies: old and new developments.” World Development 5(1):19–45. Maxfield, Sylvia. 1998. Effects of International Portfolio Flows on Government Policy Choice. In Capital Flows and Financial Crises, ed. Miles Kahler. New Jersey: Council of Foreign Relations pp. 69–92. Prebisch, Raúl. 1949. “El Desarrollo Económico de la América Latina Y Algunos de sus Principales Problemas.” El Trimestre Económico 16(63(3)):347–43. Samuels, David. 2004. “Presidentialism and Accountability for the Economy in Comparative Perspective.” American Political Science Review 98(3):425–436. Scheve, Kenneth. 2000. “Democracy and Globalization: Candidate Selection in Open Economies.” Working Paper, Yale University. Singer, Hans. W. 1950. “The Distribution of Gains between Investing and Borrowing Countries.” The American Economic Review 40(2):pp. 473–485. URL: http://www.jstor.org/stable/1818065 Stokes, Susan. 2001. Mandates and Democracy: Neoliberalism by Surprise in Latin America. Cambridge: Cambridge Unviersity Press. 13