Paying The Costs Of Austerity In Latin America

Howard Handelman, Werner Baer

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9780367282479
• eBook ISBN:
  9781000313925
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

This book examines a number of the nations—Argentina, Bolivia, Mexico, Nicaragua, and Venezuela—in which the declines were far greater, ranging from -11.9 percent in Mexico to -27.0 percent in Bolivia.

1
Austerity Under Different Political Regimes: The Case of Brazil

Werner Baer, Dan Biller, and Curtis T. McDonald

Introduction

Austerity programs to combat inflation usually require sacrifices in terms of economic growth, and the distribution of such sacrifices can affect the nature of a country's political regime, especially in the Third World. Distortions that occur during a prolonged period of inflation may make continued long-term growth increasingly difficult. Investments may decline or be applied to nonproductive areas. Savings may decline as capital markets become less efficient and fail to protect the real value of investors' assets. And price distortions may become increasingly evident as government-controlled prices (e.g., of public utilities and basic foods) lag behind general price increases, which result in government subsidies to state enterprises and to producers of basic foodstuffs. These subsidies, in turn, may increase the budget deficit, thereby reinforcing inflationary pressures. Finally, balance-of-payments difficulties may worsen as a result of an exchange rate that is increasingly overvalued.¹

Traditional austerity programs constitute one method to deal with such a situation. These programs entail severe credit restrictions; drastic cuts in government expenditures; increases in taxation; severe wage repression; elimination of subsidies and a consequent rise of those prices which had been allowed to lag behind; and, finally, drastic devaluation.² The net result is a decline in growth (possibly a period of negative growth); growing unemployment; falling real wages, which are worsened by higher prices of public services and food products; and a general redistribution of income away from the wage-earning sector, and from those sectors depending on imported inputs, in favor of exporters and financial institutions.

The traditional belief regarding austerity programs is that their measures can achieve relative success only if carried out in a political environment characterized by an authoritarian/military government, as opposed to a democratic administration. Such programs, by their very nature, imply tremendous costs for society. The various economic tools used within a given austerity program will trigger strong negative reactions in many different sectors. Eventually various groups in society must be made to accept and absorb these costs in the interest of correcting the distortions that made the austerity program necessary to begin with.

Proponents of the traditional rationale claim that the political costs of austerity programs are too great for those who sponsor such measures in a democratic setting, where relative power is based on the appeasement of various pressure groups and constituents. Authoritarian regimes, on the other hand, normally draw their power from within and therefore find no need to win the approval of various support groups. Subsequently, they are able to proceed systematically through the different steps of an austerity program, essentially immune to the criticism of society at large.]

Carlos Diaz-Alejandro, for instance, notes that inflationary expansionism has usually been associated with populist democratic regimes:

Populist governments are likely to have witnessed substantial expansion in government expenditures not financed by tax collections, either because the opposition blocks efforts to raise taxes or because the government regards fiscal and monetary management as less important than structural reforms. Fiscal deficits are more likely to be financed by borrowing from the central bank than from either the domestic or foreign private sectors. Increased public expenditures will be channeled more toward consumption than investment. . . . Across-the-board massive wage increases also accompany . . . populist governments. Because these measures will be felt first in output expansion, especially of wage goods, rather than an acceleration of inflation, . . . the government will be confirmed in the wisdom of its heterodoxy. Pressure on the balance of payments in those early times can be handled by strengthening administrative import-repressing mechanisms, drawing down reserves, and seeking foreign loans.³

Ultimately, the general consensus will be that "'things cannot go on like this' and that something must be done. ... Moderate technocrats may be able to attempt their own stabilization plans, which will come too late. The opposition will move for the kill, culminating in a military coup."⁴

Diaz-Alejandro further observes that after a coup the new authorities will have "some room to maneuver; for a considerable time, they can blame economic difficulties on the deposed populists, and a relieved bourgeoisie, with their property rights confirmed, will contemplate short-term economic hardships with equanimity. Entrepreneurs in particular will find the reestablishment of their authority within factories ample compensation for sluggish sales."⁵

Alejandro Foxley, in turn, notes that

Orthodox policies are being applied today by authoritarian military governments. The relative independence of these governments from popular pressure seems to solve what the monetarists saw as the reason for previous failure: the premature reversal of the policies, caused by the adverse reaction of the social groups most affected, mainly the workers. . . . Obviously, an authoritarian government should have no problem in disciplining the workers and controlling the political and social environment so that a sustained application of a consistent stabilization policy is made possible. Thus, authoritarianism is presented almost as a prerequisite for the success of the orthodox economic policies.⁶

Foxley believes that orthodox policies are the result of an alliance of capitalists and the military, and that the net result is a worsening of the distribution of income in favor of the capitalists. This "conclusion is familiar to political scientists: distribution of income and property rests ... in the structure of power in society. If this is authoritarian and nonparticipatory and excludes important social groups from the political process, the outcome of the distributive process will almost necessarily be regressive."⁷

It is our purpose here to determine the extent to which these commonly accepted generalizations have been applicable to Brazil during the various periods in which austerity programs were called for—especially since the military takeover in 1964.

The Brazilian Austerity Program Prior to 1964

The implementation and orientation of the austerity program fielded by Brazil's first military government after the 1964 takeover, in contrast to the experiences of the previous democratic governments,...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Introduction: The Economic and Political Costs of Austerity
• 1 Austerity Under Different Political Regimes: The Case of Brazil
• 2 Austerity Under Authoritarianism: The Neoconservative Revolution in Chile
• 3 What Difference Does Regime Type Make? Economic Austerity Programs in Argentina
• 4 Austerity Programs Under Conditions of Political Instability and Economic Depression: The Case of Bolivia
• 5 Austerity, External Debt, and Capital Formation in Peru
• 6 The Social and Economic Consequences of the National Austerity Program in Mexico
• 7 Austerity Policies in Ecuador: Christian Democratic and Social Christian Versions of the Gospel
• 8 Venezuela: Austerity and the Working Class in a Democratic Regime
• 9 The Costs of Austerity in Nicaragua: The Worker-Peasant Alliance (1979-1987)
• About the Contributors
• Index