1.1 Neo-Institutionalism
While we may have accepted the idea that there was one mode of development in Latin America during the import substitution industrialization era, between the 1930s and the 1970s, it is now impossible to uphold a single model of development on this continent. In fact, the idea that there was one single model of development was already questioned during the 1970s by the structuralist studies of Cardoso and Faletto, that were the founding works of the dependence school . At the present time, the main perspectives of analysis on the societies of continent, the CEPAL and the neo-institutionalist schools, consider that Latin America can be analyzed as a unity, that the countries within this continent share more or less the same problems, which may be approached with the same instruments of public and economic policies. This is true although of course, both the CEPAL and the neo-institutionalist school also distinguish particularities between the different countries. While the viewpoint of the CEPAL is extremely valuable in order to define the main deficits of the development of the continent and delivers the most significant core of data on Latin America, the matrix of the analysis is taken to be that of the totality. The analysis fluctuates from this general perspective of the continent as a whole, to the particularities of each country. The neo-institutionalist perspective, upon which we will continue the discussion, cannot escape this duality as it focuses on institutions rather than on structures and actors.
In this book, we consider that the way to escape this duality is to analyze the economies of the continent from a perspective informed by the differences, based on a typology that outlines different modes of development or capitalism, rather than between each particular country. We defend the idea, of the school of VoC and of the French regulation school because, just as there exist different types of capitalism in the developed world, in our continent we are also confronted with diverse types of capitalism, although they may not be as consolidated and coherent as those of the central economies; in some countries important fluctuations may occur that may make them shift from one type to other. But, it is also true that some countries have shown a very significant stability that strengthens the hypothesis we are defending in this book.
In this chapter, we will concentrate on the criticism of neo-institutionalism because it has elaborated the most detailed and coherent argument of why Latin American countries can be considered as a unique capitalist type. Before discussing the way the VoC school (which epitomizes this perspective) analyses the continent we want to examine its theoretical foundations. While neoclassical economics argues that economic success depends on the extent to which a particular country allows the market to act as efficiently as possible without State intervention and takes advantage of comparative advantages in their relationship with the world economy, neo-institutionalism analyzes the institutions that shape the economy, basically the market, that allow it to function most efficiently or blocks it. While neoclassical economics produces the recipes that all countries should follow in order to develop their economies, based on a general theory of a perfect market and a rational individual, neo-institutionalism analyses the institutions that allow some countries to effectively develop and the institutions that inhibit development. While neoclassical economy proposes a theory based on the myth of the self-regulated market, as Polanyi (1944) has shown, neo-institutionalism discusses the obstacles that a self-regulated market encounters, which are basically the absence of order, democracy , property rights, and in contrast, the excess of the importance of politics, the weight and intervention of the State .
The path-breaking studies of Cardoso and Faletto as well as those of Wallerstein, that offered a very rich political and long-term historical perspective, in which the countries of Latin America were analyzed according to both their internal and external economic, social and political relations. During the 1970s, these analyses were vulgarized by authors that situated themselves within the dependence school and held that the economic situation of the countries depended exclusively on their position in the world economy. In reaction, in the 1980s, mainstream economists simply dismissed the dependence theory, rejected any concern with history or politics, and proposed an ahistorical analysis. Riding the liberal wave that was being implemented in the real economy by Reagan and Thatcher, they disinterested themselves in anything other than the definition of universal recipes to reach development . After a short impasse, in the late 1980s, liberal economists rediscovered politics and history to give birth to neo-institutionalism. And in fact, the new institutional economy became the spearhead of neoclassical economics in the study of development. These neo-institutionalist perspectives did not break with the neoclassical hypotheses of the unity and universality of the liberal model of development they formalized. The founders of neo-institutionalism (North and Weingast 1989; North et al. 2002) argue that institutional differences between countries explain development and underdevelopment, that the legal/constitutional framework of societies is the variable that explains economic development. For this current of thought (followed through by De Soto 2005; Acemoglu et al. 2002; Acemoglu and Robinson 2012), what distinguishes developed from underdeveloped countries is the lack, in the latter, of a legal/political framework that assures order in society; in the economic sphere, order is basically ensured by the institutions that guarantee property rights. They discuss the fact that the market requires order, which in turn needs institutions that establish a stable juridical system that imposes rules on the market that everybody accepts and that are effectively implemented by the government. According to North et al. (2002), the absence of such a legal framework imposes high transaction costs on entrepreneurs, obliging them to look for sizeable short-term benefits that maximize performance and accelerate return on investment. Hence the extent of speculation and processes of overexploitation of natural resources and labor force in the underdeveloped countries. De Soto (2005) adds that unless such an order exists, the majority of the population is not able to participate in the economy, or invest; although the poor accumulate significant amounts of wealth, they can neither invest it, nor use it as capital for lack of property rights. Acemoglu and Johnson add that both disorder and extreme power inequality lead to extractive institutions that impede economic development .
North and Weingast put forward the theoretical foundations for justifying the retreat of the State from the economy. They offer the paradox that a self-regulated market requires rules in order to function, that only a strong State can impose. Nonetheless, a strong State can be oppressive, abusive, arbitrary, or as Acemoglu et al. (2002) have analyzed, extractive; which has the contrary effect, that of repressing investment, for the fear of being expropriated. That is why these authors consider that only a strong (but very restricted) State can induce development, something that leads to an un-politicized State, and thus a society where politics has low significance; because where politics has a great weight it overrules economy, and individuals tend to involve in politics in order to acquire privileges, rather than turn their interest toward economics. The State has to be limited by counter-powers, and by its own interest, politics has to be restricted and rules have to be internalized by the population, rather than imposed continuously by government (North et al. 2002).
The ideal model of such a situation is the USA, a political system that has checks and balances, a strong division of powers, and a federal state, where power is decentralized. On the other hand, it is a stable democracy with rule of law, where individuals respect the law not only because they are afraid of the consequences of breaking it, but because they have internalized it. In this situation, there is little need for a strong State, as society, in a great manner, rules itself. Furthermore, the State has little leeway to act because the political system and civil society sets strong limits to its action.
Thus, in fine, we can conclude that a limited State is the most effective requisite to pursue economic development a political order founded on consensus of most of the population regarding the rules of the game, and cooperation rather than coercion, where values are both internalized and imposed by a government that does not intervene excessively, that does not depend much on its own intervention . Democracy , in this perspective, is the equivalent of the market in the political sphere, it is the most effective regime for economic development due to the fact that it is best suited to restrict the predatory instincts of the State and/or entrepreneurs (North 1990, quoted by Maravall 1997: 30; Weingast 1995). This is clear when Weingast (1995) considers that thriving markets “…require not only an appropriate system of property rights and contract law, but also a secure political base that limits the state’s ability to confiscate wealth” (Weingast 1995: 1).
One of the manners by which the political system can limit the power of the State is the division of power, the other one is the organization of the civil society ; both ideas that neo-institutionalism rescues from Locke, Montesquieu, and Tocqueville. Another manner of limiting the action of the State is through federalism , which is, as Tocqueville wrote, a manner of decentering power. Weingast inverts this conception with his notion of “market preserving federalism ,” which through its support of the market leads to economic development. He considers federalism as a way of preserving the market from politics, from governmental intervention ; as a manner of drastically limiting State interference with the functioning of markets. In addition, he considers that market-preserving federalism incorporates competitive institutions and mechanisms that make the governments have incentives—positive and negative—to respect the rules, which help the system to self-regulate. Nonetheless, according to this author, not all federalisms are effective in pursuing this goal. He states that, for example, “…it is unlikely that federal systems diverging from market-preserving federalism can stimulate its development …” or that they can develop even in the context of democratic rule of law as in the case of India (Parikh and Weingast 1997: 1612).
More significantly, federalism can be a functional substitute for democracy. Weingast deems that the best examples of market-preserving federalism—after England of the Glorious Revolution (late seventeenth and early eighteenth centuries) and the USA (“from its constitution and until the mid-1930s”)—is current China, since the beginning of the transition to capitalism, as it undertook extreme decentralization (Montinola et al. 1996). All of this infers something that was implicit in the writings of North, that democracy is less important in itself, as a specific political regime that entails a certain type of political culture and a specific type of political system , but that it is more significant for its capacity to limit the State ; this is the only way we can understand that these authors can consider China in this context, which is evidently far from being a democracy. Market-preserving federalism is a functional substitute for democracy and rule of law, only if one considers that its principal function is to limit State power. Rodrik poses an even more utilitarian relation between democracy and development. He considers, on the one hand, that democracy allows for the peaceful transfer of political power from a leading group that has implemented failed economic policies toward another one that can attempt new policies. On the other hand, institutional mechanisms that allow “loser” social groups to make their voices heard reduce the utility of violent protests and manifestations that affect the accumulation and investment capacity of a society (Rodrik 2001: 27).
Thus, the rule of law need not be democratic or, in other words, to ensure the political freedom of the individual, since it is committed to defending property rights and the “free” functioning of markets. In a sense, the profound link between democracy and development , that seemed to emerge in the first works of the neo-institutionalists, is evidently broken: thus, in a sense, free markets replace free individuals. Both, the rule of law and democracy (and/or federalism) induce the economic development of a country due to their capacity to limit the scope of the State, in fine of politics as they exist in the developed countries. In contrast, in the underdeveloped countries, in Latin America for example, politics, government and the State have all an ample capacity to modify the status quo. In these countries, the concern of individuals is set upon controlling politics, the State, in order to obtai...