Moments of Truth

The Politics of Financial Crises in Comparative Perspective

Francisco Panizza, George Philip

• Publisher: Taylor & Francis
• Year: 2013
• eBook ISBN: 9781135050795
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: International Economics
• Index: Politics & International Relations

The current financial and sovereign debt crisis of the European Union and the United States can be regarded as the most recent of a wave of financial and sovereign debt crises that have affected different regions of the world over the past quarter century. While there is a large and growing body of literature on the economic aspects of financial crises, its political elements remain surprisingly under-studied.

Moments of Truth: The Politics of Financial Crises in Comparative Perspective fills this gap in the literature by looking at the political repercussions and policy implications of financial crises in comparative perspective, using case studies in Latin America, Korea, and Russia, as well as the contemporary crises in the US and in key European countries. Contributors to this volume look at the crises as critical junctures that generate high levels of uncertainty while calling for decisive action. The chapters emphasize structural or agency based explanations and give relevance to the role of ideas, interests, and institutions in explaining different outcomes. The questions addressed by the case studies include: how the crises were defined by key actors, the range of political and policy options available to deal with their impact, the role of ideas in policy shifts, how political and economic actors redefine their interests in contexts of uncertainty, how political institutions mediate reactions to the crises, what explains the choice of a certain option over other alternatives, and whether the crisis has (so far) resulted in significant political and policy changes or in incremental adjustments to the status quo.

The first book to comparatively analyze the political dimensions of financial crises across different global regions, Moments of Truth will be highly significant for any scholars interested in the contemporary debate on financial crises.

1
Crises and Their Consequences in Latin America

Mexico in 1982 and 1994 and Venezuela in 1994

George Philip, The London School of Economics

Introduction

The year of 1982 is writ large in the economic history of Latin America for all the wrong reasons. In 1982, a long period of economic growth came to an abrupt end and ushered in the so-called lost decade, which featured economic stagnation and in some cases hyperinflation. A number of factors contributed to this depressing transition, which continued in many countries until the adoption of so-called Washington Consensus economics at the end of the 1980s (Williams 1990).

For a short period in 1982—and lasting no more than a few months—it looked as though Mexico’s president Lopez Portillo was contemplating leading a revolt against the world’s international financial institutions. In the end, the character of Mexico’s authoritarian system—with its strictly observed term limits—ruled out this option. With the inauguration of Miguel de la Madrid as president in December 1982, economic management in Mexico became one of the most orthodox in the region and has remained so ever since. This market reforming orientation later survived a further fiscal upheaval in 1994–1995— the so-called tequila crisis—with surprisingly little political drama.

Venezuela, like most of the rest of the region, experienced economic problems after 1982. Despite having to devalue in early 1983, it would be too much to say that the country experienced a full-scale crisis in a way that Mexico clearly did. However, both the political system and the economy ran into increasing trouble at the end of the 1980s. A series of crisis events, including the collapse of the Banco Latino in 1994, shook the status quo over a period of several years and led to the election of Hugo Chavez to the presidency in 1998.

For Latin America as a whole, the long-term consequences of the region’s lost decade were not wholly negative. The 1982 crisis played a major role in discrediting the authoritarian regimes that were then in power in most of the region. As it turned out, the subsequent democratization proved to be much more thorough and durable than most observers expected at the time. Mexico was part of the general Latin American trend toward democratization during the 1980s, though it had some specific features of its own. Ironically, despite its reluctance to democratize, Mexico proved to be more politically robust than economically successful until it suffered a further economic crisis in 1994. This crisis, painful though it was, enabled a decisive rebalancing of the economy to take place and led to even closer integration with the US.

Democracy and free-market economics had become widespread across Latin America by 1994, and its economic prospects seemed to be improving markedly in consequence (Edwards 1995). Yet, 1994 also proved a year of crisis—not across the whole region, but in two important countries. In Venezuela, the collapse of Banco Latino was followed by a domino effect across the whole national financial sector. Then, at the end of 1994, the Mexican economy suffered yet another setback (the “tequila crisis”) that forced the economy back into recession. The 1994 crises in Venezuela and Mexico should have dispelled any naïve belief that democratization, fiscal orthodoxy, and market reform were proof against crises in Latin America, though it is fair to say that the effect of the 1994 crises was more localized than was the case in 1982.

The consequences of the 1994 crises were mostly less than those of 1982. Mexico continued with its process of democratization and market reform, and by the end of 1996 its economy was well on the road to recovery. Mexico has not suffered another major financial crisis since then, though it has experienced “normal” recessions. If anything, the effect of the tequila crisis was to speed up the process of market reform and political democratization rather than change the direction of policy as such.

Although Venezuela was a market-reforming democracy in 1994, its public opinion was far more skeptical about its political system—with good reason— than most other countries in the region. The Banco Latino crisis further weakened popular attachments to existing institutions. Venezuela was already in the process of moving closer to twenty-first-century socialism and plebiscitary democracy. There is at least something in the notion that the rise of Chavez was a consequence of the Banco Latino’s failure. Moreover, the Banco Latino’s failure illustrates much of what was wrong with the whole pre-Chavez partidocratic Venezuelan system. We now look at these three cases in more detail.

The Mexican Crisis of 1982

The Mexican crisis of 1982 came as a real shock, and not only in Mexico. What made it particularly surprising was that Mexico was in the process of becoming a major oil exporter while oil prices, though by then generally on the decline, were still historically high. Mexican oil output had risen dramatically in the 1970s. During the course of the Lopez Portillo presidency (1976–1982), petroleum exports rose from $600 million to $16,500 million (Luke 1988, 60). The fact that this degree of export expansion did not protect Mexico from a balance of payments crisis made for a real paradigm shift, not least because the government was as surprised by this turn of events as everyone else. President Lopez Portillo, in office during the most expansive years of the oil boom, was personally convinced that Mexico’s economic future lay with its oil, famously remarking on one occasion that ‘our task is to manage abundance.’

There had been an enforced devaluation in Mexico in 1976, but the 1982 crisis was deeper, more durable, and more significant. Many policymakers believed that the discovery of large oil reserves would cure the balance of payments weaknesses that seemed responsible for the 1976 setback. There was a real sense of shock when this turned out not to be the case. Initially, observers tended to blame the government for the debacle, and there was certainly a degree of macroeconomic mismanagement involved (Chislett 1985; Kraft 1984; Duran 1988; Luke 1988). For example, public sector prices were kept low and there was little serious tax effort.

However, in hindsight, research has tended to give more importance to the existence of an unresolved ideological conflict in Mexico between structural and monetarist economists, both of whom were represented at high levels in the government. President Lopez Portillo arbitrated but did not seek to homogenize economic policy. Some of Mexico’s most prominent economic policymakers (including cabinet ministers) took what was in effect a Keynesian position, with the claim that public-sector deficits could be financed so long as there was enough demand within the economy.

In 1982, the Mexican government learned the hard way that deficits mattered as inflation led to several devaluations of the peso. After one of them, President Lopez Portillo ruefully admitted that ‘a president who devalues is a devalued president.’ What added a further dimension to this crisis was its regional, and indeed global, dimension: Mexico was not alone. Many other Latin American countries found themselves in a similar predicament. The region as a whole had built up dangerously high levels of foreign debt, allowed its currency to become overvalued, and failed to deal effectively with the problems caused by capital flight. Meanwhile, the global economic environment was changing in an ominous way for Latin America. Neoclassical economics was tending to replace Keynesianism as the dominant paradigm in US and European government thinking. Bringing down inflation rather than achieving global macroeconomic balance was increasingly seen as the primary aim of policy. When US interest rates moved up sharply at the beginning of the 1980s, many Latin American countries found themselves exposed by their excessive levels of debt. What made things worse was large-scale capital flight, as private wealth holders proved quicker on the uptake than governments and sought to protect their assets by moving their local currency holdings into dollars.

The Mexican crisis deepened further when the government finally responded to its policy dilemmas by moving in the direction of aggressive nationalism. It nationalized the banks in September 1982, forcibly converted dollar accounts held by Mexicans into pesos at unfavorable rates, imposed exchange controls, and began to consider the possibility of a debtor cartel covering the major Latin American borrowers. These steps encountered popular approval at the time (Basáñez 1990), but they were viewed with dismay by Mexico’s economic elite and even the middle class.

Neoliberalism Triumphant in Mexico

At the end of 1982, however, Mexico decisively rejected nationalist economic policies and moved in the direction of fiscal orthodoxy and market reform. The immediate factor that enabled this to happen was the unusually institutionalized character of Mexican authoritarianism. Authoritarian Mexico was commonly described as a six year dictatorship and, by the Peruvian novelist Mario Vargas Llosa, as a perfect dictatorship. One thing that it did perfectly was to organize presidential successions. The Mexican presidential term was six years, and no reelection (to anything) was permitted. The outgoing president chose his successor, subject to a few restrictions, theoretically after consultation with his close colleagues. The cabinet, however, had been appointed by the incumbent, whose power to decide upon the succession was therefore largely unlimited.

This institutional arrangement meant that what might have been the decisive battle in late-twentieth-century Mexican history between the statist nationalists and the market liberals was largely over before it was fought. The statist-nationalist response to the 1982 debt crisis was undermined by the political calendar, because, in October 1981, Lopez Portillo had nominated his planning minister, Miguel de la Madrid, to be president. The two men were not particularly close (Zarate 1995; Torres 1999), but the Planning Ministry was a key power center from when it was set up in the late 1970s until its abolition in the early 1990s (Torres 1999). De la Madrid’s achievements as planning minister included the publication of the national plan, a project that was dear to the president’s heart. De la Madrid also proved a good planning minister. He was a capable administrator and a man with relatively few enemies. He was also expected to stabilize Mexico’s financial markets, which were just starting to become jittery in late 1981. Even so, it is widely believed that Lopez Portillo would have preferred to nominate the head of Pemex, Jorge Diaz Serrano, but the latter blundered by cutting the export price of oil at a time of market weakness without presidential permission. This permitted Diaz Serrano’s many enemies within the cabinet to come together against him and make his position untenable. In the end, de la Madrid was nominated because he was believed to be an economic technocrat (which he was) and not because he was an ideologically committed market-reforming economist (which he was as well, though he mostly concealed the fact).

De la Madrid was nominated before the full economic crisis broke. When it did break, the president and the presidential nominee reacted quite differently. Lopez Portillo, after vacillating to a degree, eventually reacted as a nationalist. De la Madrid reacted as an orthodox economist, seeking debt renegotiations and a deal with the IMF. De la Madrid also put together a mainly orthodox transitional economics team that included many future members of the cabinet. This made it feasible for the US government and the international financial institutions to bypass Lopez Portillo in his last few months in office and deal directly with de la Madrid (Kraft 1984). When de la Madrid was inaugurated in December 1982, a period of market-reforming government began that has persisted to this day.

Once de la Madrid was safely in office, presidential patronage power played a major part in reorienting the state as a whole in the direction of market reform (Centeno 1994). In theory, the president appointed virtually the whole public sector, and in practice he controlled the careers of several thousand top officials. This was more than enough to reorient the state. Whereas there had been a degree of ideological pluralism in most Mexican cabinets before 1982, this was less true thereafter. Post-1982 cabinets have all had a significant market-reforming orientation. Such were the powers of the Mexican presidency that de la Madrid could appoint a cabinet full of market-reforming technocrats despite the fact that in 1982, at every level of politics within Mexico (including the general public), the rank and file of the PRI, the trade unions and most of the government bureaucracy there would almost certainly have been a majority in favor of adopting a more nationalist orientation. However, the presidential system gave the nationalists nowhere to engage except by taking on the PRI colossus in a doomed electoral undertaking—as they did without success in 1988.

Near the end of his term, de la Madrid nominated Carlos Salinas, another market liberal, as his successor. This choice was made essentially on ideological grounds, though Salinas’ experience as planning minister during 1982–1987 would have helped him. Things did not run smoothly on this occasion due to what was in effect a split in the PRI, but in the end Salinas was declared elected and was inaugurated in December 1988. The general perception that the 1988 election results were doctored only reinforces the argument being presented here, which is that market reform in Mexico was essentially an elite project that was unpopular among the broader public. This did not bother Salinas, who continued with market-reform policies more aggressively than did de la Madrid and still (until 1994, at least) enjoyed considerable personal popularity.

It may seem surprising that there was not more political fallout from the economic crisis of 1982, but the Mexican state elite was both organizationally impressive and utterly ruthless. Until the system democratized at the end of the 1980s, the PRI continued to deliver electoral victories to order, and Fidel Velazquez of the Confederation of Mexican Workers (Confederación de Trabajadores Mexicanos) kept organized labor in line. The PRI did split in 1987– 1988, but the market liberals retained control of the electoral machinery and were also responsible for counting the votes.

One key to the victory of Mexico’s market reformers, therefore, is that Mexico had a disciplined state elite, which was embedded within civil society, institutionalized in its own way, on good terms with the United States, and capable of fighting to win (Centeno 1994). Many of the younger members of this elite had studied economics at US (in some cases UK) universities. They broadly accepted the need for market reform and were capable of managing it, if asked. A common educational and to an extent cultural background also made it easier for members of this state elite to communicate meaningfully with each other and with their US counterparts.

Meanwhile, the inflation and recession that hit Mexico in the years after 1982 had a powerful inoculating effect on the Mexican public, which by the end of that decade had shown every sign of changing its mind about the merits of debts, deficits, and nationalization (Basáñez 1990). Still, the extent to which these hard times generated civil unrest was limited by elite cohesion.

Apart from a combined commitment to market-reforming economics, there is a plausible historical explanation for this elite cohesion. At least until Mexico democratized, the key event in twentieth-century Mexican history was the Mexican Revolution. While schooled in its official values, successive Mexican authorities nevertheless did everything possible to avoid a repetition of its anarchy and economic hardship. The Mexican state—notwithstanding its revolutionary past—had by the 1970s acquired a pronouncedly counterrevolutionary character. The country’s powerful trade union confederation was in the hands of authoritarian anticommunists supportive of the regime. The student unrest of the 1960s had been shot down by the army. The PRI routinely submitted election results demanded by the regime. Not only was political repression pervasive, but the government’s at times ruthless mechanisms of social control were seen by much of the Mexican population as legitimate. Thus, the army was simultaneously obedient, violent, and reasonably popular (Lopez 2012). Meanwhile, despite not being exactly a members’ party, the PRI had an impressive capacity for mobilization and, indeed, demobilization. While less personally authoritarian than their predecessors, presidents Lopez Portillo and de la Madrid were in a position to impose order if they so desired, and this was known to be the case. Potential dissidents needed to tread carefully.

The authoritarianism of Mexico’s political system was not invented purely to oppress the population—though it certainly was capable of this—but to facilitate social peace and economic growth. The PRI’s investment in social control paid off throughout the 1940–1970 period, when the economy mostly performed well, and only gradually attenuated thereafter. When financial crises struck in 1976 and 1982, the first instinct of the majority of the population was to support the government. It is true that ballot rigging and the organizational weakness o...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Contributors
• Series Foreword
• Introduction: Crises as Moments of Truth
• 1. Crises and Their Consequences in Latin America: Mexico in 1982 and 1994 and Venezuela in 1994
• 2. “Everybody Out,” “We Are Fantastic:” The Politics of Financial Crises in Argentina and Uruguay 2001–2003
• 3. After Neoliberal Constitutionalism: Financial Crisis and State Resurgence in Russia and Argentina
• 4. The Neoliberalization of South Korea after the 1997 Economic Crisis: A Cultural Political Economy of Crisis Discourse and Management
• 5. The United States: Institutional Continuities, Reform, and “Critical Junctures”
• 6. Financialization, Financial Crisis, and Deficit Hysteria: Neoliberalism Redux
• 7. A Critical Juncture in EU Integration? The Eurozone Crisis and Its Management 2010–2012
• 8. The Trouble with Economic Reform: Understanding the Debt Crisis in Spain and Italy
• 9. Greece and the Recent Financial Crisis: Meltdown or Configuration?
• 10. The Promise and Peril of Smallness in World Markets: The Case of Financial Crisis in Denmark
• Conclusion
• Index