1995 es Corden, W. Max Corden, W. Max Una zona de libre comercio en el Hemisferio Occidental: posibles implicancias para América Latina En: La liberalización del comercio en el Hemisferio Occidental - Washington, DC : BID/CEPAL, 1995 - p. 13-40 2014-01-02T14:51:16Z hdl:11362/31931 Political Crises, Social Conflict and Economic Development Political Crises, Social Conflict and Economic Development The Political Economy of the Andean Region Edited by A n d r é s S o lim a n o Edward Elg ar Cheltenham, U K • Northam pton, M A , U S A © Andrés Solimano, 2005 A ll rights reserved. N o part o f this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission o f the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library ISBN 1 84542 196 5 Printed and bound in Great Britain by M P G Books Ltd, Bodmin, Cornwall Contents L is t o f fig u res L is t o f tables C ontributors A cknow led g em en ts 1 viii xi xiii xv Introduction and synthesis 1 A n d rés Solim ano 1. 1 M ain questions 2 1.2 1.3 M ain findings Organization o f the b ook 3 8 PART I A N A L Y T I C A L O V E R V IE W A N D C R O S S -C O U N T R Y A N A L Y S IS 2 Political instability, institutional quality and social conflict in the Andes 15 A n d rés Solim ano 2.1 Introduction 2.2 Political regimes, institutions and social conflict: a conceptual fram ework 15 17 2.3 2.4 2.5 Empirical analysis Interpreting Andean countries’ governance performance Concluding remarks References 23 36 39 42 3 Poverty, inequality and public policy in the Andean region: a comparative perspective 45 A m a n d a G lassm an a n d Sudhanshu H a n d a 3.1 3.2 Poverty and inequality Addressing poverty and inequality in the Andean region: 45 3.3 social policy and programs Conclusions References 60 63 66 v Political crises, social conflict and economic development vi P A R T II 4 C O U N T R Y S T U D IE S The political econom y o f the crisis in the Andean region: the case o f Bolivia 73 George Gray M o lin a a n d G onzalo C hávez 4.1 Introduction 73 4.2 4.3 Governance block Econom ic block 76 92 4.4 Conclusions References 110 113 The economy, conflict and governance in Colom bia 115 5 José A n to n io O cam po 5.1 Introduction 115 5.2 Openness and macroeconomic volatility 118 5.3 A n active social policy and inconclusive social results 127 5.4 Violence and the governance crisis References 135 151 6 Political econom y o f Ecuador: the quandary o f governance and econom ic development 156 Gustavo A r te ta a n d Osvaldo H urtado 6.1 Introduction 156 6.2 6.3 Political performance: return to democracy Econom ic performance 158 170 6.4 6.5 Interaction o f economics and politics Limits o f legal formalities and final thoughts Bibliography 190 200 204 Governability and econom ic performance in 1990s Peru 208 7 M ig u e l Jaram illo a n d Jaim e Saavedra 7.1 7.2 Introduction Governability and econom ic performance: a conceptual framework 208 212 7.3 Structural factors and politics in Peru 217 7.4 7.5 7.6 The political process o f the 1990s The structural adjustment: stabilization and econom ic reform M acroeconom ic performance 221 224 243 7.7 7.8 Regulated democracy or dictatorship on tenderhooks? Final reflections References 248 253 259 Contents 8 vii Venezuela: from stability to turmoil 263 E n zo D e l B ufalo 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 Th e end o f an era The crises o f governance Aggregated governance indicators A b rief review o f the Venezuelan economy Governance and economics: the main links in the 263 274 Venezuelan case Chávez’s regime A new political econom y for Venezuela Postscript References 309 311 320 321 In d e x 283 292 329 331 List of figures 3.1 Percentage o f population living on less than two U S dollars 3.2 Incidence o f poverty by race or m other tongue, circa 2000 a day (P P P 1985) by region, 1998 (tw o U S dollars a day P P P 1985) 46 47 3.3A Changes in the G ini index in Latin A m erica during the 1990s 48 3.3B Income inequality by regions (G in i index), 1990s 48 3.4 Changes in poverty and growth during the 1990s, regional, 3.5 Changes in inequality and growth during the 1990s, regional, 3.6 Employment rates for children by age and income level, 3.7 Human poverty index in Latin Am erica, 1999 54 3.8 Infant m ortality rates, circa 2000 55 3.9 Fertility rates in the region, 1999-2000, circa 2000 (births 3.10 Governance indicators 57 3.11 Governance index and growth: regulation 57 3.12 Governance index and growth: rule o f law 58 3.13 Governance index and growth: government effect 58 Andean and non-Andean countries Andean and non-Andean countries 1998-99 49 50 53 per wom an) 55 3.14A Latin America: total social public expenditures as a percentage o f G D P (millions, constant 1995 U S$ ) 61 3.14B Latin America: public social expenditures per capita, 1994-99 61 62 3.15 Social expenditure per capita by sector and region, 1998-99 4.1 Quality o f institutions 82 4.2 Slowdowns and strikes 1982-2000 86 4.3 Political fragmentation: Bolivia and Latin Am erica, 1979-97, the dynamic diversity o f Latin Am erican party systems, 95% confidence intervals 88 4.4 The impact o f drug traffic (narcotraffic in millions o f U S$) 4.5 Value o f natural gas exports (in millions o f U S$), Bolivia 4.6 Direct foreign investment 1996-2001 1990-2000 107 107 viii 108 List o f figures ix 4.7 W hat most worries Bolivian businessmen is corruption. 5.1 5.2 Bolivia: obstacles to the growth o f business Long-term econom ic growth Export growth (a) and export diversification (b ) 5.3 Grow th and domestic demand volatility 124 5.4 Private indebtedness 125 5.5 5.6 Latinobaróm etro comparative results Coca production area vs sprayed area 137 142 5.7 6.1 6.2 M urder rate Political instability Perception o f corruption 143 161 167 6.3 6.4 Confidence in the judicial system Ecuador, G D P growth 1965-2003 168 171 6.5 6.6 Ecuador, effects o f exogenous shocks in G D P (1970.01-2001.03) Ecuador, inflation (year-end) 173 175 6.7 6.8 N om in al exchange rates (sucre/US$) Fiscal volatility and oil revenue volatility 175 176 6.9 6.10 6.11 Ecuador, non-financial public balance, per cent o f G D P Distribution o f expenditures Ecuador, total factor productivity (T F P ) growth 1966-98 177 180 183 6.12 6.13 6.14 6.15 Ecuador, current account balance as per cent o f G D P Real exchange rate and imports W orker remittances Ecuador, poverty incidence 185 186 186 188 6.16 7.1 G D P growth and ministerial instability A pproval ratings for the President, fo r the political economy, and expectations for the econom ic situation 193 7.2 7.3 Average tariffs in 1998 (ad-valorem rates) Evolution o f degrees o f openness (exports + im ports)/GDP 1980-98, selected countries 230 7.4 7.5 7.6 Grow th rate o f G D P 1985-2000 (per cent) Annual inflation 1985-2000 (log base) A pproval o f the President’s management o f the Republic by socioeconomic segment 243 246 7.7 7.8 Public perception o f econom ic issues Difference in presidential approval between socioeconomic levels 251 8.1 8.2 8.3 Inflation and growth in Venezuela Aggregate governance indicators fo r Venezuela Voice and participation 277 284 285 8.4 Political instability and violence 287 109 118 121 216 231 250 252 Political crises, social conflict and economic development Government effectiveness Regulatory burden Rule o f law Oil prices and G D P growth Real effective exchange rate Current account balance Central government fiscal balance Government expenditure Public debt Poverty in Venezuela (per cent o f population) President Chávez’ approval rating 289 291 292 295 298 301 304 305 307 308 325 List of tables 2.1 Constitutional reforms, presidential crises and political regimes, Andean countries, 1900-2003 2.2 Constitutional reforms, presidential crises and turnover o f 2.3 2.4 2.5 prime minister, selected countries, 1900-2002 Ranking o f governance indicators, Andean countries 24 26 30 Competitivenes and governance indicators rankings, Andean countries, 2001-02 Dem ocracy is preferable to any other political regime 32 (per cent o f public support) 33 2.6 Indigenous population in the Andean countries (per cent o f total population) 33 2.7 Poverty and inequality in the Andean countries 1990-97 34 2.8 2.9 Econom ic growth in the Andean countries 1950-2003 G D P per capita in the Andean countries 1970-2003 (U S$ at 35 1995 price/number o f persons) 36 3.1 Per capita G D P growth in Latin A m erica (per cent) Annex 3.1 Incom e distribution and poverty in Latin Am erica 50 and the Caribbean in the 1990s 69 4.1 4.2 Support for democracy Satisfaction with democracy 81 81 4.3 4.4 Quality o f institutions in Bolivia 83 4.5 Corruption perception index Ethnic fragmentation 85 90 4.6 Poverty according to ethnicity and urban/rural geography 91 4.7 M acroeconom ic indicators 1985-90 4.8 Structure o f the markets, post-reform 4.9 M acroeconom ic indicators 1991-2001 4.10 4.11 Bolivia: selected social indicators Savings and investment in Bolivia averaged by time period 103 (per cent o f G D P ) 105 Bolivia: growth by sector Public finances 4.12 96 100 102 5.2 Social indicators 106 129 132 5.3 W orld Bank governance indicators 136 5.1 xi xii Political crises, social conflict and economic development 6.1 6.2 Seats in Congress o f government party Congressional seats held by government party, selected Latin Am erican countries 6.3 Ecuador, consolidated non-financial public sector 1990-2003, period averages Sources o f growth in Ecuador (in percentage points) M arket concentration 6.4 6.5 6.6 6.7 6.8 7.1 7.2 7.3 7.4 7.5 7.6 8.1 8.2 8.3 8.4 8.5 8.6 Per capita income and real wages Ecuador, poverty incidence by region and area 1995-98 (consumption m ethod) Ecuador - indicators o f social development Electoral participation 1939-2000 Population five years old and older, organized by first language 1993 Changes in Peruvian labor legislation 1991-97 Evolution in social spending Com position o f G D P by sector 1990-99 (per cent) M acroeconom ic flows (as a percentage o f G D P, base 1994) Presidents o f Venezuela since 1958 O il impact on the Venezuelan economy Summary o f macroeconomic indicators Summary o f monetary and banking indicators Summary balance o f payments (U S$ m illion) Central government financial operations (per cent o f G D P ) 163 164 179 182 187 188 189 190 209 219 237 240 245 247 275 293 294 300 303 305 Contributors Gustavo A rte ta D irector o f Research, C orporation fo r Econom ic D evelopm ent Studies (C O R D E S ), Quito, Ecuador Gonzalo C hávez D irector o f the M asters Program in E con om ic D evelopm en t Studies, Bolivian Catholic University (U C B ), L a Paz, Bolivia E nzo D e l B ufalo Professor o f Economics, Department o f Economics, Central University o f Venezuela, Caracas, Venezuela A m a n d a G lassm an Specialist in Social D evelopm ent, Inter-A m erican D evelopm ent Bank, Washington, D C , U nited States George Gray M olina Executive Director, Econom ic and Social Policy Analysis U nit (U D A P E ), Ministry o f the Presidency, L a Paz, Bolivia S u dhanshu H a n d a Associate Professor, D epartm ent o f Public Policy, U niversity o f N o rth Carolina-Chapel H ill, U nited States Osvaldo H urtado Form er President o f Ecuador and President o f Corporation fo r Econom ic Developm ent Studies (C O R D E S ), Quito, Ecuador M ig u e l Jaram illo Senior Researcher, G roup fo r the Analysis o f D evelopm ent (G R A D E ), Lim a, Peru José A n to n io O cam po Former Minister o f Finance o f Colom bia and Under-Secretary General for Econom ic and Social Affairs, U nited Nations, N e w York, U nited States xiii xiv Political crises, social conflict and economic development Jaim e Saavedra Senior Researcher, G roup fo r the Analysis o f E con om ic D evelopm ent (G R A D E ), Lim a, Peru A n d rés Solim a no R egion a l A dvisor, E con om ic Com m ission fo r L atin A m erica and the Caribbean (E C L A C ), U nited Nations, Santiago, Chile Acknowledgements This b ook is the fruit o f a project supported by a grant (# 1010-0586) from Ford Foundation in N e w York. The project was administered by the Inter-Am erican D ialogue in Washington, D C . It also had the substantive collaboration o f the Econom ic Com m ission fo r Latin A m erica and the Caribbean o f the U nited N ations in Santiago, Chile. Special thanks for the support throughout this project go to: Manuel M ontes from the Ford Foundation; to Peter Hakim , President o f the Inter-American D ialogue for continuous support; to José A nton io Ocampo, form er Executive Secretary o f E C L A C and author o f one o f the country studies in this book and, in the initial stage o f the project, to Barbara Stallings, form er head o f the Econom ic Developm ent D ivision at E C L A C . A n international conference to present the different chapters that led to the book was held at the N e w School University in N e w York C ity in M ay 2003. Chapter 2 was also presented in seminars held at the W orld Bank, the Inter-Am erican D evelopm ent Bank and the U niversity o f Paris, III, Sorbonne L a Nouvelle. I am also very grateful to C laudio A ravena w ho provided excellent assistance fo r the developm ent o f the w hole project. X im ena Sánchez and M aritza A g a r from the Econom ic Developm ent D ivision o f E C L A C participated in the organization o f the workshops for the project. Claudia Allendes provided effective editorial support and coordination with the various contributors for the preparation o f this book. Finally, we would like to mention that the content o f this book represents the view s o f the authors and not necessarily the institutions to which they belong. xv 1. Introduction and synthesis Andrés Solimano E con om ic grow th and the process o f developm ent do not evolve in a political and institutional vacuum. E con om ic choices depend on rules, institutions and social constraints that are mediated by a political process. A governance environment characterized by stability, the rule o f law, and social cooperation w ill foster wealth creation provided go o d econom ic opportunities are in place. H owever, in many societies - including the Andean countries - the political process is often messy, institutions are far from being the ideal set o f rules that minimize transactions costs and social relations are characterized by conflict and even violence. Ultimately, underdevelopment is not only a problem o f lack o f economic resources but it is largely associated also with volatile politics, dysfunctional institutions and highly differentiated social structures. Th e subject o f this b o ok is to understand the main characteristics o f political systems, institutions and social structures in the Andean region o f Latin Am erica and their impact on and interplay with their economic performance. Th e A ndean region is com prised o f B olivia, C olom bia, Ecuador, Peru and Venezuela.1 These economies have a per capita income o f around US$2000. They are rich in natural resources such as oil, mining, forestry, biodiversity, fishery, and so on. In the Andean region we find a high frequency o f political crises in recent decades. In some countries there is also a high turnover o f ministers and other authorities. Constitutions have been reformed in the five Andean countries in the last 15 years. International rankings o f quality o f institutions as measured by indices o f rule o f law, effectiveness o f regulation, control o f corruption and others place the Andean group in a relatively low place o f the rankings. Their social structure is characterized by considerable poverty, inequality o f income and wealth and social exclusion o f certain social groups. In Bolivia, Ecuador and Peru a significant share o f the population is o f indigenous origin but this is not the case in C olom bia and Venezuela. Econom ic growth has been moderate and volatile in the last two to three decades and some countries, such as Venezuela, have suffered a protracted growth slowdown in the last quarter century. The Andean economies also have had their fair share o f economic 1 Political crises, social conflict and economic development 2 crises associated with terms o f trade shocks, changes in capital flows and, at different junctures, internal destabilization. 1.1 MAIN QUESTIONS This b ook includes comparative cross-country studies along with political econom y country papers fo r each A ndean country. Th e country studies cover at least the 1990s and early 2000s although some o f them go even further back and include previous decades as a background to understand current political econom y developments in these countries. Th e volume tries to address the follow ing questions: a. W hat are the main characteristics o f the political system and the stability o f democracy in the Andean countries? b. W hat is the frequency o f episodes o f systemic breakdown (coup d ’ état, authoritarian regimes, m ajor social upheavals) and collapse o f democracy in recent decades in the Andean nations? c. A re social contracts - as embedded in the constitutions - stable over time? Conversely, what is the frequency o f constitutional change in the Andean region? d. H o w com m on are presidential crises and turnover o f ministers and other authorities in the Andean countries, reflecting continuous political change and instability in these countries? H o w can we measure political instability and institutional fragility? e. W hat is the interplay between econom ic and political crises? Is the causality running from political crises to econom ic crises or from f. econom ic crises to political crises? D oes one type o f crises necessarily lead to the other? W hat is the quality o f institutions in the Andean region as measured by historical indicators and by subjective indices o f rule o f law, control o f corruption, effectiveness o f regulations, degree o f violence? g. W hat are the main political and econom ic effects o f income and wealth inequality in the Andean region? D oes inequality worsen governance? D oes inequality hamper econom ic growth? h. H o w have the abundance o f natural resources and the existence o f illegal activities (for example drug traffic) affected the economy and governance conditions in the Andean region? i. W hat are the main economic effects o f political instability and the quality o f institutions on the rate o f econom ic growth and other dimensions o f econom ic development? Introduction and synthesis 1.2 3 MAIN FINDINGS The main findings o f this b ook can be summarized as follows: Political Systems, Constitutions and Crises A theme underscored in this book is that fo r m a l political systems do not always guarantee strong presidencies and stable democracies. W e document a high incidence o f presidential crises in the Andean countries. Recent examples are Bolivia in 2003, Ecuador and Peru in 2000, Venezuela in 2001. Traditionally a response to recurrent instability in the Andean countries has been trying to strengthen the presidential system. However, this reform may not, per se, avoid political crises. W e are not advocating parliamentary systems either. The point is that strong presidencies may take more than having a presidential system written into the constitution. In the 1990-2003 period, Colombia, Ecuador, Peru, Bolivia and Venezuela - all five Andean countries - reformed, in m ajor ways, their constitutions as a way to solve their chronic political and econom ic problems. Historically, say during the 20th century, the frequency o f constitutional reform in the Andean region was high. I f we interpret (m ajor) constitutional reforms as an attempt to redraw existing social contracts, we find that social contracts are not very stable in the Andean countries. A gain we have to distinguish between form al social contracts - as expressed in constitutions - and actual (o r ‘inform al’ social contracts), that embed other considerations such as political culture, history and social norms that are certainly m ore difficult to change than the constitutions. Th e specific consequences o f the last round o f constitutional reforms undertaken since the 1990s in the Andean countries merit their own analysis but are beyond the scope o f this book. Still the experiences o f the last ten or 15 years suggest that changing the constitution is not an overnight fix fo r the political, econom ic and social problems o f these countries. In addition, new constitutions in some cases may create new problems that probably were not envisaged by the reformers. A sensitive issue, fo r example, is the expansion o f econom ic rights (and devolution o f powers to sub-national levels) sanctioned by some o f the new constitutions w ithout concom itant increases in wealth and income to finance the new mandates o f the reformed constitutions. This could be relevant for Colom bia follow ing the constitution o f 1991 and in Venezuela after the constitutional reform o f 1999-2000. Other new rules that have proved complex are provisos on the number o f political parties, re-election rules, decentralization and others. 4 Political crises, social conflict and economic development Interplay between Economic and Political Crises Th e A ndean countries, some m ore than others, suffered a number o f economic crises in recent decades. From a political economy perspective, the question arises whether these economic crises are always followed by political crises? O f course, we may also have a reverse causality in which political instability leads to economic crises. The answer to the first question is mixed. The Bolivian presidential crisis o f 2003 that led to the departure o f form er President Sánchez de Lozada, who flew to M iam i after resigning, came at a time when the incomes o f coca growers and poor peasants sharply declined follow ing the policy o f coca eradication initiated earlier. So although there were economic and social causes behind the departure o f President Sánchez de Lozada, such as the above mentioned squeeze o f the incomes o f coca growers, it was not a case o f a political crisis that follows a macroeconomic crisis (defined as high inflation, continuous currency devaluation, massive decline in G D P, and so on). In contrast, in Ecuador in the last 1990s, the country indeed suffered a severe m acroeconom ic and financial crisis in 1998-99 characterized by accelerated currency depreciation, inflation, a crisis in the banking system and a decline in gross domestic product o f over 9 per cent in 1999. Against this background o f econom ic crisis, President M ahuad was deposed in an indigenous-m ilitary uprising in January o f 2000. Th e Ecuadorian political crisis o f early 2000 was a clear case in which econom ic crises preceded a presidential crisis. O f course, these are not purely mechanical relationships and there were also political factors (the management by the President o f various conflicts between the sierra and the coast, the relationship with parliament, etc.) behind the collapse o f President M ahuad’s administration. Anyhow, it is clear that the serious econom ic crises o f 1998-99, intertwined w ith various political factors, created a climate conducive to a presidential crisis. Other presidential crises have a different origin. Som e o f them are related to corruption scandals associated with lack o f transparency and weak mechanisms o f checks and balances. Th e departure o f Peruvian President Fujim ori in 2000, triggered by a bribery scandal involving C h ief o f Security Vladim iro Montesinos, is a case in point o f a corruption-led crisis. In addition, the neo-authoritarian style o f government o f Fujim ori in the 1990s certainly generated increasing levels o f social resistance and delegitimization at domestic and international levels that led to such a crisis. Regarding the interplay between economic and political crises, it is apparent that no open, large-scale economic crises happened to occur before or after the departure o f Fujimori. In sum, various recent experiences in the Andean region suggest that econom ic and political crises are not always closely related with each other. Crises in each realm seem to have a certain degree Introduction and synthesis 5 o f ‘ autonom y’ . One type o f crisis (political or econom ic) is not necessarily preceded or follow ed by the other. Stability and Quality of Democracy The cross-country analysis and individual country cases in this book show that historically, and recently, democracy has follow ed cycles (alternating with authoritarianism) in some Andean countries. In the 1960s and 1970s, there were frequent regime changes in which military regimes alternated with democracy in Bolivia, Peru and Ecuador. This underscores the fragility o f democracy in these countries. In contrast, in the last four decades democracy has been more stable in C olom bia and Venezuela, although these countries have been also affected by chronic internal armed conflict (C olom bia) and political polarization (Venezuela). The Andean countries’ experience suggests that the dichotomy between dem ocracy and authoritarianism has to be qualified. This brings us to the com plex issue o f qu ality o f democracy. A t a broad level we may associate the quality o f democracy with the efficacy with which political institutions mediate and aggregate the interests, voice and preferences o f different individuals, political parties and social groups to produce results that are deemed to be socially desirable (including creating an environment conducive to econom ic prosperity and stability). A ls o democracies are incomplete when civic and political rights are not respected and enforced for everyone. In the context o f the Andean countries, the demands by certain social and ethnic groups fo r an increased voice and political representation are an im portant test o f the qu ality o f democracy. Exclusion and lack o f representation o f these groups show that democracy is incomplete. Recently we have seen the increasing demands o f indigenous groups in B olivia, Ecuador, and Peru for a greater voice and representation (and eventually autonomy). Traditionally these groups have been largely excluded from the political system although in the 1990s that situation started to be reversed. Another issue pertaining to the quality and stability o f democracy is how dem ocracy manages violence. C olom bia is the country with the highest incidence o f political violence in the Andean group and in Latin America. The country has suffered fo r m ore than four decades an armed conflict that started in the 1960s w ith socioeconom ic and political demands by armed peasants’ organizations but that later on became linked to drugtrafficking, changing the original nature o f the conflict. Peru also suffered from heightened violence by Sendero Lum inoso in the 1980s and early 1990s. Persistent political violence reflects a failure o f the democratic system that cannot impose the rule o f law and maintain the m on opoly o f the 6 Political crises, social conflict and economic development use o f force by the institutions o f the state. The econom ic consequences o f violence are bound to be severe as it often destroys human lives and valuable econom ic assets and creates an environment that penalizes the accumulation o f capital. The Nature and Quality of Institutions Econom ic theories o f institutions stress that they are created to minimize transaction costs and facilitate economic exchange. However, recent political econom y theories take a different approach and envisage institutions as instruments that are designed and maintained to protect the econom ic and political interests o f certain elites which are not necessarily coincident w ith the interests and general w elfare o f society. In fact, we may find several historical and recent examples o f countries in the w orld in which dysfunctional institutions can bring stagnation, econom ic retardation and misery to the population. The country studies in this volume assess the effectiveness o f institutions using both historical and recent indicators o f institutional change as well as a set o f indices o f quality o f institutions compiled by the W orld Bank and the W orld Econom ic Forum fo r a large sample o f countries. This allows us to put the institutions o f the Andean countries in international comparative perspective. The W orld Bank-World Econom ic Forum indices are based on surveys applied to users o f these institutions such as individuals, domestic companies and foreign investors. These are subjective indices in the sense o f being based on people’s opinions o f how institutions work. Although there are differences within the Andean group in general these countries rate below some other Latin Am erican countries and the O E C D in terms o f quality o f institutions. Natural Resources, External Vulnerability and Illegal Activities Political institutions interact with econom ic structures and international conditions in generating certain econom ic outcomes. Several A ndean countries depend on natural resources as their main source o f foreign exchange and fiscal revenues. This is the case o f oil in Venezuela and Ecuador, o f hydrocarbon in B olivia, copper in Peru, and so on. This dependence on natural resources makes these econom ies vulnerable to international vola tility in com m odity prices. C om m od ity price shocks often create internal cycles o f b oom and bust in Latin Am erican countries and the A ndean group is not an exception in that regard. These cycles occur, in part, because mechanisms o f ‘financing’ the shocks (when they are considered as transitory) are lim ited given the incom plete nature o f Introduction and synthesis 7 domestic and international capital markets. Com m odity stabilization funds have been set up in several Andean countries with various degrees o f success (o r failure) in avoiding macroeconomic fluctuations. This dependence on natural resources not only create problems o f macroeconomic management (that is, how much to save o r spend o f a positive shock) but also raise political econom y dilemmas, chief among them to decide how and in which sectors to spend revenue windfalls when they occur. Moreover, managing the revenues o f natural resources in a transparent way - avoiding rent seeking and corruption - is also a political challenge. A nother issue related to ‘natural’ resources is the importance o f illegal activity such as drug trafficking based in the cultivation o f coca lea f and poppies. This has been especially serious in Colom bia since the 1960s and 1970s where the revenues o f the drug traffic provide resources to rebel groups fueling and perpetuating internal conflict. A lso Bolivia and Peru have been affected by drug trafficking problems at least since the 1980s. A lso money from illegal activity can have a corrupting effect on institutions debilitating the democratic system and altering econom ic priorities away from development. Social Structure, Institutions and Growth The social structure o f the Andean countries is very complex. It comprises poverty and econom ic inequality and exclusion o f certain social groups. Traditionally, the urban and rural economic elites (landowners, industrialists, bankers, renters) have a disproportionate influence in society. This is in contrast with the limited political and econom ic influence o f low-income groups, including the working class, the unemployed or underemployed, p o or peasants and part o f the middle class. This social structure generates distributive conflicts over the shares o f national income accruing to each group and conflict over access to and use o f political power. A very im portant role o f political institutions is to mediate this latent (o r open) social conflict in such ways that society remains reasonably stable and in which the capital accumulation and grow th process can develop. W hen institutions fail to mediate this conflict, for example after a negative shock has occurred, the result is likely to be a combination o f both political instability and lower growth. Institutions and governance conditions affect econ om ic grow th through fa cto r accumulation and productivity growth. Th e com bination o f weak institutions and social conflict creates uncertainty over policies and rules, deteriorates the quality o f labor-em ployer relations and worsens the general business climate in the country. In the external dimension, they can deter international investors and capital inflows also affecting growth. This book examines at country 8 Political crises, social conflict and economic development level how these mechanisms operate in practice identifying the channels through which social and governance factors affect econom ic outcomes. The empirical growth literature has ample evidence showing the negative effects o f weak governance conditions on econom ic growth. The country studies included in this volume examine in rich institutional and historical detail the interactions between politics and institutions on the one hand and econom ic performance and growth on the other. Geopolitical Considerations This book focuses, mainly, on the internal political-economy factors that affect econom ic performance. Still, we should not neglect the importance o f international politics and geopolitical factors. The Andean region is under the direct influence o f the U nited States, its foreign policy and its international financial policies. Th e influence o f Latin A m erican and European governments is also relevant. The Andean region is affected by the decisions o f international financial institutions such as the IM F , the W orld Bank and the regional development banks. Stabilization plans supported by the Bretton W oods institutions have been critically important at times in affecting the econom ic and political outcomes in these countries. For example the withholding o f a large loan by the I M F to Ecuador in 1999 has been credited with a decisive effect on the eventual demise o f President M ahuad in early 2000. A lso Plan C olom bia actively supported by the U nited States and some European countries has been instrumental in trying to affect the course o f the four-decades-old internal armed conflict in Colombia. The U S policy towards drugs in Bolivia and Peru affected the actual patterns o f geographical location o f drug production in the Andean region and outside it. A s already mentioned, policies o f coca eradication in Bolivia, encouraged from abroad, altered the fragile social and political balances o f the country. 1.3 ORGANIZATION OF THE BOOK This b o ok is organ ized in tw o parts besides this introduction. Part I includes two essays, Chapters 2 and 3, that consider the Andean group in international comparative perspective. Chapter 2, ‘Governance crises and the Andean region: a political economy analysis’ by Andrés Solimano provides a conceptual framework to study governance patterns distinguishing between (a ) the political regimes and the constitution, (b ) the quality o f institutions and (c) the patterns o f social conflict and cooperation. The chapter then undertakes an em pirical analysis fo r the A ndean region that combines Introduction and synthesis 9 historical and recent data on political crises, changes o f constitutions for the 20th century along with subjective indices o f quality o f institutions published by the W orld Bank and the W orld Econom ic Forum. The chapter also illustrates the linkages between governance, inequality and growth performance. Chapter 3, ‘Poverty, inequality and governance in the Andean region’ by Am anda Glassman and Ashu Handa analyses the main trends in poverty and inequality in the Andean countries. The chapter explores the role o f the level and volatility o f econom ic growth, the incidence o f recessions and crises, inflation, labor market dynamics and governance factors in terms o f their impact on poverty and inequality. The chapter also highlights options for social policy and reform that make compatible growth with social equity and inclusion. Part I I o f the book is devoted to five political econom y country studies written by well-known economists and political economists o f each Andean country. These studies distinguish between institutional and governance factors and economic and social outcomes, exploring the interfaces between both sets o f variables. The country studies provide rich institutional detail and place the country experiences in the proper historical and contemporaneous context o f each country. Chapter 4, ‘The political economy o f the crisis in the Andean region: the case o f B olivia’ written by G eorge G ray M o lin a and G onzalo Chávez make a distinction between a ‘governance block’ and an ‘econom ic block’ . The study covers from 1982 to 2002. The governance block identifies political fragmentation, corruption, ethnic fragmentation and drug tra ffick in g as im portan t governance issues in B olivia. Th e econom ic block documents the stabilization o f hyperinflation in the mid1980s and the successive econom ic and social reforms undertaken in the 1990s and early 2000s. The authors warn o f some critical contradictions o f Bolivian society; particularly the fact that the modernizing econom ic reforms o f the 1990s were unable, to a large extent, to tackle a variety o f fundamental problems o f Bolivia such as its economic dependence on non­ renewable natural resources, the sizeable coca sector that provides the inputs for drug processing, a fragmented political system, a high level o f poverty and inequality and a history o f exclusion o f indigenous groups. These factors have been important in explaining the crises that shook Bolivia in 2003 (and previous crises as well). Chapter 5, ‘The economy, conflict and governance in C olom bia’ by José A nton io Ocam po examines the evolution o f governance conditions and econom ic developments in C olom b ia in the 1990s and early 2000s. Th e chapter also provides some discussion o f historical trends and data when relevant. The author relates the fourdecades-old internal armed conflict o f C olom bia started in the 1960s to colonization, the geographical fragmentation o f power, intensified by the effects o f drug trafficking and its degenerative effects on the rebel groups 10 Political crises, social conflict and economic development and society at large. In the econom ic area Ocam po analyses the impact o f incomplete adjustment to trade liberalization and the vulnerability o f the Colom bian economy to external financial cycles. H e also notes the tensions between econom ic openness and an increased role o f the state sanctioned by the constitution o f 1991. Ocampo characterizes C olom bia as a relatively stable dem ocracy (in terms o f duration and continuity since the 1950s) although it coexists w ith a violent, gang-controlled system largely related to drug trafficking activity and armed conflict. Chapter 6, ‘Political econom y o f Ecuador: the quandary o f governance and econom ic developm ent’ by Gustavo A rteta and O svaldo H u rtado analyzes the political and econom ic performance o f Ecuador in the 1990s and early 2000s. The authors highlight the fact that Ecuador was the first country in Latin Am erica to begin the transition to democracy in 1977-79 after successive authoritarian regimes. Ecuadorian democracy, however, has been characterized by political instability, a high turnover o f presidents and ministers, volatility o f laws and reforms, fragmented and conflictive politics, regional divides, influential corporate interests and weak executives. Ecuador grew very rapidly in the 1970s follow ing the oil price boom but the 1980s and 1990s were two decades o f low and unstable growth, inflation, recurrent currency devaluations, external vulnerability to com m odity price shocks and volatile capital flows. Th e authors highlight two im portant political and econom ic reforms oriented to restoring good governance and econom ic stability in Ecuador: the constitutional reform o f 1998 and the adoption o f official dollarization in 2000. Chapter 7, ‘Governance and econom ic performance in Peru in the 1990s’ by M ig u el Jaramillo and Jaime Saavedra examines the main politicoinstitutional and econom ic developments in Peru up to 2000. The authors document that in the late 1980s, before the Fujim ori administration, Peru was affected by econom ic collapse and social turbulence and violence led by the M aoist group Sendero Luminoso. The chapter highlights, however, that the new F u jim ori adm inistration com bin ed free m arket policies with neo-authoritarian political methods. The Fujim ori administration’s econom ic program comprised macroeconomic stabilization, liberalization, and privatization. However, Fujim ori also showed social concern and an active effort at providing social infrastructure in rural and urban areas was launched. For almost a decade, these policies maintained a certain legitimacy. However, the contradictory mix o f social market economics and authoritarian politics in any incomplete democracy proved ultimately explosive when the M ontesinos corruption and M afia-like scandal erupted forcing the departure from the country o f President Fujim ori w ho sent his resignation from Japan in mid-2000 where he stayed afterwards in self­ imposed exile. Introduction and synthesis 11 Chapter 8, ‘Venezuela: from stability to tu rm oil’ by Enzo D el Bufalo provides an interpretative essay on the events and factors that led to the government o f President H u go Chávez in the late 1990s and the economic and political polarization o f the early to mid-2000s in Venezuela. The author discusses several features o f Venezuelan society during the second half o f the 20th century and before: the heavy econom ic reliance on oil (the ‘ oil rental’ model, el m odelo rentista), a political system dominated by two traditional political parties (A D E C O and C O P E I), a varied ‘human geography’ , the influence o f the international economy and global politics. This model led to persistent econom ic decline from the late 1970s, followed by political instability and attempts at either partial reform o f the system or to more radicalized alternatives oriented to shattering the prevailing system along neopopulist lines. The author also looks at econom ic performance in Venezuela and discusses the interplay between governance and economics in the early part o f the Chávez administration. NOTE 1. The criterion for including the five countries in the definition o f ‘Andean region’ is their membership o f C A N (Andean Com m unity o f Nations), an econom ic integration and political agreement that has a governing council, a parliament and forms a customs union. Chile is also an ‘Andean country’ in a geographical sense but it is not a member o f C A N . PART I Analytical overview and cross-country analysis 2. Political instability, institutional quality and social conflict in the Andes Andrés Solimano* 2.1 INTRODUCTION The A ndean region o f Latin A m erica has experienced governance and econom ic difficulties that have com pounded its structural problems o f poverty, slow grow th, in equality and financial volatility. G overnance difficulties are reflected in a high turnover o f authorities, low rankings in international indices o f institutional effectiveness, recurrent political crises, violence (particularly acute in C o lo m b ia ) and potentially fragile democracies.1 A ll these governance problems put clear obstacles to steady econom ic growth besides affecting the quality o f democracy. The last few years have been marked by considerable political instability in the Andean region. Recently, in October o f 2003, the Bolivian President Sánchez de L o za d a was forced to resign follow in g a sequence o f social protests directed by groups o f indigenous peoples and peasants. In A p ril o f 2002, fo r example, a failed coup d’état took place in which Venezuelan President H u go Chávez was temporarily ousted from power only to regain the presidency a day later in a confusing set o f events that involved the m ilitary and some leaders o f the main business association. In Ecuador in January o f 2000, the dem ocratically elected President Jamil M ahuad was deposed by the m ilitary follow in g an indigenous uprising in which a short lived military-indigenous junta took power for a few hours, only to eventually, under strong foreign pressure, turn pow er over to V ice President Gustavo N o b o a . In 2000, Peru’s President A lberto Fujim ori fled the country after a scandal o f corruption and political intimidation that involved his Chief o f Security, Vladimiro Montesinos, stripped the Fujimori administration o f all its remaining credibility. Th e econom ies o f the A ndean countries have also been affected by governance and instability problems. In the last ten years the average rate 15 16 Political crises, social conflict and economic development o f econom ic growth fo r the five Andean countries2 (B olivia, C olom bia, Ecuador, Peru and Venezuela) was lower than the average growth rate in the Latin Am erican region as a whole. Colom bia has seen its historically stable economy give way to slow growth and financial vulnerability. Ecuador, in turn, suffered a severe econom ic and financial crisis in 1998-99 and has experienced recurrent currency depreciation and escalating inflation that was further complicated by a severe banking system crisis.3 Ecuador’s answer to this instability was to radically change the currency regime and adopt the U S dollar as its official currency in early 2000. O fficial dollarization, supportive fiscal and financial policies, and better external conditions helped Ecuador to, albeit gradually, restore domestic confidence, reduce inflation, and resume econom ic grow th in the last tw o years; although external imbalances developed in 2002. In Peru the political turbulence associated with the demise o f the Fujim ori regime affected output growth in 2001 though it recovered in 2002 and 2003. Venezuela has experienced a volatile growth record that followed the fluctuations in international oil prices. Gross domestic product in Venezuela declined substantially in 2002 and 2003 (accumulating a drop o f 22 per cent) associated with a cut in investment and output follow ing domestic political polarization and strikes. Although B o livia ’s growth rate increased during the 1990s, B o livia ’s econom y has also been affected by the regional slowdown and by internal social unrest in the early 2000s. This chapter underscores the critical importance o f governance conditions in affecting econom ic developm ent. Th e purpose o f this chapter is to characterize political and constitutional regimes, the quality o f institutions, social inequality, and ethnic diversity in the Andean region. To that end, a conceptual fram ew ork is developed (Section 2.2) that distinguishes the specific roles o f political regimes, constitutional rules, the quality o f institutions, and patterns o f social conflict in generating governance patterns that, in turn, affect econom ic outcomes. The focus o f the chapter is mainly on how to characterize and understand governance rather than on providing a detailed analysis o f the channels through which governance conditions affect econom ic growth. This w ill be the subject o f a subsequent chapter. Th e em pirical analysis o f the chapter (Section 2.3) combines long-run evidence on the frequency o f constitutional reforms, presidential crises, and political regimes o f the Andean region in the 20th century along with more recent indicators o f governance and institutional quality in the 1990s and early 2000s prepared independently by the W orld Bank and the W orld Econom ic Forum in conjunction with H arvard University. Indicators o f social inequality, ethnic diversity, and econom ic performance for each o f the five Andean countries are also provided in this section. Section 2.4 gives Politics, institutions and social conflict 17 an interpretation o f the governance and econom ic record o f the Andean region countries and Section 2.5 presents our conclusions. 2.2 POLITICAL REGIMES, INSTITUTIONS AND SOCIAL CONFLICT: A CONCEPTUAL FRAMEWORK Th e conceptual fram ew ork adopted in this chapter sees governance conditions as the result o f the interaction o f three sets o f variables: a. the nature and stability o f the political regime and the constitution; b. the quality o f state institutions; c. the pattern o f social conflict and cooperation related to inequality and ethnic diversity; d. other factors affecting governance. Th e political regim e and constitutional rules constitute the highest echelon in the hierarchy o f institutions.4 The judiciary, the regulatory bodies, the ministries, the budgetary process are part o f the second level in the hierarchy o f institutions. This chapter identifies complex agent-principal problems, rent seeking, corruption, and violence as important factors that weaken state institutions and create serious governance problems. The third set o f variables goes beyond form al institutions and focuses on patterns o f social behavior such as cooperation and conflict, largely related to inequality o f income and wealth and to ethnic diversity. This framework highlights the impact o f each o f these three sets o f variables (and the effects o f their interaction) on the governance and econom ic performance o f the Andean countries. (a) Political Regimes and Constitutions Constitutional theory has a long history going back to Montesquieu (1748), Ham ilton and the Founding Fathers o f the U S Constitution, Hayek (1960), Buchanan and Tullock (1962), with more recent treatments given by Cooter (2000) and A gh ion , Alesina and Trebbi (2002). Th e p u b lic choice sc h o o l or c o n tra cta ria n ap p ro a ch 6 cham pioned by N o b e l Prize W inner James Buchanan focuses on a social contract, such as the constitution, that defines the overall political fram ew ork under which society evolves. Buchanan (1988) distinguishes between the process o f w riting up a constitution - setting up the basic rules o f the gam e in 18 Political crises, social conflict and economic development society - and the specific policym aking process that unfolds under the rules established by that constitution. In the words o f game theory, the constitution is the first stage establishing the rules o f the game: the second stage is playing the game. A normative analysis would enter into the first stage (w riting the constitution and creating the basic institutions). The positive analysis, in turn, would focus on playing the game.6 U nder ideal conditions, constitutions are assumed to have been written under the ‘veil o f ignorance’ regarding initial resources and interests and such that the writers o f the constitution did not end up in a better or worse position in society as a result. This assumption has been criticized as unrealistic because the framers o f constitutions do often consider their own interests in the process o f w riting the constitution.7 A n important tradition in political theory focuses on the design o f the main political institutions o f the state. This institutional design includes electoral rules, division o f powers, and checks and balances am ong different branches o f the state. The constitution is the main legal charter that establishes the basic rights and responsibilities o f individuals and the workings o f the political system. The m ajor types o f democracies are the p a rlia m en ta ry and p re sid en tia l systems with sem i-presidential regimes (fo r example France) that mix elements o f both systems. In presidential systems (fo r example like in the U nited States), presidents are elected either by a direct vote or by an electoral college, have fixed terms in office, and often have legislative initiative. In fact, presidents are often endowed with considerable powers to present legislation to congress and to administer the executive branch o f government and cannot be removed from office before the expiration o f their official term, except in cases o f impeachment or resignation. Presidential regimes do not require legislative majorities. In contrast, in parliamentary regimes, heads o f government or prime ministers are the leaders o f the m ajority party in parliament. They can be removed through a vote o f no-confidence in cases o f political crisis and the head o f government (that is the prime minister) needs a parliamentary m ajority to sustain their government. Basic criteria w ith which to com pare presidential and parliam entary systems include how each system contributes to the continuity and stability o f democracy and how the system forestalls ‘ regime breakdowns’ in the event o f a m ajor political crisis. Authors such as Juan Lin z and A rtu ro Valenzuela (1994) argue that the ‘ dual legitim acy’ between the president and parliament, the alleged tendency towards a ‘winner-take-all’ system in presidential regimes, the role o f outsiders in bidding fo r the presidency, and the rigidity o f terms make presidential regimes more prone to generate political crises than parliamentary regimes.8 From an econom ic viewpoint the choice o f political regime and, even more importantly, its stability over Politics, institutions and social conflict 19 time are important factors that affect the degree o f political stability in a country, a variable that influences both investment and the rate o f economic growth. (b) Institutions of the State: Strengths, Weaknesses and Factors that Affect Quality Once the basic political fram ework o f a country has been defined by its constitution , there is a vast array o f political and economic institutions (for example ministries, central banks, customs, public investment agencies, the judiciary) whose quality o f performance is critical for ensuring appropriate governance and, ultimately, go o d econom ic outcomes. Positive political econom y (P P E ) applies econom ic principles o f individualism, incentives, rationality and constraints to the analysis o f institutions and o f their impact on econom ic performance.9 In this view, institutions are form ed to reduce transaction costs both in the econom ic and political realms.10 A politicaleconom y approach that has gained considerable attention in recent years is the theory o f transaction costs po litics (T C P ) developed by N orth (1990) and D ixit (1996, 2001a, 2001b). This approach evaluates how different political governance structures (constitutions, government agencies, laws) cope with ‘transaction costs’ . In an analogy with transaction cost economics (T C E ), transaction cost politics uses the contract as a unit o f analysis. W hile in economics a contract is a verifiable process (fo r example renting a house or lending to a firm ), in politics contracts are more complex. The definition o f a ‘political contract’ is often ambiguous: a president or senator may be elected on a platform that is vague, making it difficult to m onitor the fulfillment o f the initial promises. Besides, there are incentives to change policies along the way, dismissing initial commitments (fo r example the phenom enon known as ‘time inconsistency’) . 1 These agency problems 1 are further complicated by the existence o f several principals (the general public, voters, specific interest groups); these multiple principals lead agents (the governm ent, parliament, public agencies) to face several mandates that are often inconsistent. Th e enforcem ent o f ‘political contracts’ is difficult because the institutional mechanisms o f enforcement (elections, the supreme court, referendums) cannot be activated at every small deviation from initial commitments. In recognition o f all these difficulties, modern political econom y theories have devised new concepts such as reputation, commitments, rules, and delegation (using independent central banks, for example, to conduct non-inflationary monetary policy). This literature sees these institutional mechanisms as a way to cope with incentives fo r non­ compliance by agents that face incentives to be inconsistent, conflicting mandates, and a system w ith lim ited accountability. These com plex Political crises, social conflict and economic development 20 principal-agent problems make clear the need for appropriate institutions that can deal with governance problems. Rent-seeking, corruption, and violence as factors that weaken institutions U n d er ideal conditions, institutions and organizations must have clear goals, be properly funded, have a sound financial and human resource base, and be free o f undue political interference. A t a ‘general equilibrium level’ they must be part o f an institutional architecture that is based on adequate governance principles that ensure a proper working o f institutions for among other things fostering econom ic prosperity. In the previous sub­ section we identified several reasons related to the agent-principal problems that are particularly serious in the case o f political transactions as regards why institutions fail to function properly. Here we identify three phenomena that tend to weaken the institutions o f the state. These three factors are: a. rent-seeking behavior; b. corruption; c. violence. R e n t seeking The rent seeking approach12 in political economy sees society as form ed by individuals organized in special interest groups (o r acting alone) that are motivated by their particular interests rather than by the general interest o f society. Com m on examples include: farmers seeking price support schemes, industrialists wanting import protection, bankers pressing fo r protective regulation and less com petition from new intermediaries. From this perspective, the state is seen as institutional machinery that, among other things, dispenses economic favors and transfers income among groups in exchange for political support. Rent seeking behavior leads some groups to attempt the capture o f key state institutions such as customs, tax administration authorities, public contracts agencies, where they can extract rents. C o rru p tio n These rents can be obtained by lobbying (rent seeking) or simply by illegally appropriating public assets fo r personal benefit. In this latter case we are referring to corruption. In some cases, groups may attempt to capture the whole state apparatus and corruption becomes the norm fo r the predatory groups (fo r example the kleptocracy) that have captured the state. Corru ption and the stealing o f state assets (like the ‘spontaneous privatization’ in post-Soviet Russia) tend to flourish in weak states where mechanisms that make government officials accountable to the public, parliament, and the courts w ork very poorly and curtail the rule o f Politics, institutions and social conflict 21 law. Corruption and rent seeking clearly undermine the strength o f state institutions. M oreover, intense rent seeking can lead to corruption. V iolence In a w orld o f voluntary exchange and compliance with the rule o f law, there is no role fo r violence. Less so fo r internal arm ed conflict entailing different armed groups from the official army. A n im portant feature o f several contem porary societies1 and relevant for some o f the 3 Andean countries, however, is pervasive violence and internal conflict that severely weaken the state and can lead to its collapse. In these cases, the state loses its m onopoly on the use o f force and the rule o f law becomes severely limited or simply non-existent. In the case o f armed conflicts, it is interesting to analyse the different motivations o f rebel groups. They may be a mix o f political motives (rebellion as justice seeking) and quasi-criminal motives (rebellion as crim e).14 The view o f rebellion as driven by greed considerations emphasizes the quasi-criminal features o f rebel organizations and the motivations that those organization have in com m on with criminal organizations.1 The scale o f rebellion and armed conflict is much larger 5 than that o f crime, even including organized crime.1 6 The view o f rebellion as ‘justice seeking’ emphasizes ‘grievance factors’ such as incom e inequality, ethnic and religious divisions, and political motivations as the most important driving factors o f the groups engaged in internal conflict. Rebel groups with a mix o f both political and quasi-criminal motives consistently behave in a way oriented to w e a ken in g and even d estro yin g the state, so as to pursue their goals more easily, and with impunity. It is interesting to note that in many cases, rebel organizations do not want victory against the governm ent (that is the seizure o f pow er). Th ey are often interested in preserving a very weak state and profiting from that situation. In these conditions, an armed conflict becomes an ‘equilibrium’ or at least a stable situation that can last for a long time (see C ollier 2000).1 7 Interestingly, this model can be used to explain the long duration o f certain internal conflicts such as the one in Colombia. (c) Social Cooperation and Conflict, Inequality and Ethnic Fragmentation Beyond form al institutions, social cooperation and social conflict also play an important role in generating actual governance and economic outcomes. Individuals, groups and social classes each have different economic interests and motivations. Society, in turn, is an arena in which conflict and cooperation coexist with a political system that mediates the various demands and claims from different social groups.1 Social conflict can vary in nature: one type 8 is distributive conflict, in which groups (o r econom ic classes) fight over 22 Political crises, social conflict and economic development their shares o f the national income.1 In a situation o f distributive conflict, 9 inflation can be seen as the result o f the conflict over real income in which each group manages a price (wages, markups, and so on), which combines with an accommodative monetary policy to generate inflation. Other points o f distributive conflict are taxes, transfers, and spending, with low-income groups pressing for higher taxation to finance social spending and income transfers. In contrast, the upper middle class and the wealthy tend to favor lower taxation o f income, financial assets and productive wealth. In practice, conflict and cooperation alternate; the approval o f tax and spending laws, for example, has different distributive implications and requires some degree o f cooperation and consensus in parliament. The endogenous grow th theory investigates the role o f inequality in econom ic growth and finds that more unequal societies such as countries with m ore incom e and wealth inequality am ong their members tend to generate more social polarization and political conflict than more egalitarian societies. Thus economic growth, controlling for development levels, would be higher in more egalitarian societies than in unequal and polarized ones, as in the latter the pressures fo r higher taxation tend to be higher and the quality o f labor-capital relations tends to be lower than in the more egalitarian societies.20 Recent literature on the origins o f institutions (Acem oglu 2002) relates them to social and distributive conflict, and argues that inefficient policies and institutions are functional to the interests o f politicians and social groups holding pow er to the detriment o f society at large. In this view institutions can be socially inefficient. The only and overriding m otivation to create institutions is not to reduce transaction costs: they are often set up and maintained to help keep power fo r certain groups and individuals. A nother dimension o f social differentiation that is especially relevant fo r B olivia, Peru and Ecu ador is ethnic diversity. Th e question arises whether multiethnic societies have more difficulties in reaching consensus than ethnically homogeneous societies. Empirical studies o f the impact o f ethnolinguistic fractionalization on economic performance (growth) suggest different answers to this question. On the one hand, authors such as Easterly and Levine (1997) attach a central role to ethnolinguistic fractionalization in explaining the poor growth performance o f multiethnic Africa. In contrast, other analysts such as C o llier (2001) find that ethnically differentiated societies do not necessarily have either worse econom ic performance or greater risk o f civil conflict than more ethnically homogeneous societies. For Collier, the political regime and the degree o f ethnic dominance are more important than simple ethnic diversity in explaining growth performance in Africa. Politics, institutions and social conflict 23 (d) Other Factors Affecting Governance The previous set o f variables affecting governance does not exhaust the factors that explain the type and quality o f governance. A variable emphasized by M a x Weber, for example, is the quality o f leadership. A forceful leader (for example a president) can be important in steering a country in a certain direction and help it to avoid political conflict, ensuring stability.2 However, 1 that leader can also be authoritarian, therefore their behavior could be inconsistent with democracy. M oreover the econom ic ideas o f the leader may be inconsistent with econom ic policies that bring prosperity. Th is discussion underscores the fa ct that the type o f leader, their personality, ideas, political abilities, and so on, can have an im portant influence in creating good or bad governance in a country. Other governance variables that can be im portant are ideology, the type o f legal system (Anglo-Saxon, N apoleonic, and so on), and the degree o f professionalism (o r politization) o f the armed forces and others. 2.3 EMPIRICAL ANALYSIS In this section, we empirically investigate the effects that political regimes, constitutional change, the quality o f institutions and social conflict have on governance and economics in the Andean countries. (a) Frequency of Constitutional Reforms, Presidential Crises and Political Regime Change W e start our analysis o f governance in the Andean countries by looking first at the stability o f the constitutional framework. To examine this, we investigate the frequency o f m ajor changes in the constitution that led to the approval o f a new constitution in each o f the countries during the 20th century (see Table 2.1). This is an important indicator o f the frequency o f changes in the basic rules o f the game in society and therefore a crucial indicator o f instability in rulemaking institutions. This is, certainly, a ‘low frequency’ indicator o f instability, but still o f a great importance. The Andean country that experienced the highest number o f new constitutions in the period running from 1900 to 2000 is Venezuela with eight constitutions approved in that period (six out o f those eight constitutions were approved between 1901 and 1953, Table 2.1). It is follow ed by Ecuador with seven constitutions (three approved since 1967); B olivia (five constitutions), Peru (four constitutions) and Colom bia (just one new constitution approved in 1991). Table 2.2 also shows the number o f new 20th century constitutions in Table 2.1 Countries Constitutional reforms, presidential crises and political regimes, Andean countries, 1900-2003 Number o f constitutions [a] 1900-2000 Number o f constitutional reforms in the Year 20th century Bolivia Colombia 1938 1945 1960 1967 1994 1991 5 1 Presidential crises [b] 1950-2003 Crisis year and president 1951(Mamerto Urriolagoitia) 1952 (Gral. Hugo Ballivián) 1964 (Víctor Paz) 1969 (Gral. René Barrientos) [d] 1969 (Luis Siles) 1970 (Gral. Alfredo Ovando) 1971 (Gral. Juan José Torres) 1978 (Gral. Juan Pereda) 1979 (Walter Guevara) 1979 (Gral. Alberto Natusch) 1980 (Lidia Gueilier) 1981 (Gral. Luis Garcia) 1982 (Gral. Celso Torrelio) 1982 (Gral. Guido Vildoso) 1985 (Hernán Siles) 2001 (Hugo Banzer) [c] 2003 (Gonzalo Sánchez de Lozada) [b] 1953 (Laureano Gómez) 1957 (Gustavo Rojas) presidential crises in the Presidential period period until crisis 1950-2003 1949-1951 1951-1952 1960-1964 1966-1969 1969 1969-1970 1970-1971 1978 1979 1979 1979-1980 1908-1981 1981-1982 1982 1982-1985 1997-2002 2002-2003 1953 1953-1958 17 2 Prevailing political regime before presidential crisis Democracy Authoritarian, military Democracy Authoritarian, military Authoritarian, civilian Authoritarian, military Authoritarian, military Authoritarian, military Democracy Authoritarian, military Democracy Authoritarian, military Authoritarian, military Authoritarian, military Democracy Democracy Democracy Democracy Authoritarian, military Ecuador Peru 1929 1938 1945 1946 1967 1979 1998 1920 1933 1979 1993 1901 1909 1931 1945 1947 1953 1961 1999 7 4 8 1961 (José Maria Velasco) 1963 (Carlos Arosemena) 1970 (José Maria Velasco) [e] 1972 (José Maria Velasco) 1976 (Gral. Guillermo Rodriguez) 1981 (Jaime Roldás) [e] 1997 (Abdalá Bucaram) 1997 (Rosalia Arteaga) 2000 (Jamil Mahuad) 2000 (Solórzeno, Mendoza, Vargas) 1962 (Manuel Prado) 1963 (Ricardo Pérez) 1968 (Fernando Belaude) 1975 (Juan Velasco) 1992 (Alberto Fujimori) [e] 2001 (Alberto Fujimori) 1950 (Carlos Delgado) [d] 1958 (Marcos Pérez) 1993 (Carlos Andrés Pérez) 2002 (Hugo Chávez) [f] 1960-1961 1961-1963 1968-1970 1970-1972 1972-1976 1979-1981 1996-1997 1997 1998-2000 2000 1956-1962 1962-1962 1963-1968 1968-1975 1990-1992 1995-2000 1948-1950 1952-1958 1989-1993 1999- 10 6 4 Democracy Democracy Democracy Authoritarian, civilian Authoritarian, military Democracy Democracy Democracy Democracy Democracy Democracy Authoritarian, military Democracy Authoritarian, military Democracy Democracy Authoritarian, military Authoritarian, military Democracy Democracy Notes: [a] [b] [c] N e w constitution approved Presidents that did not complete theirconstitutional periods by coups, resignation and non-voluntary removals By illness o f the president [d] Death o f the president [e] Self-coup [f] Failed coup Sources: http://geocities.yahoo.com.br/escritoriorbm/historia/index_b-html http://es.geocities.com/datalia2002/colombia.htm www.explored.com.ec/ecuador/1960.htm,http://www.tierra-inca.com/presidents/index_es.html, http://www.aldeaeducativa.com Table 2.2 R egim e Constitutional reforms, presidential crises and turnover o f prim e minister, selected countries, 1900-2002 N u m b e r o f constitutions [a] 1900-2000 C ountry N um ber o f constitutional reform s Year in the 20th century C hile Costa R ica U rugu ay Presidential 1925 1980 1949 1918 1934 1942 1952 1967 USA 2 G erm an y Parliam entary Italy U n ited K in g d o m Crisis year and president Nu m ber o f presidential crises Presidential p erio d in the p eriod until crisis 1950-2002 1973 (S a lva d o r A lle n d e ) 1970-1973 1976 (Juan M . B ordaberry) 1976 (A lb e rto D em ich elli) 1972-1976 1976 1963 (John F. K en n ed y) 1974 (R ich a rd N ix o n ) 1961-1963 1969-1974 1 0 1919 1949 1948 1 D em ocra cy 0 5 Y ear Prevailin g p olitical regim e before presidential crisis Presidential crises [b] 1950-2002 2 D em ocra cy Au th oritarian , civilian 2 D em ocra cy D em ocra cy N um ber o f constitutional reform s in the 20th century T u rn over o f prim e m inister 2 5 D em ocra cy 1 0 58 12 D em ocra cy D em ocra cy Notes: [a] N e w constitution approved, [b] Presidents that did not complete their constitutional periods by coups, resignation and non-voluntary removals. Sources: http ://icarito.tercera.cl www.observa.com.uy/eluruguay/historia/lpresidentes.html www.guiascostarica.com/h02.htm#republica www.inter-nationes.de/d/frames/presse/sonder/s/brjabre-s-ll.html www.fmmeducacion.com.ar/historia/notas/prestadosunidos.htm www.bbc.co.uk/portuguesa/noticias/2001/01/010509-italiatempo.shtml http://es.geocities.com/datalia2002/inglaterra.htm Politics, institutions and social conflict 27 the three countries that are often considered the most politically stable countries in Latin Am erica: Costa R ica, Chile, and Uruguay. A similar computation is done for four O E C D countries: the United States, Germany, Great Britain, and Italy. A ll the Latin Am erican countries analysed, as well as the US, had presidential regimes during the period o f analysis. In contrast, Germany, the U K , and Italy have parliamentary regimes. The five Andean countries had an average o f five new constitutions in the 20th century, a high number when considered from an international perspective. In the same time period, the average number o f new constitutions for Costa Rica, Chile, and Uruguay was 2.5.22 In turn, the average number o f constitutional reforms in the US, U K , Italy and Germany in the 20th century was 0.8. N eith er the U nited States nor the U nited K in gdom has had new constitutions approved in the last century. Germany, on the other hand, approved one new constitution in 1919 and then another in 1949, after W orld W ar I and II, respectively. A nother measure o f political instability is the frequency o f presidential crises (turnover). By ‘presidential crisis’ we refer to a situation in which a head o f state (the president) does not complete his/her constitutional term for various reasons: forced removals by a coup d ’état, resignation, and so on. Table 2.1 provides the number o f such presidential crises in the five Andean countries in the period 1950-2003. The country with the highest number o f presidential crises in this period is Bolivia, with 17 crises between 1950 and 2002. M ost o f those crises (11) took place in the period 1969-82. Clearly the 1970s (and surrounding years) were a period o f high political instability for Bolivia. Another country with a high frequency o f presidential crises is Ecuador, with ten such crises, mostly concentrated both in the 1970s and in the 1990s. In contrast, Colom bia registered only two presidential crises in the last h alf century, both in the 1950s. Interestingly, C olom bia displays a remarkable degree o f democratic continuity (as demonstrated by low frequency o f presidential crises) in spite o f its internal armed conflicts. This is certainly a paradoxical situation (see Chapter 5, ‘The Economy, Conflict and Governance in C olom bia’ in this volume). T h e last colum n o f Table 2.1 shows the prevailing political regime (democratic, authoritarian) at the time o f the presidential crises in each o f the five Andean countries. There seems to be no clear correlation between the nature o f the political regime and the frequency o f presidential crises although the nature o f the relationship varies across countries. In fact, in Bolivia, most o f the presidential crises took place in the 1970s within non-elected m ilitary regimes, in a pattern o f generals-turned-presidents replacing other generals-turned-presidents. In contrast, Ecuador, the second highest frequency country in terms o f presidential crises, had 28 Political crises, social conflict and economic development several presidential crises in a period o f democracy, mostly in the 1990s (that is Abdalah Bucaram and Jamil Mahuad were two presidents who were democratically elected and then ousted from office before the expiration o f their constitutional mandates). A n o th er im portant dim ension o f a political regime is the distinction between presidential and parliamentary regimes.23 A s mentioned before, Lin z and Valenzuela (1994) have argued that presidential regimes are m ore prone to generate political crises and regime breakdowns than parliamentary systems. W e have noted that the frequency o f presidential crises has been very high in Ecuador and Bolivia, low to moderate in Peru and Venezuela, and low in Colom bia. A n interesting case o f a country, outside the Latin Am erican region, with high turnover o f prime ministers (a different concept to that o f presidential crisis) is Italy, which has had 58 prime ministers in the last 52 years o f the 20th century (on average more than one prime minister per year). The Italian case suggests the perplexing conclusion that an exceedingly high frequency o f change in prime ministers can take place w ithout constitutional and econom ic crisis in a parliamentary regime. In the Andean region, the degree o f continuity o f democracy (defined as an absence o f constitutional breakdowns) in the last 40 years has been much higher in C olom bia and in Venezuela than in Peru, Bolivia, and Ecuador. In fact, while these countries had several military interventions in the 1960s and 1970s, C olom bia and Venezuela have managed to avoid m ilitary regimes since the 1950s. This is not to say, however, that these two countries have had complete political stability in the years follow ing their m ilitary regimes. In fact, Venezuela had a presidential crisis with Carlos Andrés Perez in 1993 and a coup attempt against Chávez in 2002; this turbulence, however, has not led to a collapse o f democracy (at least so far).24 (b) Subjective Indicators of Quality of Institutions and Governance: the World Bank Indices W e w ill now turn to the empirical assessment o f institutions in the five Andean countries in comparative perspective. Drawing from a data set o f over 150 countries, Kaufmann, Kraay, and Z o id o -L ob a tó n (1999, 2002) o f the W orld Bank provide six governance indicators fo r each A ndean country in two years: 1998 and 2001. U sing the indices o f Kaufm ann et al., Table 2.3 provides the values o f these indices for Costa Rica, Chile, and Uruguay, and the average o f Latin Am erican and O E C D countries. These governance indicators are based on qualitative response surveys taken o f citizens, investors, and users o f public services and comprise the follow ing dimensions:25 Politics, institutions and social conflict • • voice and accountability; political instability and violence; • • government effectiveness; regulatory quality; • • 29 rule o f law; control o f corruption. These variables reflect several aspects o f ‘good governance’ .26 Voice and accountability, for example, are an important feedback mechanism between users and providers o f public services, or between principals (voters) and agents (governm ent, politicians) regarding com pliance w ith public mandates. The existence o f political instability and violence are indicative o f governance problem s and are also correlated w ith p o o r econom ic performance.27 The other variables listed above are also identified by the literature as indicators o f qualities both o f government and o f the stability o f institutions. From a development perspective, there is a growing literature that finds a positive correlation between economic performance and quality o f government and institutions (see Knack and K eefer 1995; M auro 1995; Barro 1996 and others). Table 2.3 shows that the Andean group as a whole ranks lower on different governance measures (in the sense o f lower institutional performance) than the Latin Am erican and Caribbean average. This is clear in the indices o f voice and accountability, the degree o f political instability and violence, governm ent effectiveness, rule o f law, and control o f corruption. Their rankings are lower when compared with Chile, Costa R ica, Uruguay, and the O E C D . W ith in the A ndean countries there are also cross-country differences in the value o f the indices. Bolivia, for example, has a level o f regulatory burdens that is closer to O E C D levels than that o f the other A ndean countries. There are, however, some changes in the rankings between 1998 and 2001, such as the w ay that voice and accountability improves in Peru in 2001 com pared to 1998 (this is probably associated with greater government accountability after the demise o f the Fujim ori administration). Voice and accountability worsens, however, in C olom bia, Ecuador, and Venezuela between 1998 and 2001. Political instability and violence increases (lowering a country’s place in the rankings) in Bolivia, Colom bia, and Venezuela but improves in Peru. The control o f corruption improved in Colom bia, Peru, and Venezuela in 2001 compared to 1998. World Economic Forum-Harvard University indices A nother set o f governance indices that include the five Andean countries is the G lo b a l C o m p e titiv e n e s s R e p o r t prepared jo in tly by the W orld Economic Forum and Harvard University. This Report computes a ‘Growth Table 2 .3 R a n k in g o f governance indicators, A n d ea n countries Countries Year N u m ber o f countries Bolivia Colom bia Ecuador Peru Venezuela, R B A n d ea n C ountries Voice and accountability 1998 170 63 91 66 124 68 82 2001 173 67 112 92 70 106 89 Political instability and violence 1998 152 87 140 108 111 92 108 2001 161 122 149 131 95 100 119 Government effectiveness Regulatory 1998 153 83 74 1998 163 22 110 54 131 90 2001 159 101 95 129 93 124 108 quality 69 61 37 91 56 Rule o f law Control o f corruption 2001 1998 168 167 39 97 93 128 121 95 61 110 115 117 81 115 2001 169 100 132 1998 152 130 109 136 121 123 73 114 24 24 50 48 101 25 37 45 91 17 32 27 25 23 95 102 101 2001 160 119 89 140 72 107 105 Top Latin Am erican Chile Costa R ica Uruguay 54 21 L a tin A m erica 46 83 OECD 24 Source: Kaufmann et al. (1999, 2002). 52 30 24 23 42 81 51 30 58 83 25 91 37 92 23 28 26 24 16 32 23 37 44 83 18 16 13 79 13 26 22 61 48 61 105 25 28 29 27 37 89 Politics, institutions and social conflict 31 Com petitiveness In d ex ’ fo r 75 countries including developed nations, transition economies, and developing countries. This index assesses the medium-term potential o f sustained econom ic growth fo r a given country as a function o f three sets o f sub-indices: (i) technology index, (ii) quality o f public institutions index and (iii) macroeconomic environment index. Th e grow th competitiveness index28 fo r 2000-01 is calculated fo r a group o f 18 ‘core econom ies’ that includes countries with higher levels o f income per capita, and a more advanced level o f technological capabilities (measured by number o f patents per m illion popu lation ). Th e index also includes a group o f ‘non-core econom ies’ o f low to intermediate income per capita levels and less advanced technological development. For the group o f non-core economies, among which we find the Andean group, the index is computed by giving equal weights (one third each) to technology, quality o f public institutions, and macroeconomic environment sub-indices. In the core group, the technology sub-index has a higher share, 40 per cent versus 33 per cent, reflecting the higher contribution o f technological improvements to output growth in higher per capita income economies. In order to highlight the links between growth potential and quality o f institutions, Table 2.4 presents the rankings o f the G row th Competitiveness Index, and the public institutions sub-index. This latter sub-index is com posed o f (i) a contracts and law sub-index and (ii) a corruption sub-index. These two sub-indices are based entirely on survey questions and measure the average scores given to judicial independence, government procurement practices, law enforcement, and costs related to organized crime. Th e corruption sub-index measures the pervasiveness o f bribery in three key public services areas: im port and export agencies, public utilities, and tax collection. Table 2.4 shows that on average for the five Andean countries there is a close association between their ranking in the Grow th Competitiveness Index (ranking 63 out o f 75 nations) and their ranking in the public institutions sub-index (59 out o f 75), suggesting a direct positive correlation between medium-term growth potential and the quality o f public institutions. The Andean countries on average occupy 67th place in the ranking for contracts and law sub-index and 50th in the corruption sub-index. Cross-country differences among Andean countries are not very large except for the corruption sub-index, in which Peru has the best ranking and Ecuador has the worst (in 2000-01). Finally, another aspect o f governance lies in citizens’ attitudes towards democracy. Latin Barometer, a survey conducted on an annual basis in several Latin American countries, provides a measure o f such public attitudes. Table 2.5 shows that, on average, the degree o f public support fo r democracy has been declining since 1997, with a sharper decline in 2001. In 2001, within the Andean group, the country with the lowest public support for democracy Political crises, social conflict and economic development 32 is Colom bia (30 per cent), a country that has suffered severe violence; the highest degree o f support for democracy, on the other hand, is found in Peru (62 per cent). The degree o f support for the democratic system was also low in Ecuador in the late 1990s and early 2000s. It is interesting to note that the lower support for democracy after 1997 coincides with the post-1997 worsening o f econom ic conditions in these countries that was associated with the Asian crisis and other internal econom ic developments. Table 2.4 C om petitiveness a n d governance indicators rankings, A n d ea n countries 2 0 0 1 -0 2 Countries Growth Public Contracts and Corruption Competitiveness institutions law sub-index sub-index Index rank sub-index rank rank rank Number o f countries Peru Venezuela Colombia Bolivia Ecuador 75 55 62 65 67 68 63 75 45 65 57 62 68 59 75 60 71 67 62 73 67 75 30 61 40 56 63 50 L atin Am erica 27 35 46 56 21 37 31 55 26 35 27 57 13 43 38 51 OECD 20 21 21 23 Andean countries Top Latin American Chile Costa Rica Uruguay N ote: G rowth Competitiveness Index = one third technology index + one third public institutions sub-index + one third macroeconomic environment sub-index. Public institutions sub-index = one h alf contracts and law sub-index + one half corruption sub-index. The rank is o f 75 countries. Source: Porter et al. (2002). Social Inequality and Ethnic Diversity The Andean countries have stratified social structures characterized by high inequality and large incidences o f poverty. This social situation is bound to affect patterns o f social conflict and cooperation in society. A n oth er important element o f their social structure that is more relevant in Bolivia, Ecuador and Peru is ethnic diversity.29 In fact, the share o f indigenous population in total population for Bolivia, Ecuador and Peru in the early 1990s (last census available) is 44 per cent (see Table 2.6). In contrast, the average share o f indigenous population in C olom b ia and Venezuela is Politics, institutions and social conflict 33 very low, less than 1 per cent. Ethnic diversity often comes along with a linguistic and cultural variety among different ethnic groups within the same state. Ethnic diversity has some important implications for the capacity o f the political system to articulate a social consensus. The ability to reach consensus depends on a range o f factors, such as the levels o f political participation o f the different groups, their rights, their organization, the quality o f their leadership and others. Table 2.5 D em ocracy is preferable to any other p o litic a l regim e (p er cent o f p u b lic support) Countries 1996 Bolivia Colom bia Ecuador Peru Venezuela 64 60 52 63 62 60.2 60.6 A ndean countries L a tin A m erica Source: 1997 1998 2000 2001 66 69 41 55 55 57 63 60 58.0 61.6 62 50 54 64 61 58.2 59.8 54 36 40 62 57 49.8 47.4 60 64 60.0 62.8 Latinobarómetro. Table 2 .6 Indigenous p o pulation in the A n d ea n countries (p er cent o f to ta l p o p u la tio n ) Countries Year Bolivia Colom bia Ecuador Peru* 1992 Venezuela 1985 1992 1992 1992 Total population 5 183 403 29 719 875 11 078717 22 500 000 34 974 667 Indigenous population % 3 058 208 237 759 3 800 000 9 000 000 314 772 59.0 0.8 34.3 40.0 0.9 (* ) Estimate. Source: Based on last censuses, C E L A D E . Returning to the social indicators, Table 2.7 provides poverty levels, the values o f G in i coefficients measuring inequality, and the ratio between the top and b o tto m quintiles in the incom e distribution fo r selected years in the 1980s and 1990s. These social indicators show a significant incidence o f poverty in the Andean countries, over 40 per cent in recent Political crises, social conflict and economic development 34 years (above the average poverty levels fo r Latin A m erica). Th e highest incidences o f poverty are found in Ecuador and Bolivia. Moreover, poverty is on the rise in Venezuela, a country that in the past had relatively lower poverty rates within the Andean region. The G ini coefficients are higher in C olom bia, Bolivia and rising in Venezuela, than they are in the other Andean countries, although the Gini coefficients are generally high in all five Andean countries. Table 2 .7 P overty a n d inequality in the A n d ea n countries 1 9 9 0 -9 7 % households G ini Ratio Countries Year below the poverty line coefficient Q5/Q1 Bolivia [a] 1989 1994 49 46 47 1997 C olom bia Ecuador [a] 1980 1991 1994 1997 1990 1994 1997 1979 1986 1990 Peru 39 50 47 45 56 52 50 46 52 Venezuela 1997 Latin Am erica 1980 1990 1994 1997 0.062 0.104 0.088 0.518 0.403 0.505 0.477 0.381 0.058 0.117 0.104 0.088 0.128 0.397 0.388 0.108 0.125 0.438 [a] 1991 1994 1995 1997 1981 1990 1994 0.484 0.435 0.455 0.370 [a] 0.350 [a] 41 37 22 34 42 42 0.306 0.378 0.184 0.127 0.387 0.425 0.132 0.101 35 41 38 36 Notes: [a] Urban zones. Q5/Q1 = Ratio o f the poorest quintile to the richest quintile. Sources: Bank Econom ic Commission for Latin Am erica and the Caribbean and The W orld Politics, institutions and social conflict 35 (d) Economic Performance In the second h a lf o f the 20th century (1950-2000), the five A ndean countries grew at an average rate o f 3.9 per cent per year, a bit below the average rate o f growth o f 4.2 per cent fo r the whole Latin Am erican and Caribbean region in the same period (E C L A C , statistical data base). In the 1990s, the econom ic growth performance in the Andean group was moderate, although im portant econom ic reforms were undertaken in several o f them. Average annual growth for the five Andean countries declined from 4.1 per cent in 1950-90 to 2.9 per cent in 1990-99 and 1.5 per cent in 2000-03. The countries that experienced the largest deceleration in growth rates were C olom bia and Ecuador (see Table 2.8).30 W hile Ecuador managed to grow at an annual rate o f 5.2 per cent in the period 1950-90, its annual growth rate o f the 1990s was only 1.9 per cent. C olom bia’s average growth rate decelerated from 4.7 per cent in 1950-90 to 2.9 per cent in 1990-99 and 2.2 in 2000-03.3 In contrast, B olivia’s growth rate accelerated, 1 albeit moderately, in the 1990s (4 per cent per year versus 2.5 per cent in the 1950-90 period).32 The average per capita income level o f the Andean group is around U$2000 (period 2000-03, see Table 2.9), below the average in Latin A m erica o f near $3900 fo r the same period. There is no doubt that the modest governance and political instability already documented is correlated with this econom ic growth performance. A lthou gh we w ill not enter here into the transmission mechanisms between governance and growth, the literature has highlighted the impact o f institutions on private investment and productivity growth. Table 2.8 Countries E co n o m ic grow th in the A ndean countries 19 5 0 -2 0 0 3 1950-00 1950-90 1990-95 1995-99 1990-99 2000-03[a] Bolivia 2.8 2.5 4.2 Colom bia 4.3 4.7 4.5 3.9 1.4 Ecuador 4.5 5.2 3.4 Peru 3.6 3.5 3.9 Venezuela 4.1 4.6 4.1 4.5 A ndean countries 3.9 L a tin A m erica 4.2 N ote: Source : 4.0 2.9 2.3 2.2 0.2 1.9 3.1 3.6 3.3 3.0 4.0 0.9 2.4 2.8 4.0 2.0 2.9 1.5 2.6 2.5 2.7 1.3 [a] 2003 preliminary estimates. Economic Commission for Latin Am erica and the Caribbean. 36 Political crises, social conflict and economic development Table 2.9 G D P p e r capita in the A n d ea n countries 1 9 7 0 -2 0 0 3 (U S $ a t 1995 price/num ber o f persons) Countries Colom bia 1990-95 1995-99 1990-99 2000-03 [a] 934.0 Bolivia 1970-89 868.0 2229.9 940.6 2382.6 900.5 2289.2 2285.3 937.1 Ecuador 1815.5 1367.4 1530.1 1538.4 1530.7 1740.5 Peru 2734.3 2199.5 2579.4 2355.0 3523.0 2074.8 A n d ea n countries 3258.8 2017.2 3179.6 2124.1 2351.4 3227.1 2059.8 2034.8 L a tin A m erica 3455.0 3708.7 3570.1 3846.1 Venezuela N ote: [a] 2003 Preliminary estimates. Sources : 2.4 3325.2 2856.0 Economic Commission for Latin Am erica and the Caribbean and C E L A D E . INTERPRETING ANDEAN COUNTRIES’ GOVERNANCE PERFORMANCE A lo n g with the conceptual fram ework o f Section 2.2 and the empirical analysis in Section 2.3, we can highlight three main factors that are important to explain governance patterns observed in the Andean region: a. characteristics o f the political system; b. weaknesses o f the state; c. the impact o f high inequality and the ethnic makeup. (a) The Political System One hypothesis is that at the root o f the governance problems o f the Andean region lies the nature o f its political system. A n important dimension o f the political system is the presidential regime that governs all the Andean countries. A s mentioned before, it is argued that presidential systems, with their rigidity o f fixed presidential terms, their tendency to produce a winnertake-all situation, and their dual legitimacy with legislatures and executives, tend to be associated with more frequent presidential crises that in some cases can lead to ‘regime breakdowns’ , that is, the collapse o f democracy and the disruption o f constitutional rule. W hile this argument has validity, it needs to be qualified. A ll Andean countries have presidential regimes but not all o f them have the same high frequency o f presidential crises that has Politics, institutions and social conflict 37 been observed in the recent histories o f Bolivia, Ecuador and Peru, nor the same record o f regime breakdowns. W ith respect to regime breakdowns, however, the potential fragility o f democracy can be a real problem even for Colom bia and Venezuela, two countries that have avoided the disruption o f democratic rule in the past four decades. Current polarization between the Chávez administration and the opposition is indicative that Venezuela is far from immune to destabilizing pressures on democracy. A nother important indicator o f problems in the political system is the relatively high frequency o f constitutional reforms (higher than other Latin Am erican and O E C D countries) that has been observed in several Andean countries during the last century (already documented in Section 2.3). This frequent constitutional reform is indicative o f a certain instability in the core rules o f the political game in Andean countries. Regarding the perception o f the presidential system, it is worth noting that in their last two new constitutions, both Ecuador in 1998 and Venezuela in 1999 reinforced the authority o f the president ( ‘more presidentialism’). N e w constitutions addressed other issues as well, like the indigenous population problem by increasing indigenous political and economic rights. In fact, the Colom bian and Ecuadorian more recent constitutions encouraged decentralization and a greater access to social services, such as education and health services, by excluded groups. The Venezuelan constitution that was approved in 1999, besides strengthening the presidency, also had an explicit redistributive objective pursued through an increase in social rights and entitlements (see Chapter 8, ‘Venezuela: from stability to turm oil’ in this volum e). A lso the constitution o f 1991 in C olom bia that expanded the economic entitlements and fostered decentralization led to an important increase in public spending as a share o f G D P in the 1990s (see Chapter 5, ‘The economy, conflict and governance in C olom bia’ in this volume). A nother feature o f the political system in some Andean countries is the fragmentation and weakening o f political parties. Ecuador, for example, has more than 12 political parties; there was an attempt to change this situation in the constitution o f 1998 by putting a minimum vote requirement (5 per cent) on form ing and legally maintaining a political party. The large number o f parties in Ecuador, some reflecting strong regional interests, makes it difficult to reach a parliamentary consensus and, in other instances, fractionalizes national politics (see A rteta and H urtado 2002). In contrast, in Colom bia and Venezuela the political systems have traditionally gravitated around two large parties: liberals and conservatives in C olom b ia and A D E C O and C O P E I in Venezuela - although in recent years even these parties have been severely weakened. In Colom bia, internal factions undermine the strength o f the conservative and liberal umbrella groups. In Venezuela, the Chávez administration presided over the virtual disintegration o f A D E C O 38 Political crises, social conflict and economic development and C O P E I that left a political vacuum in the place o f strong parties or movements. In Peru, the traditional A P R A party suffered a considerable loss o f influence in the early 1990s after the government o f A la n García in the late 1980s (García made a strong return a decade later in the presidential election o f 2001). (b) The Weak State Hypothesis Th e state must be able to provide public goods such as law and order, infrastructure, contract enforcement, control o f the territory. A ‘weak state’ is one that fails to provide the required amounts o f these public goods with the consequence that individual security becomes precarious, that the rule o f law is partial and incomplete, and that respect for civil rights and property rights is limited. Physical and institutional infrastructures, in turn, become weak and econom ic prosperity fails to develop. Colom bia is an interesting case in this regard. O n the one hand, it has high levels o f violence (political and criminal), an ongoing internal conflict that has lasted for more than four decades, and an important illegal drug industry. On the other hand, C olom bia in the last 40 years has maintained normal and regular elections, presidents complete their constitutional terms, and democratic institutions operate with apparent normalcy. The state is ‘w eak’ in some governance dimensions, for example lack o f maintenance o f law and order in the whole territory, but relatively ‘ strong’ in others (elections are maintained regularly, civil freedoms are preserved). Our empirical analysis o f quality o f institutions based on survey indices suggests several problems o f governance and institutional weaknesses already discussed that fit the description o f a weak state; although the concept has its nuances that are important to keep in mind. (c) Social Inequality and Ethnic Structure A third hypothesis that helps explain the governance problems o f the Andean nations is their high levels o f income and wealth inequality and, in three out o f five countries, their significant ethnic diversity. D uring the first three to four decades o f the 20th century, these countries were predominantly rural societies with a concentrated structure o f land ownership and a wide income differential between landowners, small landholders, and peasants. In equ ality was predom inantly a rural phenom enon associated largely with the prevailing land tenure patterns.33 Following the development o f local manufacturing, the expansion o f the state sector, and the adoption o f im port substitution policies, rural-urban migration too k on a greater intensity around the mid 20th century and a middle class form ed (varying Politics, institutions and social conflict 39 across countries in size and importance) that helped to stabilize societies. In this new setting, social inequalities remained, but revolved around the ownership o f productive capital, access to credit, access to educational opportunities, and access to political decisionmaking. A s mentioned before, various strands o f social theory, including recent endogenous grow th models, predict that countries with high inequality w ill tend to have higher levels o f social conflict, polarization, and political instability than more egalitarian countries.3 4 To incom e and wealth inequality, we must add the significant ethnic diversity in Bolivia, Ecuador, and Peru. A s Table 2.9 shows, between 34 and 59 per cent o f the population in all three countries is indigenous. Gray M olin a and Chávez (Chapter 4 in this volum e) show that only 58 per cent o f the population o f Bolivia speaks Spanish, follow ed by Quechua (22.9 per cent), Aym ara (15.7 per cent) and other languages.35 In Bolivia, the pattern o f indigenous population participation in national civic life went from exclusion and m arginalization to active demands fo r ethnic rights and nationalistic claims such as Aym ara Nationalism . Th e presidential candidates that were supported by several indigenous groups also obtained a high number o f votes in the recent presidential election. In 2003 the pressure o f the indigenous movement was ultimately decisive in the resignation o f President Sánchez de Losada. Th e indigenous m ovem ent also became an im portant political actor in Ecuador in 1998 and 1999, during the M ahuad administration. The C O N A IE , the largest Ecuadorian confederation o f indigenous people, organized several mass protests in 1999, culminating in January o f 2000 with an indigenous uprising that was joined by colonels o f the army and that eventually led to the ousting o f President Mahuad. The main point here is that indigenous groups have become an important political force in some Andean countries. These indigenous movements demand economic and civic rights and entertain, at times, a nationalistic agenda. 2.5 CONCLUDING REMARKS The Andean countries, which form a region with an abundance o f natural resources and oth er valuable assets, exhibit a va riety o f governance problem s that hinder their p o ten tia l fo r social peace, stability, and econom ic prosperity. T h eir governance records, past and present, vary from country to country but have generally been characterized by political instability, frequent constitutional reforms, presidential crises, volatility o f dem ocratic institutions, and violence. The em pirical evidence o f the quality o f institutions puts the Andean region in a low place in international Political crises, social conflict and economic development 40 rankings o f (survey-based) indices o f voice and accountability, rule o f law, regulatory burden, control o f corruption, political instability, and violence, although improvements in some o f these governance dimensions have also been observed. This chapter highlights the w ay that governance problem s can be decom posed at three levels: the p olitica l-con stitu tio n a l regim e, the w orkin g o f interm ediate level institutions, and the patterns o f social conflict, inequality, and ethnic diversity. Im portant features o f the political regime in Andean countries need further scrutiny fo r any broad agenda o f institutional reform. These features comprise the scope and limits o f presidential regimes to handle political crises, the workings o f the party system and other constitutional provisions. A t the level o f intermediate institutions, complex principal-agent problems combine with the chronic problems o f rent seeking, corruption, and violence that governments have tried to tackle but that continue to severely hinder institutional effectiveness. Organizational principles o f goal clarity, adequate resources, and freedom from undue political interference must be reinforced. Income and wealth inequality, although not new phenomena in the Andean region or in Latin Am erica, need to be addressed as high inequality is often correlated with social conflict, political polarization, and slow economic growth. Although radical redistribution o f existing assets can be destabilizing and can slow growth, policies that foster a m ore egalitarian access to capital, credit, education, and political representation can have good medium-term payoffs in terms o f enhanced stability and more rapid econom ic growth. Ethnic diversity is another important social feature in countries such as Bolivia, Ecuador, and Peru that needs to be addressed through creative political and econom ic reforms with an ethnically inclusive component. This analysis suggests that for the Andean region to realize its economic potential, it must adequately tackle its complex political, social and institutional problems. NOTES * 1. R egion al Advisor, U n ited N ation s E conom ic Com m ission for Latin A m erica and the Caribbean. Paper presented at the conference ‘ Political Crises and Developm ent Alternatives in the Andean R egion ’ at N e w School University, N e w York, 8-9 M ay 2003. The very efficient research assistance and comments by Claudio Aravena are much appreciated. Comments made on an earlier version o f the paper at seminars held at the W orld Bank and the Inter-American Development Bank are appreciated. The paper is part o f a multicountry project on the political economy o f the Andean region coexecuted by E C L A C and the Inter-American Dialogue with the financial support o f the Ford Foundation. Individual comments by Enrique Garcia, Carol Graham, Peter Hakim, Fidel Jaramillo and José A n ton io Ocampo are acknowledged. The definition o f ‘Andean countries’ comprises Bolivia, Colom bia, Ecuador, Peru and Venezuela, which are the member countries o f the Community o f Andean Nations, CAN. Politics, institutions and social conflict 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 41 By ‘Andean countries’ we refer to the countries that are currently members o f the C A N (Andean Community o f Nations). See Beckerman and Solimano (2002). See Tommasi (2002) for a discussion o f the concept o f ‘hierarchy o f institutions’ . See Buchanan and Tullock (1962) and Buchanan (1988). D ixit (1996) stresses that, in practice, the distinction between rulemaking and actions is more a continuum rather than a discrete choice binary category. Specific policies can have long-run permanent effects comparable to the impacts o f rulemaking decisions. See D ixit (2003). See Linz and Valenzuela (1994) and M ainwaring and Scully (1997) for alternative views on presidentialism and parliamentarianism. See N orth (1991). A n alternative view o f the origin o f institutions is provided by Olsen (2000) who puts forward a theory o f power and compulsory compliance to explain the origin o f the state and institutions. In Olsen’s framework institutions are not necessarily created for efficiency reasons to reduce transaction costs but for purposes o f redistributing resources towards those in power. In this vein institutions can be dysfunctional and consistent with bad social outcomes such as economic decline and recurrent crisis. See Drazen (2000). See Krueger (1974). Currently around 40 countries, included Colombia, are experiencing some sort o f internal conflict, civil war, or significant rebellions within their own territories. Collier and H oeffler (2002), using data for 78 large civil conflicts between 1960 and 1999 find econometric evidence that the risk (probability) that a civil war will start during a five-year period is better explained by a set o f determinants known as greed factors than by ‘grievance’ factors. In general the determinants o f crime are not the same determinants o f rebellions and civil wars, although crime and rebellion often intertwine in complex ways. Empirically the literature identifies a civil war as a conflict involving at least 1000 battle deaths per year, with deaths taking place in a context o f violence between a government and an identifiable organized group; moreover, at least 5 per cent o f the deaths must be on each side. In turn, while criminal organizations, gangs and mafias, typically range from around 20 to 500 members, rebel organizations have 500 to 5000 or more combatants. Rebel movements may have several sources o f funding: (i) criminal activities such as kidnapping, extortion and ransom to raise revenues to finance their activities along with alliances or taxes on criminal organizations (for example it is found that guerrilla groups in Colom bia derive an important part o f their income from taxes to drug cartels); (ii) predation o f natural resources that they control; (iii) funding coming from foreign governments hostile to the adversaries o f those rebel groups; (iv) funding from diasporas (often living in developed economies) formed by nationals that left their home countries because o f civil wars or extended conflict and send financial contributions to support rebel groups they identified for historical reasons with their exit. M arxian theory puts considerable emphasis on the conflicting nature o f capitalist development, although its main channel is conflict between capital and labor. Other theories identify other actors and channels o f social conflict that go beyond the simple capital-labor dichotomy. See Taylor (1991). See Solimano (1998). Conversely the form al leader can be weak, politically inept and unable to manage conflict. Uruguay had the highest number o f constitutional reforms o f the three most ‘ stable’ countries in Latin America. A ll the Andean countries have presidential regimes like m ost Latin Am erican and Caribbean countries. See Hartlyn (1994) and Coppedge (1994) for analysis o f presidentialism in Venezuela. 42 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. Political crises, social conflict and economic development Studies o f the relationship between institutional quality and growth performance are Barro (1996), M auro (1995), K nack and K eefer (1995). A useful survey o f this literature is A ron (2000). See La Porta et al. (1998) for an interesting discussion o f ‘quality o f government’ and its determinants. See Serven and Solim ano (1993) and Pindyck and Solim ano (1993) for analytical discussion and empirical evidence o f the adverse effects o f (mainly economic) instability on private capital formation, an important determinant o f the rate o f economic growth. Studies o f the effects o f political instability on growth are Alesina and Rodrik (1994), Barro (1991), Alesina et al. (1996). Porter et al. (2002), Chapter 1. A n analysis o f ethnicity and governance for Latin Am erica and Andean countries is De Gregori (1998). See Beckerman and Solimano (2002) and Solimano (2000). See Ocampo (2002) for an analysis o f the economic performance o f Colom bia in recent years. The individual country story o f the evolution o f the economy o f each Andean countries is told in the country papers o f the Political Economy o f the Andean Region’s project. See Thorpe (2000). See Solimano (1998), Alesina and Rodrik (1994), Persson and Tabellini (2000). According to the last published national population census o f population (1992). REFERENCES Acemoglu, D. (2002), ‘Why not a political cause theorem? Social conflict, commitment and politics’ , N B E R Working Paper, 9377. Aghion, P., A. Alesina and F. Trebbi (2002), ‘Endogenous political institutions’, N B E R Working Paper, 9006. Alesina, A. and D. Rodrik (1994), ‘Distributive politics and economic growth’, Quarterly Journal o f Economics, 109 (May), 465-90. Alesina, A., S. Ozler, N. Roubini and S. Swagel (1996), ‘Political instability and economic growth’, Journal o f Economic Growth, 1 (2), 189-211. Aron, J (2000), ‘Growth and institutions: a review o f the evidence’, The World Bank . Research Observer, 15 (1), 99-135. Arteta, G. and O. Hurtado (2002), ‘Political economy o f Ecuador’, mimeo, Project Political Economy o f the Andean Region , ECLAC. Barro, R. (1991), ‘Economic growth in cross section of countries’, Quarterly Journal o f Economics, 106 (2), 407-43. Barro, R. (1996), ‘Democracy and growth’ , Journal o f Economic Growth, 1 (1), 1-27. Beckerman, P. and A. Solimano (eds) (2002), Crisis, Dollarization and Social Impact. The Case o f Ecuador, Directions in Development, The World Bank. Buchanan, J.M. (1988), ‘Contractarian political economy and constitutional interpretation’ , American Economic Review, 78 (2), (Papers and Proceedings), 135-9. Buchanan, J.M. and G. Tullock (1962), The Calculus o f Consent: Logical Foundation fo r Constitutional Democracy , Ann Arbor, M I: University o f Michigan Press. Collier, P. (2000), ‘Rebellion as a quasi-criminal activity’ , Journal o f Conflict Resolution, 44 (6), 839-53. Politics, institutions and social conflict 43 Collier, P. (2001), ‘Ethnic diversity: an economic analysis’, Economic Policy, 32 (April), 129-66. Collier, P. and A. Hoeffler (2002), ‘Greed and grievance in civil war’ , Working Paper Series 2002-01, Centre for the Study o f African Economies, Oxford, UK. Available at www.csae.ox.ac.uk. Cooter, R.D., (2000), The Strategic Constitution, Princeton, NJ: Princeton University Press. Coppedge, M. (1994), ‘Venezuela: democratic despite presidentialism’, in J Linz . and A. Valenzuela (eds), The Failure o f Presidential Democracy, Johns Hopkins University Press. De Gregori, I. (1998), ‘Ethnicity and democratic governability in Latin America: reflections from two Central Andean countries’, in F. Aguero and J Stark (eds), . Fault Lines o f Democracy in Post-Transition Latin America, North South Center Press. Dixit, A. (1996), The M aking o f Economic Policy. A Transaction Costs Politics Perspective, M IT Press. Dixit, A. (2001a), ‘Some lessons from transaction costs politics for less- developed countries’, mimeo, Princeton University. Dixit, A. (2001b), ‘On modes o f economic governance’ , mimeo, Princeton University. Dixit, A. (2003), ‘Some lessons from transaction-cost politics for less-developed countries’, Economics and Politics, 15 (2), July, 107-33. Drazen, A. (2000), Political Economy in Macroeconomics, Princeton, NJ: Princeton University Press. Easterly, W. and R. Levine (1997), ‘A frica’s growth tragedy: policies and ethnic divisions’, Quarterly Journal o f Economics, 112 (4), 1203-50. Hartlyn, J (1994), ‘Presidentialism and Colombian politics’ , in J Linz and A. . . Valenzuela (eds), The Failure o f Presidential Democracy, Johns Hopkins University Press. Hayek, F. (1960), The Constitution o f L iberty , Chicago: University o f Chicago Press. Kaufmann, D., A. Kraay and P. Zoido-Lobatón (1999), ‘Governance matters’ , Policy Research Working Paper, 2196, The World Bank. Kaufmann, D., A. Kraay and P. Zoido-Lobatón (2002), ‘Governance matters I I ’, Policy Research Working Paper, 2772, The World Bank. Knack, S. and P. Keefer (1995), ‘Institutions and economic performance: cross country tests using alternative institutional measures’, Economics and Politics , 7 (3), 207-27. Krueger, A. (1974), ‘The political economy o f the rent seeking society’, American Economic Review, 64, 291-303. La Porta, R., F. López de Silanes, A. Schleifer and R. Vishny (1998), ‘The quality o f government’, National Bureau o f Economic Research Working Paper Series, 6727. Linz, J and A. Valenzuela (eds) (1994), The Failure o f Presidential Democracies: . The Case o f Latin America , Johns Hopkins University Press. Mainwaring, S. and T. Scully (1997) , L a Construcción de Instituciones Democráticas. Sistema de Partidos Políticos en América Latina, C IEPLAN, Santiago, Chile. Mauro, P. (1995), ‘Corruption and economic growth’ , Quarterly Journal o f Economics, 110 (3), 681-712. Montesquieu, C. (1748), The Spirit o f the Laws , Paris. 44 Political crises, social conflict and economic development North, D. (1990), ‘A transaction costs theory o f politics’, Journal o f Theoretical Politics, 2 (4): 355-67. North, D. (1991), Institutions, Institutional Change and Economic Performance , Cambridge University Press. Ocampo, José Antonio (2002), ‘Política Económica y Economía Política en Colombia en la década de los Noventa’, mimeo, Project Political Economy o f the Andean Region , ECLAC. Olsen, M. (2000), Power and Prosperity, Outgrowing Communist and Capitalist Dictatorships, Basic Books. Persson, T. and G. Tabellini (2000), Political Economics. Explainging Economic Policy , M IT Press. Pindyck, R. and A. Solimano (1993), ‘Economic instability and aggregate investment’, in O. Blanchard and S. Fischer (eds), N B N E R Macroeconomic Annual 1993, M IT Press. Porter, M., J Sachs, P. Cornelius, J McArthur and K. Schwab (2002), The Global . . Competitiveness Report 2001-2002, World Economic Forum and Harvard University. Serven, L. and A. Solimano (eds) (1993), Striving fo r Growth A fter Adjustment. The Role o f Capital Formation , The World Bank Regional and Sectoral Studies. Solimano, A. (ed.) (1998), Social Inequality. Growth, Values and the State, Ann Arbor, MI: University o f Michigan Press. Solimano, A. (ed.) (2000), Colombia. Essays on Conflict, Peace and Development, The World Bank. Taylor, L. (1991), Income Distribution, Inflation and Growth: Lectures on Structuralist Macroeconomic Theory , M IT Press. Thorpe, R. (2000), A n Economic H istory o f Latin America in the 20th Century, Inter-American Development Bank. Tommasi, M. (2002), ‘Crisis, political institutions and policy reform’ , paper presented at the 4th World Bank ABCD E Conference held in Oslo, Norway, 24-26 June 2002. 3. Poverty, inequality and public policy in the A ndean region: a comparative perspective Amanda Glassman and Sudhanshu Handa* INTRODUCTION Using a comparative perspective, this chapter describes trends in poverty and inequality in the Andean countries, and examines the relationships between these factors and economic growth, growth volatility, labor markets, human capital formation, governance and political economy issues. A second brief section reviews patterns in public social spending and programs intended to deal with some o f the effects o f poverty and inequality. Finally, a concluding section summarizes the stylized facts and sets out unanswered questions and policy issues. The chapter is not intended to exhaustively review the literature in each area, which is significant, but rather seeks to present key stylized facts important to understanding the country case studies included in the rest o f the volume. 3.1 POVERTY AND INEQUALITY Poverty In 2000, approximately 35 per cent o f the Latin Am erica region1 lived in poverty, defined as less than $2 per day.2,3 W hile showing great dispersion within the Andean subregion and within nations, the Andean countries display a slighly higher ratio than the regional average, with nearly 38 per cent o f the population under the $2 per day poverty line (see Figure 3.1). In absolute terms, o f total w orld poor, 1.5 per cent live in the Andean region, which represents approximately 20 per cent o f the total p o or in the Latin Am erican region. A t the regional level, the ID B estimates that the incidence o f poverty has stagnated during the 1990s (see Annex 3.1 to this chapter). W hile the 45 Political crises, social conflict and economic development 46 90 m + 3 C CD O 78.0 80 70 60 501 40 30 20 10 0 48.7 352 37.5 29.9 20.7 U Eastern Middle East Latin Andean East Asia Europe and America* countries North Africa Source: 83.9 SubSaharan Africa Reast of Asia ID B (Székely and Hilgert). F igure 3.1 Percentage o f po p u la tio n living on less than two U S dollars a d a y ( P P P 1985) by region, 1998 first h a lf o f the 1990s led to poverty reduction, the second h alf led to poverty increase, resulting in little change over the period. Results in the A ndean region are generally consistent with these regional patterns. In Ecuador, Colom bia and Bolivia poverty decreased marginally between 1990 and 2000. In Peru, poverty incidence increased slightly. The exception has been Venezuela, where a 64 per cent increase in poverty incidence has been recorded. The poverty gap increased slightly during the 1990s as well, with Venezuela as a clear outlier where the poverty gap has increased 76 per cent. Andean exceptions are Colom bia and Ecuador, though the magnitude o f the decline is marginal. Disparities within countries are well-known. Rural areas tend to display higher levels o f incidence; regionally, rural poverty incidence is double the urban figure. Certain Andean countries display this same relationship but o f a more significant order o f magnitude. In Peru, fo r example, poverty incidences in the Rural Jungle (79.6 per cent) and the Rural Highlands (79.5 per cent) are more than five times that in the M etropolitan A rea o f Lim a (14.6 per cent). The incidence o f poverty by ethnicity or mother tongue is also high when compared to respondents who classify themselves as white or Spanish speakers (see Figure 3.2). Other determinants o f poverty in both Latin Am erica and the Andean subregion include the occupation o f the household head (those working in agriculture tend to be worst o ff), educational attainment (low er levels o f attainment are most significant predictors o f poverty) and fam ily size (larger family sizes are related to poverty incidence). These factors w ill be Poverty, inequality and public policy 70 i 60 ­ » 50 an I 40§ 30u ^ 20 ­ 10­ 0 56.1 58.6 47 64.9 62.9 35.4 28.5 Branca Preta and Indigenous Non- Indigenous Spanish (White) Parda (Black indigenous and Mulato) Brazil Source: Guatemala Native Peru ID B M E C O V I Household Survey, calculated by the Poverty Unit, IDB. Figure 3.2 Incidence o f p o ve rty by race or m o th er tongue, circa 2000 (tw o U S dollars a day P P P 1985) explored in more detail in the section on human capital endowment, poverty and inequality. A t the regional level, in urban settings, poverty is higher amongst female heads o f household (F H H ) (30.4 per cent) than their male counterparts (25 per cent).4 The evidence in Andean countries is mixed; urban Colom bian F H H (W orld Bank 2002) are disproportionately poorer than other households while Peruvian F H H (Bouillon and M ontes 2001) show no clear patterns over time. Inequality A s is well known, Latin Am erica is the most unequal region in the w orld; more than 31 per cent o f national income is earned by the wealthiest 5 per cent o f the population. The bottom 30 per cent earns only 7.5 per cent o f total income. In the Andean subregion, 28.5 per cent o f the national income is earned by the wealthiest 5 per cent o f the population. In the non-Andean Latin Am erican nations, this share is 31.9 per cent, indicating that while highly unequal, the Andean subregion is not much more unequal than the rest o f the Latin Am erica region. Circa 2000, the Gini index in the Andean subregion ranges from a low o f 0.47 in Venezuela to a high o f 0.60 in Bolivia (see Annex 3.1 for a table on income distribution and poverty in the 1990s and Figures 3.3A and 3.3B). Inequality, as measured by the Gini, has increased substantially in Bolivia over the past decade (more than 10 per cent), while in the remaining Andean countries the index has remained more or less unchanged. In the longer- Political crises, social conflict and economic development 48 0.7-1 □ Circa 1990 ■ Circa 2000 0.6- X 0.5I 0.4- ;a 0.3­ 0.2 0.1 0.0 « e o •s « a* * 3 O «3 O * = « -s 2 I .S g 2 C C O o o U Q C ^ d1 Û £ §1 23 ï mi £ £ Source: N _ ë § Poverty Unit, Inter American D evelopment Bank (see Annex 3.1). Figure 3 .3 A Changes in the Gini index in L a tin A m eric a during the 1990s Figure 3 .3 B In co m e inequality by regions (G in i in d e x), 1990s term perspective, however, inequality appears to be increasing. In Colombia, for example, the G ini coefficient increased 4 per centage points during the last two decades, and simultaneously, the income share o f the top quintile relative to the share o f the poorest 20 per cent increased from 17 to 20 times as high (W orld Bank 2002). Growth, Poverty and Inequality Rising per worker wage differentials have not automatically translated into simultaneous increases in inequality and poverty in terms o f per capita Poverty, inequality and public policy 49 household income. In a recent b ook on the topic, Vos et al. (2002) analyse 17 Latin Am erican nations5 and 47 econom ic periods to assess trends in growth, poverty and inequality. In this analysis, Ecuador (national data, 95-99) and Peru (national data, 85-91) are the subregional cases where poverty and inequality increased together,6 while the remainder o f the subregional episodes fall into the falling poverty/rising inequality category. (Th is analysis, however, omits the post-1997 effects o f the recession in Colom bia, where poverty and inequality have increased jointly.) W here poverty reduction did occur, econ om ic grow th was a clear contributor in the subregion (see Figure 3.4 and Table 3.1), and this effect is more pronounced in the Andean subregion than in non-Andean nations. W h ile most countries in the Latin A m erica region achieved m oderate growth rates in the 1990s, it is difficult to speak o f a strong and sustained recovery from the dismal performance o f the 1980s. In the countries o f the subregion, this recovery was extremely modest, with Peru showing the greatest gains. In large part, this disappointing performance is attributable to a tapering o ff o f growth towards the end o f the 1990s due to emerging domestic financial crises (Ecuador), natural disasters (Ecuador, C olom bia) or external events such as plummeting com m odity prices and international financial crises (C olom bia). Source: ID B M E C O V I household surveys data bank, authors’ calculations. Figure 3.4 Changes in p o ve rty a n d grow th during the 1990s, regional, A ndean a n d non-A ndean countries Econom ic growth is also a m ajor determinant o f inequality reduction, particularly for the Andean subregion (See Figure 3.5). In the non-Andean Political crises, social conflict and economic development 50 Latin Am erican countries, the relationship between changes in inequality and growth is flat, that is, changes in growth are seemingly unrelated to changes in inequality. In the Andean subregion, however, the slope o f this relationship is quite steep, primarily due to Ecuador’s performance in the 1997-99 period. Table 3.1 Per capita G D P grow th in L a tin A m eric a (p er cen t) Country 1960s Bolivia Colom bia Ecuador Peru Venezuela Andean mean 1970s 1980s 1990s 0.7 2.0 1.0 2.2 1.2 1.4 1.7 3.3 5.8 1.1 -2.5 1.2 -0.3 -2.4 0.4 2.5 -2.8 -1.4 1.8 0.6 -0.3 1.9 -0.2 0.8 Source : D e Ferranti et al. (2000). Source: ID B M E C O V I household surveys data bank, authors’ calculations. Figure 3 .5 1 Changes in inequality a n d grow th during the 1990s, regional, A n d ea n a n d n o n -A n d e a n countries Growth Volatility and its Impact on Poverty and Inequality W hile the Latin Am erica region has high levels o f growth volatility relative to industrialized countries between 1970 and 2000, there is evidence o f a Poverty, inequality and public policy 51 decline in G D P growth volatility that affected most countries in the region. The variability o f G D P growth remained roughly stable until the late 1970s, and then rose sharply in the 1980s, due principally to the debt crisis and associated macroeconomic and financial effects. In the 1990s, however, the rising trend in aggregate volatility in Latin A m erica was reversed. G D P data up to 1999 shows that the variability o f real G D P growth declined substantially across the region, approximately to levels experienced in the 1960s and 1970s (D e Ferranti et al. 2000).8 The evidence ultimately is mixed, however, on whether vola tility has becom e higher today than it was in the relatively normal 1970s, because the 1980s are viewed as an unusually turbulent decade. A n d when taking into account the most recent data from 2001-02 (Solim ano and Soto 2003), volatility appears to be increasing. Th e A ndean experience is mixed. G row th volatility, as measured by standard deviations o f growth rates by decade, increased in C olom bia (substantially) and Venezuela (marginally) since the 1960s, while decreasing in B olivia, Ecuador and Peru during the same time period (D e Ferranti et al. 2000). W age o r earnings volatility captures a central dimension o f income volatility. The cycle o f rise and fall in wage volatility tracks closely that found in the macroeconomic aggregates. Nevertheless, since the 1970s, real wage growth volatility has declined substantially in the Andes with the exception o f Venezuela. H owever, although vola tility at the macro level (G D P growth, consum ption grow th ) decreased during the 1990s, m icroeconom ic volatility (expressed in turnover rates, Saavedra (2003)) has increased in several countries in part due to the flexibility required to compete in w orld markets. This is the case in the subregion. It has been amply documented that recessions and econom ic instability intensify wage inequality. O ver the past 20 years, the subregion has weathered a succession o f macroeconomic crises, which, apart from armed conflict and natural disasters, have been the chief cause o f the surge in poverty and in many cases have also increased inequality. Panel data from Peru show how significant movements in and out o f poverty can occur during recessive periods (Bouillon and M ontes 2001). Such upheavals can cause setbacks in human capital accumulation, particularly in the poorest households, when family members display malnutrition or have to cut short their schooling. D e Janvry and Sadoulet (2001) analysing income growth and inequality for the 1970-94 period show that crises create ratchet effects on inequality that growth cannot erase. The effects o f recessions mean, for instance, that a 1 per cent decline in income cancels the poverty reduction effects o f more than 0 per cent o f income growth. Volatility and inflation also exacerbate inequality (Lustig 2001; Birdsall and Székeley 2003). Inflation hurts the p o or m ore than the upper income brackets, since their meager financial holdings are undiversified and cash- 52 Political crises, social conflict and economic development heavy. Likewise, the poor are more likely to be dependent upon government cash transfers, subsidies or pensions that are not adjusted fo r inflation. Labor Market Dynamics, Poverty and Inequality A s total household income is more dependent on labor earnings than in other regions o f the world, most recent poverty increases in the region are due to decreases in labor income. In contrast to Central A m erica where unem ploym ent rates declined or increased only moderately, the 1990s have been characterized by rising unem ploym ent rates in the A n d ean subregion, with the exception o f Bolivia (Duryea et al. 2003). In Colom bia, unemployment rates increased from 7.1 per cent in the early nineties to 16.7 at the end o f the decade. In Venezuela, unemployment rose from 4.8 to 10.3 per cent during this same period. Participation rates o f women and youth also increased substantially during the decade o f the 1990s. In the Andean subregion, unemployment rates also increased sharply fo r youth at ages 15-18, but as the share o f youth unemployment o f total unemployment has dropped due to dem ographic trends (n ot increased schooling), this phenomenon does not explain increases in the unemployment rate. A similar pattern has emerged fo r females. Average wages (measured in PPP-adjusted $) remained constant or declined throughout the region during the 1990s (D uryea et al. 2003). The decline was very pronounced in Colom bia and Venezuela. In Bolivia and Peru, however, wages in dollars have not changed much relative to their values at the beginning o f the decade. The gender gap in wages, controlling fo r educational attainment, experience and sector o f em ploym ent, has been steadily declining in the Andean countries. However, the quality o f jobs is p o or overall. In an exercise to estimate the percentage o f workers earning ‘poverty wages’ , defined as individual hourly earnings o f one PPPadjusted U S dollar or less, Duryea et al. (2003) estimate that 48 per cent o f Colom bian workers earned poverty wages while in Bolivia, this figure was more than 70 per cent o f the workforce. The remainder o f the Andean countries fell in between these two figures. W om en tend to be concentrated in poverty wage employment. L a b o r m arket segm en ta tio n and b o th o ccu p a tio n a l and w age discrimination are also important contributors to inequality. Controlling fo r education, experience and hours worked, rural workers make nearly 30 per cent less than urban workers; urban form al workers make about 20 per cent m ore than their inform al counterparts (ID B 1999). Occupational and w age discrim ination, alon g w ith stigma, is com m on and affects women, indigenous people, A fro descendants and other excluded workers. F or instance, in urban Peru, after controlling fo r a number o f variables, Poverty, inequality and public policy 53 predominantly white individuals have better jobs (in the service sector) and earn higher wages than predominantly indigenous workers (Saavedra et al. 2002). Further, with no exceptions in the Andean region, the proportion o f persons in low paying jobs is higher among women than men. Child labor is also a significant feature o f labor markets in the Andean subregion. Figure 3.69illustrates the magnitude o f this phenomenon. Ecuador presents the most dramatic case. A t age 15, more than half o f children in the bottom two quintiles o f the income distribution are in the labor market, perhaps due to a combination o f extremely low secondary school supply, poverty and significant earnings opportunities in the market. Child’ s age Source: Social Indicators Information Service, Research Department, ID B 2001 Figure 3 .6 E m p lo ym e n t rates f o r children by age a n d incom e level, 1 9 9 8 -9 9 Human Capital Endowment, Poverty and Inequality Despite the growing inequality o f incomes and limited poverty reduction, the region did make important progress in improving social indicators during the past decade. For example, taking the U N D P ’s Human D evelopm ent Index (H D I), which measures a combination o f life expectancy at birth, adult literacy (over 15 years), enrollment in primary, secondary and post­ secondary education, and G D P per capita, rose from 0.69 in the 1980s to 0.74 in the 1990s. The H D I for Latin America and the Caribbean is exceeded only by the overall average for developed countries, and the gap between these two groups has narrowed over time. The Andean H D I is close to the regional average, though somewhat above it, and shows an improvement over time. Political crises, social conflict and economic development 54 The U N D P ’s human poverty index (H P I), which measures human poverty or capacity poverty, summarizes three different aspects o f poverty in a single index: the probability o f premature death, the absence o f basic education (illiteracy) and lack o f access to public services, such as health and potable water, as well as the percentage o f underweight children under five years old. Th e H P I ranges m ore broadly within the Andean group, with Peru showing the worst results and C olom bia the best (see Figure 3.7). 45 -, 403530l__ 2 5 s 20 15100 □ 2002 HPI value 111 111gj .2 Pü B S o c «ü s S3 o w X P 2 n n n n n nn nn O o c u d a 5a 1 S - O xi S 2a ^ I « I c I ’ E S I ¡3 o Z o £ u U •a Source: U N D P (2001). Figure 3 .7 H u m a n p o verty index in L a tin A m erica, 1999 This improvement can also be seen in the progress that the region has been making in human development, particularly in education and health. Prim ary school enrolment is near 90 per cent, while secondary is 70 per cent on average (Ecuador is a notable exception to this record, with only 51 per cent o f the eligible population attending secondary school). Infant m ortality (I M R ) has declined dramatically in the Andes and is now below the regional average; 26.1 per 1000 live births versus 28.5 in the non-Andean nations. Bolivia remains an important exception, with an I M R o f 61 per 1000 live births. Fertility rates, however, remain higher than the non-Andean nations and above the regional average; this is a key factor as fam ily size is a crucial determinant o f poverty (see Figures 3.8 and 3.9). However, the relatively positive performance o f the subregion in human development must also be analysed from the perspective o f inequality. The discriminatory power o f human capital endowments has been increasing over the past two decades, with recessions accentuating the value o f higher Poverty, inequality and public policy Figure 3.8 55 In fa n t m o rta lity rates, circa 2000 (p er 1000 live b irths) a C O t 2.0­ m 1.51.0-1 Figure 3.9 1990 1 1995 1---------------2000 F ertility rates in the region, 1990-2000, circa 2000 (b irth s p e r w om an) education. Across the subregion, decreasing wage returns to secondary education and increasing returns to tertiary have been recorded (Duryea and Pagés 2001), which has a clear impact on income inequality. In Colombia, for example, on average, individuals with post-secondary education receive 4.3 times the labor earnings o f individuals with incomplete primary education (W orld Bank 2002). Globalization-related growth and recent market reforms have reinforced wage inequality, due to the higher premia that they have placed on skills. Returns to post-secondary education have been rewarded 56 Political crises, social conflict and economic development disproportionately and the gap in earnings between those with more and those w ith less than post-secondary education has widened (Behrman, Birdsall and Székely 2000). D espite recent educational progress, the evidence is unambiguous in showing persistent educational gaps and differential returns to schooling between rich and poor. Average schooling completion rates are four years for the poorest 20 per cent and ten years for the wealthiest 20 per cent, although these rates vary significantly between countries. In addition, the returns to schooling increase substantially by level, showing that income inequality is the result, not only o f fewer years o f schooling depressing earnings, but also o f higher market rewards for higher levels o f schooling. For instance, while, on average, having incomplete primary schooling results in an income that is 18 per cent higher than having no schooling, complete secondary education yields returns o f 61 per cent and higher education yields returns as high as 152 per cent (Attanasio and Székely 2001). Duryea and Pagés (2003) demonstrate that, using a fixed-effect regression method, returns to secondary are falling slightly in the subregion while returns to tertiary education are rising, though Peru is the exception to this phenomenon. Other Assets and Poverty Attanasio and Székely (2001) have demonstrated the key role that access to assets (credit, land ownership), including public assets such as basic public services (water, sewerage, electricity), play in the generation o f poverty. Level o f assets and the changes in returns on them are as im portant as the possession o f assets in the determination o f poverty. Case studies on Bolivia (G ray-M olin a et al. 2001), where access to social capital was found to be a significant factor in reducing the probability o f poverty, and Peru (Escobal et al. 2001), where access to assets, particularly in the form o f basic public services, had an important effect on the probability o f poverty, both confirm the importance o f non-human capital assets for poverty reduction in the subregion. Governance, Poverty and Inequality Th e region has been characterized by w eak social contracts between governments and citizens and little societal consensus on and enforcement o f the principles o f fairness and solidarity, precluding domestic support fo r and sustainability o f redistributive policies (G rah am 2001; Birdsall 2003). Solimano (2003), follow ing on Kaufm ann et al. (1999), highlights the important role that governance variables may play in the production o f development outcomes and the relatively low levels o f achievement in Poverty, inequality and public policy 57 governance among the Andean countries vis-a-vis the rest o f the region. U sin g the same fram ew ork, an analysis o f the relationship between governance indicators, grow th and poverty confirm s that the A ndean countries follow the regional mean in all cases. Better governance translates into higher growth rates and, by extension, lower poverty, and this effect is more pronounced in the Andean subregion (see Figures 3.10 to 3.13). 0.80 - □ ■ 0.60 □ South-east A sia and Pacific LAC AC 0.40 J: « 0.20 H -o 0.00 -0.20 -0 .4 0 ­ -0.60 -0.80 J Source: Government effectiveness Regulatory framework Rule of law Governance indicators from Kaufmann et al. (1999), authors’ calculations Figure 3.10 G overnance indicators Growth 1995-2000 Source: Governance indicators from Kaufmann et al. (1999), authors’ calculations Figure 3.11 G overnance in d ex a n d grow th: regulation Political crises, social conflict and economic development 58 Growth 1995-2000 Source: Governance indicators from Kaufmann et al. (1999), authors’ calculations Figure 3.12 G overnance index a n d grow th: rule o f law Growth 1995-2000 Source: Governance indicators from Kaufmann et al. (1999), authors’ calculations Figure 3.13 G overnance index a n d grow th: governm ent effect H a ll and Jones (1999) and D uryea and Pagés (2002) find these same governance variables to be highly associated with productivity per worker and earnings. W hile some o f this association may be due to reverse causation Poverty, inequality and public policy 59 - richer countries can afford better institutions - there is some evidence o f causality running from institutions to earnings. Therefore, efforts to improve the quality o f the institutional environment may help to reduce poverty. Duryea and Pagés (2002), for example, report that improving the quality o f Peruvian institutions to the level achieved in Chile would achieve a reduction in poverty equivalent to the one attained with 2.71 extra years o f tertiary education or 4.3 additional years o f secondary education on average. Social Exclusion, Poverty and Inequality Inequality and exclusion can also dampen countries’ growth potential by the social and political consequences that result from their direct negative impacts on individual and group welfare. The social problems that increasingly are linked to inequality and exclusion - crime and violence, substance abuse and other dysfunctional behavior - can trap the p o or and exact high economic costs that block a country’s growth prospects. The subregion’s particularly high rates o f crime and violence are strongly associated with its high levels o f inequality, though the association with poverty is not significant in the research to date (see Fanjzylber 1997). Inequality and social exclusion have been linked, in Latin Am erica as well as in other w orld regions, with social upheaval and threats to public safety, especially in countries w ith high ethnic or racial diversity, and in environments where social injustice and discrimination pervade. The democratic process is undermined as a result, thus affecting a country’s chances for growth. Distributional conflicts can beget inefficient political practices (inefficient tax systems, unproductive spending, and corruption) that weaken capital accum ulation incentives and lead to suboptim al investment equilibria (A lesin a and R od rik 1994; Persson and Tabellini 1994). Accordingly, a lack o f direct attention to problems o f inequality and social exclusion may translate into social and political instability and low growth. Inequality and exclusion are closely associated, in vicious cycles, with each other and with increased poverty, reduced growth, and social and political disruptions. Disentangling causes and consequences, therefore, is not easy, particularly in the Andean region. Political Economy, Poverty and Inequality W hile quantitative data provides some level o f explanatory inform ation on p o verty and in equality dynamics, recent research has focused on perceptions (Latinobaróm etro surveys) and local level experiences (focus groups, stakeholder interview s) as a means to explain the quantitative phenom enon observed. This research can also provide insight into the 60 Political crises, social conflict and economic development political economy issues ‘behind’ aggregate phenomenon. Although poverty and inequality has stagnated in the subregion during the decade, gains in human development have been exceptionally positive. W hy then has political upheaval remained at high levels in the subregion? Recent w ork by Carol Graham, using Latinobaróm etro and panel survey data in Lim a, shows that there is a large discrepancy in Peru between perceptions o f quality o f life improvements and actual improvements. This research found that those whose quality o f life, as measured by increases in income and assets over time, had improved most relative to other groups were precisely those who felt most frustrated and dissatisfied with their (and the country’s) progress to date. These findings may partially explain the low level o f political attention given to date to the dramatic advancements in human poverty reduction in the Andean region. Other w ork in C olom bia (M cIlw a in e and M oser 2001) has focused on the role o f social capital, both ‘productive’ (generating institutional change and favoring growth) and ‘perverse’ (social networks that encourage rent seeking behavior), in generating social fragmentation and low levels o f development. This qualitative study found that problems linked with a lack o f social capital, related to the effects o f political, street and domestic violence, lack o f trust in government institutions, and a general atmosphere o f fear, were identified by focus group participants much more frequently than those relating to a lack o f human capital. W hile these studies are small-scale and so difficult to generalize, their results may illustrate a political econom ic context where important advances in the reduction o f human poverty have been made in the presence o f stagnating poverty and inequality, accompanied by high levels o f frustration among the relatively better o ff and low levels o f social capital in society in general. It is perhaps the latter factors that have most affected the subregion. 3.2 ADDRESSING POVERTY AND INEQUALITY IN THE ANDEAN REGION: SOCIAL POLICY AND PROGRAMS M an y governm ent-financed actions m ight be taken to address poverty and inequality through facilitating access to human, financial and physical capital for the poor. This chapter, however, will focus on a subset o f activities generally titled social policy and programs which seek to prom ote human capital accumulation and poverty reduction. These activites include social security (pensions, health, unem ploym ent insurance), public health, nutrition, education, social infrastructure, training, housing, safety net/ poverty reduction, and water and sanitation. Poverty, inequality and public policy 61 Social expenditure in the Andean countries is significantly lower than in countries o f comparative levels o f econom ic development and with respect to the non-Andean nations. Further, although social expenditure increased in the subregion in the first half o f the 1990s (in C olom bia and Peru, there was a 100 per cent increase), from 1995 onwards social expenditure remained flat. Venezuela is the exception, as social expenditure declined over the decade (See Figures 3.14A and 3.14B). 20 18­ 16­ 14­ Ph l 8 8 12 10 8 - Region - Andean countries - Rest o f countries 6 4 2 0- Figure 3 .1 4 A 1994-1995 1996-1997 1998-1999 L a tin A m erica: to ta l social pu b lic expenditures as a percentage o f G D P (m illions, constant 1995 U S$) 900 800 700 ON 600 500 o O 400 300 Region Andean countries Rest o f countries 200 100 0 Figure 3 .1 4 B 1994-1995 1996-1997 1998-1999 L a tin A m erica: pu b lic social expenditure p e r capita, 1 9 9 4 -9 9 Political crises, social conflict and economic development 62 Since the post-1995 era included many negative shocks with a resulting increase in poverty, it is clear that social expenditure is not anticyclical. Other studies have demonstrated this effect: total social spending in the Andean subregion is in fact procyclical with econom ic growth (C E P A L 2000, fo r C o lo m b ia C R E C E 2001), thus accentuating the effects o f economic downturns on the national economy and households. This effect is attributable to the flexible nature o f certain kinds o f social expenditure (such as social assistance transfers) during periods o f fiscal adjustment that have generally accompanied recessions in the subregion, the low budget execution capacity o f many social sector ministries, the absence o f effective advocacy on the part o f program beneficiaries, and the lack o f public information on the effectiveness o f programs. W hile government social spending is a small proportion o f total household income, its importance at the margin for the poorest households may be significant. In terms o f its sectoral composition, most public financing is concentrated in social security and education. N on-social security health, housing, water and sanitation and safety net programs receive very small shares o f total resources. Safety net programs, in particular, are very p oorly financed, accounting for less than half a percentage point o f G D P in most Andean nations (see figure 3.15). Th e benefit incidence o f total social spending is generally regressive (principally due to social security spending, which is concentrated am ong form al sector em ployees and the relatively well o ff10), the exception being Peru where total social spending is moderately progressive (W orld Bank and ID B 2002). 450 - I I Region ■ Andean countries I I Non-Andean countries 400 350 8)300 i 25° - Ï5 200 O M 150 100 50 0 LI Figure 3.15 Education Health and nutrition Social security Dwelling, water, public health and others S o cia l expenditure p e r capita by sector a n d region, 1 9 9 8 -9 9 Poverty, inequality and public policy 3.3 63 CONCLUSIONS The decade o f the 1990s may be considered a ‘lost decade’ for the Andean countries in terms o f poverty and inequality reduction. Initial improvements in poverty and inequality during the first half o f the decade were essentially eliminated during the second half, resulting in virtually no net gain over the period. W hile the H P I and H D I did show significant improvements over the period, this did not translate into lower overall income poverty because these gains were made over a low base, and within a context o f deep and persistent inequality as manifested by the continued exclusion o f the ‘hard­ core’ structural p o or coupled with increasing dispersion in wages driven by higher rates o f return at higher schooling levels. P o verty and in equ ality are sensitive to econ om ic grow th, and this relationship is stronger in the Andean countries than in the Latin Am erican region as a whole. This relationship is go o d news-bad news; in the presence o f slow growth, as in the 1990s, poverty and inequality remain unabated. Conversely, in periods o f stable and rapid growth, poverty and inequality decline. Governance also matters - the indicators o f governance presented above show a fairly strong (positive) correlation with econom ic growth, and by extension, to poverty and inequality. A n d while the Andean countries rank below the region in these indicators, this means that some progress on poverty can be made through improvements along the governance dimension. A major area o f public policy concern is economic volatility and exposure to shocks. The number and magnitude o f shocks increased significantly over the decade as countries became more open and participated in the world economy. Aggregate shocks have a disproportionate effect on the p o or and vulnerable, and can eliminate years o f poverty reduction in a very short period o f time (C olom bia late 1990s). A fte r a decade o f econom ic frustration, civil society and governments in the region have become increasingly critical and apprehensive about the socalled Washington Consensus (W C ) reform agenda. The antiglobalization sentiment has been unprecedented in the last three years, with demonstrations and protests now a norm al part o f the landscape o f the W orld Bank/ International M on etary Fund and W orld Trade O rganization meetings. On the other hand, the actual reform record is mixed at best. A recent paper by L o ra and Panizza (2002)11 shows that the pace o f these reforms came to a virtual standstill in the second half o f the 1990s after significant progress in the first half. In terms o f areas o f reform, trade and financial sector reform saw the most progress, with very little (if any) progress in the area o f taxes and labor market regulations. The one exception to the timing o f the reform process is privatizations, which showed a significant increase 64 Political crises, social conflict and economic development in the second h alf o f the decade, although this might be related to the need to raise funds to counter persistent fiscal deficits. G iven the eco n om ic p erform a n ce o ver the last decade and the increasing pessimism towards W C reforms, a key public policy issue is how governments and civil society w ill approach the poverty reduction (and overall Millennium Development G oal) agenda in this decade. Leaders critical o f the W C have been elected in Venezuela and Ecuador, and Peru’s president has criticized W C policies while at the same time com m iting himself to market-friendly policies. In the current environment, efficiency and growth cannot be the overriding driving force behind policy decisions; issues o f equity and social inclusion must be addressed directly - getting the right balance w ill be the key challenge for policymakers. A n important side issue is the role that markets w ill play in the eventual policies that are employed given the level o f distrust in market institutions that has been generated over the previous decade. One specific area o f reform that has been relatively untouched is the labor market. The existence o f entrenched groups from the upper income brackets who stand to lose significant benefits makes reform in this area the most controversial o f all. Yet at the same time wages are the most important source o f income among p o or households, indicating that macroeconomic stability coupled with labor market reforms that allow the p o or access to more and better-paying jobs w ill likely have the most impact on poverty and inequality in the long term. A ction s such as im proving jo b -w o rk er matching processes, insuring workers against the risk o f jo b churning, enhancing opportunities for workers through training and adult education, and improving and enforcing labor market regulations, may help to improve com petitivity and attract jobs to the struggling Andean nations. However, the political econom ic difficulties associated with changes in labor market legislation are likely the greatest barriers to sustained poverty reduction in the region and require a social contract which does not seem likely in the near future. A key stylized fact among the Andean countries is the relatively low level o f social spending per capita or per GDP. This spending is heavily weighted towards wages and salaries, and towards social security and pensions which disproportionately favor urban and form al sector employees. In addition, social safety net expenditures are highly procyclical, meaning that they contract during econom ic downturns when they are needed the most. The low level and destination o f spending is a key concern in the Andean countries. But simply raising spending is not the answer; the efficiency o f this spending can be improved significantly through the fusion o f programs with similar objectives and overlapping target groups, while the direct impact on poverty and inequality can be raised by addressing issues o f leakage Poverty, inequality and public policy 65 and undercoverage. A m ore com plicated issue is the need to construct systems to ensure countercyclical expansion in the social safety net. A social stabilization fund was recently created in Colom bia, fo r example, with rules to allow for savings during boom periods and dissaving to finance poverty alleviation programs during recessions. In general, the high level o f fiscal inflexibility due to earmarked expenditures makes it very difficult for governments in the region to respond during recessions and crises in order to smooth consumption fo r the p o o r - this should be a key policy issue on the agenda in the next few years. Aside from more fiscal flexibility, well-managed and targeted programs should be created which can easily be expanded during periods o f crises in order to provide a true safety net for the transitory poor. Finally, the deep structural poverty among traditionally excluded groups continues to be a pressing area o f concern in the region. W hile innovative and culturally appropriate approaches are clearly needed, even m ore im portant is the political comm itm ent to address the historic inequities and underdevelopment. One o f the key failings o f past economic and social policy has been their inattention to excluded populations fo r reasons o f gender, race and ethnicity, migration status or other features that marginalize groups. W hile pioneer policy initiatives can be traced back to the late 1980s to the early 1990s, fo r instance the 1991 Colom bian Constitution which recognized ethnic and cultural diversity as a fundamental principle o f the state, the use o f the term in the social policy discourse and a flurry o f government activity prom oting social inclusion have taken place only in the last three to five years. N o te d examples, among others, are Peru’s 1997 law to outlaw racial discrimination and a few comprehensive development projects targeted specifically to address the constraints faced by excluded populations, for instance, A fro descendants on the Pacific coast o f Colombia, among others. NOTES * 1. 2. The authors appreciate the valuable contribution o f José Luis Montes in the preparation o f this chapter. Ethel Muhlstein provided useful editorial assistance. Opinions expressed are those o f the authors and do not reflect the opinions, policies or programs o f the Inter American Development Bank. Unless otherwise specified, when the chapter refers to the Latin Am erica region, it is referring to the nations o f Argentina, Bolivia, Brazil, Chile, C olom bia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. Estimated from household surveys in the region by the ID B (SDS/POV), adjusted for underreporting and follow in g a protocol described in Székely and H ilgert (2001) for treatment o f missing values and zeros. The US$2 purchasing power parity (P P P ) daily income cutoff is considered to be an adequate basis for poverty comparisons among the 66 3. 4. 5. 6. 7. 8. 9. 10. 11. Political crises, social conflict and economic development countries o f the region, given their relative development level. The base year is 1985. The region’s poverty profile has been constructed using this poverty line. N o te that both the US$1 and US$2 P P P per day thresholds are being used to track the Millennium Development Goals. The Economic Commission on Latin Am erica and the Caribbean has published data in the 2002 Panorama Social showing that 44 per cent o f the region lived in poverty, using the same income cutoff definitions. However, this publication does not describe how these estimates were obtained, nor what procedures were used to adjust for underreporting and other errors. Aggregate figures do n ot consider possible gender inequalities in the distribution o f income or consumption within the household. O f the Andean subregion, only Venezuela is not included. M exico (84-94) and Argentina (94-98) are other countries that fall into the rising poverty, rising inequality group. Figure 3.5 reflects changes in the Gini and G D P per capita during the 1997-99 period. Each data point represents the per cent change in inequality contrasted with the per cent change in G D P per capita. The Andean countries included are Bolivia, Colom bia, Ecuador, Peru and Venezuela. A ccordin g to these authors, the reported decline in vola tility is n ot a result o f the breakdown o f the period o f analysis into subperiods (decades) used here, and the same pattern arises with alternative period definitions, and even if annual rather than decadebased measures o f volatility are used. Prepared by Suzanne D uryea o f the Inter Am erican D evelopm ent Bank (Research Department). As these are contributory systems, many without a solidarity component, there may be an argument for excluding this type o f expenditure from an overall analysis o f public expenditure, as there is little scope for reallocation o f this spending within the social sector. 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Annex 3.1 Income distribution and poverty in Latin America and the Caribbean in the 1990s Per capita G D P growth ratee Ginib (1990-2000 Country Circa Circa yearly average)3 1990 H ob % change 2000 Gapb Circa Circa 1990 % change 2000 FG T2b Circa Circa % change Circa Circa 1990 2000 1990 % chang 2000 Argentina* 4.28 0.48 0.49 3.44 18.40 17.90 -2.72 4.55 4.47 -1.76 2.27 2.26 Bolivia 4.02 0.54 0.60 10.37 65.63 61.36 -6.51 32.78 36.91 12.60 20.19 27.40 35.71 Brazil 1.82 0.57 0.58 2.08 48.26 41.26 -14.50 23.80 18.65 -21.64 15.03 11.11 -26.08 Chile 6.37 0.55 0.56 2.14 32.37 16.11 -50.23 11.96 5.31 -55.60 6.12 2.60 -57.52 Colom bia 2.86 0.57 0.56 -0.88 42.39 39.37 -7.12 18.32 17.23 -5.95 10.73 10.14 -5.50 Costa R ica 5.36 0.46 0.46 0.30 34.23 30.47 -10.98 14.18 11.18 -21.16 8.07 5.88 -27.14 Dominican Republic* 4.62 0.48 0.48 -0.67 38.13 34.56 -9.36 15.05 11.64 -22.66 8.05 5.32 -33.91 Ecuador* 2.24 0.56 0.56 0.29 49.53 47.98 -3.13 25.47 23.69 -6.99 17.15 15.41 -10.15 El Salvador* 4.9 0.51 0.55 7.98 58.60 63.98 9.18 26.40 33.42 26.59 14.54 21.29 46.42 Honduras 2.76 0.57 0.58 2.45 77.20 75.25 -2.53 46.22 47.42 2.60 32.25 35.42 9.83 M exico 3.37 0.53 0.54 1.28 19.74 21.17 7.24 19.79 3.28 4.15 26.52 Nicaragua 2.87 0.57 0.60 6.26 70.67 72.68 2.84 -0.53 28.88 28.14 -2.56 Panama 5.07 0.56 0.56 0.11 47.75 36.61 -23.33 24.97 17.18 -31.20 17.04 10.80 -36.62 Paraguay* 2.33 0.57 0.59 4.25 52.09 61.12 17.34 27.29 33.84 24.00 17.96 23.28 29.62 Peru 3.46 0.46 0.49 6.25 41.86 42.43 1.36 18.11 19.61 8.28 10.33 12.22 18.30 Uruguay 3.29 0.41 0.44 7.97 23.15 13.59 -41.30 6.46 3.95 -38.85 2.70 1.78 -34.07 Venezuela, R B 2.46 0.44 0.47 6.35 12.55 20.63 64.38 4.31 7.57 75.64 2.13 4.08 91.55 Average (unweighted) 3.65 0.52 0.54 3.42 43.09 40.97 -4.93 20.45 20.06 -1.93 12.75 13.02 2.10 * Circa 1995-2000. Sources: (a) International M onetary Fund, W orld Economic O utlook. (b) Székely and H ilgert (2001). Prepared by the Poverty and Inequality Unit, Inter American Development Bank, 2003. 6.67 7.99 41.16 40.94 -0.44 PAR T II Country studies 4. The political economy of the crisis in the A ndean region: the case of Bolivia George Gray M olina and Gonzalo Chávez 4.1 INTRODUCTION The fragility o f the econom ic and political achievements o f the Andean region in recent years has revived an interest in using a political economy approach to explain the shifts in economic policy and in democratic strength. Bolivia initially appears to have had a successful experience o f stabilization and structural adjustment (1985-89), and o f political and institutional reform (1993-97). The implementation o f reforms has, however, revealed the significant difficulties o f the process and suggests the necessity o f amending any analysis o f the ‘ success’ o f these reforms with an analysis o f the ‘viability’ o f the conditions that facilitate or impede the implementation o f any public policy o f magnitude. In the last two years, social violence, road blocks, strikes, and the rise o f antisystem movements suggests that the ‘democratic transition’ as much as the ‘structural adjustment’ o f the last 80 years is still incomplete. Instead o f extending the first and second generations o f reform, there exists the perception in Bolivia that the country has only gone back to where it started from (see G raham and Pettinato 2001; Lora and Panizza 2002).1 In this chapter, we propose to (i) formulate an interpretive framework o f the political econom y to understand the success and the crisis behind the process o f economic and political reform in the last two decades: (ii) analyse the determinants o f governance, understood here as the political conditions that make the development o f a representative dem ocracy possible and the reform o f public policy viable, and (iii) analyse the determinants o f econom ic development, with a particular emphasis on determinants o f economic stability, sustained growth, and the struggle against poverty. From a practical point o f view, we ask why the reforms’ ‘success’ did not become a ‘success’ in terms o f growth rates, reduced poverty, and decreased inequality. 73 74 Political crises, social conflict and economic development From an analytical point o f view, the study approaches the paradoxical trajectory o f the reforms: why didn’t economic and political success coincide instead o f diverging and thereby weakening the chances o f further political and institutional reform? The analysis o f econom ic policy reform could be approached from two critical ‘m om ents’ : the first being the foundation o f the initial rules o f the game (the political m oment) and the second being the clarification o f econom ic policies in those rules (the policy moment). The m ore stable the rules o f the game are, the lower the transaction costs are o f making public policy. The more unstable the rules o f the game are, the higher the transaction costs are and, therefore, the larger is the disparity between econom ic and political cycles. W hen the rules o f the game are not stable, discontent with a public policy reflects not only a disapproval o f the policy itself, but also a disapproval o f the rules, institutions, and actors that produced the policy. The rejection o f one policy can produce a crisis o f legitim acy and force the government to go through a costly process o f political reaffirmation to strengthen legitimacy. In the Bolivian experience, the problems o f political credibility continue to return in an iterative way, persistently eroding the political and bureaucratic system. Rather than reduce transaction costs o f reforms, many political pacts that are constructed simply indefinitely postpone solving the problem. An Interpretive Framework H o w to approach the different time frames o f the political and economic moments in Bolivian experience? W e suggest an interpretive fram ework that complements the m odel o f ‘policy transaction costs’ , proposed by Avinash D ixit (D ixit 1996, 2000), to discover the effects o f these distinct time frames and create a new understanding o f B olivia’s case. In the literature o f ‘policy transaction costs’ initiated by Douglas N o rth (1990) and expanded upon by Avinash D ixit, econom ic policy is understood to be the result o f a political process o f negotiation. This process is also marked by multiple failures o f inform ation in the political market - negotiations occur with asymmetries o f inform ation in a market that, in the absence o f credible external sanctions, depends upon self-enforcement o f rules. The increase in the transaction costs o f the negotiation process frequently determines the viability o f an econom ic policy. One way o f decreasing transaction costs is creating arbitrating institutions with high credibility (superintendent offices, offices that control public spending, public prosecutor offices, courts o f justice), that enforce obedience to the law in an impartial way. A nother way is to decrease transaction costs is to align interest groups to maintain checks and balances during the construction o f arbitrating institutions. Bolivia: political economy o f the crisis 75 Th e focus o f ‘p o licy transaction cost’ requires an entrance into the ‘black b ox’ o f the political process o f negotiations to identify the sources o f stability or instability in the construction o f credibility (see G raham et al. 1999; Grindle 2000). In Bolivia, the three factors that characterize the social and historical conditions o f negotiation policy also help explain some o f the most important restrictions on the political process. First, in Bolivian political negotiations there is a serious clash between form al and informal institutions. The form al rules discussed in Gamarra (1997), Gray M olina et al. (1999), emphasize the hybrid aspect o f the formal system o f the political coalitions that generate a political space in the legislature to make reforms viable with the president’s support. The stability o f the democratic system observed during the last four presidential elections has made a set o f political and econom ic reforms viable in recent years. The inform al rules discussed by Calderón and Smukler (2000), however, suggest that parallel to the ‘coalition politics’ are ‘street politics’ that burst into the careful order created by the political rules, and push multiple negotiations and concessions to pressuring groups, social movements, and regional organizations in the country. The nature o f reducing transaction costs frequently favors partial negotiations that make reform viable but push vital issues o f institutional credibility towards a distant future. Second, it is clear that form al channels o f negotiation currently w ork through highly fragmented political parties and a political clientele that provides a fragile base for political governance. In recent years, the weakening o f the traditional parties o f the Bolivian democracy - M N R , A N D , M I R - has made the system o f political pacts and agreements more unstable than they were when a credible political infrastructure existed. Local and partial leaderships have multiplied the possible scenarios in political negotiation, both inside and outside o f the form al system o f political mediation. The presidential elections o f 2002 had 19 political parties registered and another 13 that had requests at the election registry. The political analysts predicted that not one party would get more than 25 per cent o f the votes and that the total vote for the traditional parties would not exceed 50 per cent o f the total votes. The political fragmentation evident here makes it more difficult to create stable coalitions that can govern. Third, even informal mechanisms o f political negotiation and mediation are also fragmented. A fte r more than a decade from the disbanding o f the Central W orkers o f B olivia (C O B ), the social movements o f A p ril and September 2000 marked an inflection point in the relations between the state and popular organizations. A leadership o f colleges - the Coordination o f W ater - propped up the W ar o f W ater and Cochabamba and the personal leadership - Felipe Quispe Huanca, the M allku - led the confrontation between the farmers and soldiers on the Northern plateau. These two actors 76 Political crises, social conflict and economic development were incorporated in a sporadic way into the leadership o f the movement o f the coca growers in Chapare, but in recent months there has been a clear splintering apart o f the 2000 social movements. The ‘new fragmentation’ o f traditional social actors has been accompanied by the proliferation o f actors that announce their displeasure with the form al political system and the market economy. W e w ill adapt the analytical framework described by Solimano (2001), w ith the approach that ‘transaction costs’ explain tw o aspects o f the crisis in the A ndean region: (i) a crisis o f governance, defined in terms o f decreasing support and satisfaction w ith democracy, worsening o f the quality o f political and bureaucratic institutions, the presence o f high levels o f corruption, and the presence o f growing social violence; (ii) an economic crisis, defined by the indicators o f growth, inflation, employment creation, and poverty reduction. For both issues, we have created hypotheses about the course o f the crises and the more structural factors o f the crisis in the Andean region. A m o n g the determinants o f governance that we analyse are the effect o f the weak presence o f the state, the effect o f political fragm entation and volatility, ethnic fragm entation, and the increasing levels o f inequality. A m o n g the determinants o f the econom ic crisis that we analyse are the effects o f the context o f m acroeconom ic policies, the m acroeconom ic environment, the productivity rate o f the economy, the effects o f geography, and the effects o f distribution. Finally, we incorporate governance variables to explain the path o f the political and economic crises from a political econom y approach. 4.2 GOVERNANCE BLOCK W e w ill use the definition o f ‘governance’ o f Kaufmann, K raay and Z oidoLobatón (1999), ‘ as a set o f traditions and institutions that determine how authority is wielded in the country’ . Governance defined this way is made up o f three interrelated processes: (i) the process o f selection and substitution o f governments; (ii) the capacity o f the government to design and implement public policies in an efficient way, and (iii) respect on the part o f the citizens fo r the institutions that govern their econom ic and social relations. The central hypothesis o f the follow ing analysis is that the success and failure o f B olivia’s governance in the last decade turns on the effectiveness o f the ‘coalition politics’ that create the political space to govern. Coalition politics encompass three important aspects: (i) the selection o f the president, that depends on (ii) the design and implementation o f public policy and (iii) the political mediation between form al and inform al systems o f political action, that reflects the processes identified by Kaufm ann et al. in their analysis o f governance. Bolivia: political economy o f the crisis 77 The analysis is divided into three parts. In the first subsection, we w ill consider the four periods o f governance that cover the period 1982-2002. In the second subsection, we w ill consider a few problems o f Bolivian governance, including perceptions about democracy, the quality o f political and bureaucratic institutions, indices o f perceptions o f corruption and measurement indices o f strikes and social m obilizations. In the third subsection, we w ill analyse a few determinants o f governance, including the weakness o f the state apparatus, the fragmentation and the volatility o f the system o f political parties, ethnic fragmentation, and growing levels o f poverty and inequality in the last decade. Five Periods of Governance Hyperinflation and crisis (1982-85) The difficult democratic transition in Bolivia and the crisis that resulted in the resignation o f the President Hernán Siles Suazo were as documented in econom ic literature (Sachs and M orales 1986) as they were in journals o f political science (W hitehead 1986, M a lly and G am arra 1987). A fte r the failed elections, the election o f 1980 favored the U nidad Dem ocrática y Popu lar (U D P ), an alliance o f leftist political parties that included the M N R - I, the M IR , and the PCB, and that w on with 38.7 per cent o f the popular vote. Siles Suazo im m ediately felt under pressure from the members o f his coalition and from the Bolivian Workers Center (C O B ) that would eventually lead the calls for his resignation. From its beginning, the administration was characterized by a pattern o f social conflict, packages o f econom ic reform, and then m ore street protests. Siles Suazo presided over more than 80 ministers in three years and suffered the abandonment o f one o f the most important parties o f his coalition in the midst o f his attempts to manage the crisis (Gam arra 1997: p. 371). Siles Suazo saw himself besieged by growing pressures from the COB, civic committees, the confederation o f businesses, and other social and political organizations. A n unsustainable m onetary and fiscal situation resulted in an uncontrolled hyperinflation that reached 22 per cent annually in 1984-85. The ambivalent role o f the International M onetary Fund and the risk o f a new m ilitary coup added layers o f instability that finally drove a negotiation between opposition parties, the COB, and what was left o f the administration coalition. In 1985, Siles Suazo called an election and, in August o f that year, the first transition between two civil governments o f the democratic era occurred. Stabilization and structural adjustment (1985-93) But even the 1985 elections lacked the presence o f a clear presidential mandate. A cción Nacionalista Dem ocrática ( A N D ) got 32.8 per cent o f 78 Political crises, social conflict and economic development the vote, followed by the M ovim iento Nacionalista Revolucionario ( M N R ) with 30.4 per cent o f the vote. A fte r the political negotiations in Congress, a new political pact, ‘pact for dem ocracy’ , was created between the M N R and the A N D that set a precedent for later post-election agreements and alliances. The pact for democracy ushered in the presidency o f V ictor Paz Estenssoro, three-time president o f Bolivia and 78 years old. The agreement generated enough political space for Paz Estenssoro to prepare an aggressive package to combat inflation, announced as Decree 21 060 o f stabilization and structural adjustment. The new econom ic policy (N P E ) developed in Decree 21 060 included three central pillars: (i) control o f the fiscal deficit and the freezing o f prices and salaries; (ii) the liberalization o f the economy, (iii) a progressive role for the private sector. In one year, the new econom ic policy had reduced inflation to less than 10 per cent, but began to struggle with the important external shock that resulted in the collapse o f the price o f tin. In 1986, with the restructuring o f C O M IB O L , the Company o f Bolivian Miners that had sustained the Bolivian economy during the previous three decades, thousands o f miners were left without work. A s a response to the mining crisis, and in the face o f growing unemployment in both rural and urban areas in the country, the Paz Estenssoro administration created an Emergency Social Fund (F S E ) to provide employment and increase public investment during the crisis period. The FSE functioned successfully until 1989, when it was institutionalized as an investment and development fund. The Paz Estenssoro administration represented an inflection point, as much for B olivia’s political path as fo r the econom ic policy o f the country. It brought about both a system o f democratic alternatives and a gradual econom ic reactivation. The high social cost o f the econom ic adjustment became a central part o f the presidential campaign o f 1989, but the issue always stayed within the framework o f democratic politics. Administration of the adjustment (1989-93) The presidential elections o f 1989 resulted in a ‘triple tie’ between the M N R (25.6 per cent), the A N D (25.2 per cent), and the M I R (21.8 per cent). The breakup o f the pact for democracy and the intense confrontation between the M N R and the A N D during the elections gave the votes to Jaime Paz Zam ora, the third candidate fo r president o f the republic in a second congressional round. A new agreement, ‘the patriotic agreement’ , was forged between the A N D and the M I R and created a new space for governance and for the administration o f structural adjustment. W ith the M N R as the opposition, the patriotic agreement gave rise to an administration from the political coalition that did little in the realm o f public policy. Towards the end o f Paz Z a m ora ’s term, he pushed through the third population and Bolivia: political economy o f the crisis 79 housing census o f the century and put social policy and the struggle against poverty at the top o f his agenda. Reform of the state (1993-97) The presidential election o f 1993 was dom inated by the M N R and its presidential candidate, G on zalo Sánchez de L o za d a , an architect o f the new econom ic policy o f V icto r Paz Estenssoro in 1985-89. Sánchez de Lozada won 34.6 per cent o f the popular vote and created a new agreement, the ‘Pact for Governance’ with the neopopulist U nión Cívica Solidaridad (U C S ) and the center-left M ovim iento Bolivia Libre (M B L ). During the campaign Sánchez de Lozada detailed a government program, the ‘Plan for A ll’ , that would guide the actions o f the new coalition. The Sánchez de Lozada administration is characterized by the beginning o f a series o f ambitious institutional and econom ic reforms, including the capitalization o f public businesses (1993), pension reform (1996), the construction o f the regulatory system (1996) for privatized businesses, the reforms o f popular participation (1994), administrative decentralization (1995), education reform (1993), and reform o f the land administration and possession system, I N r A (1996). Throughout his administration, Sánchez de Lozada portrayed himself as a technocrat and created broad areas o f reforms, particularly o f the office o f president. The coalition that supported the administration stayed intact during Sánchez de L o za d a ’s term in office and passed a range o f laws, including the R eform o f the Political Constitution o f the State Law in 1994. The reforms begun in this period were not free o f opposition. Protests against the privatization o f businesses, pension reform , and the reform o f the I N R A law marked the beginning o f the end o f the ambiguity that had characterized public sentiment over the reform o f the state. Towards the end o f his term in office, Sánchez de Lozada had exhausted all o f his political capital and found himself with approval ratings that hovered in the single digits. The 1997 elections were dominated by two ex-presidents: H ugo Banzer Suárez and Jaime Paz Zam ora, who capitalized on the discontent to apply second generation reforms. Stagnation and crisis (1997-2002) H u go Banzer Suárez w on the election with 22.3 per cent o f the popular vote. H e constructed a new pact, known as ‘M egacoalition’ , with the M IR , U C S , N F R , and C O N D E P A , which gave him an absolute m ajority in Congress. The megacoalition exemplified many o f the problems o f political negotiation between multiple parties under conditions o f political benefits and clientelism. Some 19 years after leaving the presidency de facto in 1978, Banzer Suárez had returned to the presidency as the constitutional president. Th e ascent o f the new government coincided with the end o f 80 Political crises, social conflict and economic development the Asian econom ic crisis and the beginning o f the Brazilian devaluation that acted as a macroeconomic shock to undermine Bolivian prospects for growth. A fte r growing more than 5 per cent in 1997 and 1998, beginning in 1999, the econom y entered a profound recession that would continue to stagnate for three years. Banzer’s term was characterized by a clear agenda o f coca leaf eradication and the construction o f a strategy to reduce poverty under the H IP C initiative. H e confronted two o f the less serious social crises o f the democratic period with the W ater W ar in A p ril o f 2000 and the farm ers’ blockades in September o f that same year. Between A p ril o f 2000 and A p ril o f 2001, 54 people would lose their lives in 12 confrontations between the police or m ilitary authorities and farmers or public organizers. In August o f 2001, H u go Banzer Suárez resigned for health reasons and Vice President Jorge Quiroga Ramirez assumed the presidency. The Quiroga administration was distinguished by an aggressive anticrisis plan and continuous negotiations about the future o f natural gas exports that would become, as o f 2001, the country’s most important export. Problems of Governance Perceptions of democracy The most reliable numbers available for people’s perceptions o f political and econom ic institutions come from the Latinobaróm etro surveys that have been performed throughout the region since 1996. W e w ill concentrate our analysis on the im portant indicators from the surveys: support fo r democracy and satisfaction with democracy. The first indicator tries to gauge the level o f support for democracy as a government regime, comparing it with authoritarian regimes o f the government. (Th e question in the survey asks: ‘W ith which o f the fo llow in g responses do you most identify? (i) D em ocracy is better than any other system o f government; (ii) in some circumstances, an authoritarian government is better than a democracy, or (iii) it doesn’t matter to people like me whether we have a democratic government.’) The second indicator tries to measure the level o f satisfaction with the democratic performance on a progressive scale o f agreement with the question: ‘A re yo u ... “ very satisfied” or “ satisfied” with the democracy o f your country?’ Table 4.1 compares levels o f democratic support between 1996, 1998, and 2000 and a few noticeable patterns emerge. First, Bolivia is the country with the second highest level o f volatility in its democratic support, with a fall o f 10 percentage points over the course o f the previous five years. Second, there seems to have been a clear drop in support for democracy throughout this time. The m ajor point o f disillusionment is registered in 2001, months after the social mobilizations o f September 2000 and in the midst o f a cycle Bolivia: political economy o f the crisis 81 o f recession. Third, at the regional level, the Andean countries show lower levels o f support for democracy, compared to the average levels in Latin America. The exceptions are Peru and Venezuela, which have support levels as high as the rest o f the countries in Latin America. Table 4.1 S u pport f o r dem ocracy 1996 1998 2002 2003 2004 Dem% Aut% Dem% Aut% Dem% Aut% Dem% Aut% Dem% Aut% Bolivia Ecuador Peru Colombia Venezuela Source: 64 52 63 60 62 17 18 13 20 19 55 57 63 55 60 22 19 12 17 25 56 49 57 39 75 20 18 16 1 1 12 50 46 52 46 67 22 34 20 14 15 45 46 45 46 74 19 30 20 12 11 Latinobarómetro 1996-2004 Table 4.2 compares indicators o f satisfaction with democracy in 1996, 1998, and 2001. There are two interesting aspects: first, Bolivia is one of the countries with the lowest level o f satisfaction in the Latin American region, and has an average level of satisfaction in comparison with the other Andean countries. Second, the level o f satisfaction drops significantly (18 percentage points) between 1998 and 2001. As well as a relatively weak level o f support for the democratic regime, Bolivia demonstrates dissatisfaction with the economic and social returns of democracy. Bolivia is going through a period o f serious questioning o f both the democratic m odel and the econom ic model that took root in 1985. Table 4.2 S a tisfa ctio n w ith dem ocracy 1996 % Bolivia Ecuador Peru Colombia Venezuela 1998 % 2001 % 2002 % 2003 % 2004 % 25 34 28 16 30 34 33 17 24 35 16 15 16 7 41 24 19 17 12 40 25 23 11 22 38 16 14 7 30 42 Question: ‘ re you ... “very satisfied” or “satisfied” with the democracy A in your country?’ Source: Latinobarómetro 1996-2004 Political crises, social conflict and economic development 82 Quality of political and bureaucratic institutions Th e m ost consistent indicators o f governm ent quality com e from the database o f in form ation com piled by K au fm ann, K ra a y and Z o id o Lobatón (1999 and 2002). Kaufm ann et al. analyse six types o f indicators o f government quality on the basis o f public opinion surveys and surveys o f experts: (i) voice and accountability; (ii) political stability and the absence o f social violence; (iii) government effectiveness; (iv) regulatory quality; (v ) the domination o f the state or the rule o f law, and (vi) control o f corruption. Kaufm ann et. al.’s indicators constitute a primary source o f comparable indicators between countries and times. Table 4.3 shows indicators o f government quality in Bolivia 2000-01. The column o f ‘percentile rank’ shows where Bolivia falls at the international level. The column ‘average regional percentage’ shows Bolivia’s place in relation to the other Latin American countries. Three important characteristics emerge from these columns. First, at an international level, Bolivia is distinguished by two types o f indicators, voice and accountability and regulatory quality, where it ranks am ong the top third o f the countries surveyed. Second, at a regional level, Bolivia is at the average level in terms o f government quality. Figure 4.1 compares the indicators o f quality between 1997-98 and 2000-01. There was a clear fall in all o f the indicators o f government quality, particularly political stability and control o f corruption, during the period 1997-2001. . ■I “ Voice and accountability □ ■ □ 1998 2000 2002 Political stability Government effectiveness Regulatory quality Rule o f law Control o f corruption 0 Source: Kaufmann et al. (2002) Figure 4.1 Q uality o f institutions 25 50 75 100 Table 4.3 Q uality o f institutions in Bolivia Indicator Year Voice and accountability Percentile rank (0-100) in % 2000 2002 Political stability 2000 2002 Government effectiveness 2000 2002 Regulatory quality 2000 2002 Rule o f law 2000 2002 Control o f corruption 2000 2002 Source: Governance Research Indicators, W orld Bank. 56.5 50 35.8 36.8 39.7 34.5 75.1 50.5 40 32.5 27.7 25.3 Estimation (-2.5 t o +2.5) 0.23 0.01 -0.42 -0.2 -0.35 -0.53 0.65 -0.11 -0.51 -0.6 -0.68 -0.82 Standard deviation Nu m ber o f 0.22 6 9 7 7 7 7 6 7 11 0.18 0.27 0.22 0.22 0.17 0.29 0.18 0.16 0.14 0.17 0.16 surveys 10 9 8 Average regional percentage 60.4 61.2 51.2 51.2 50.4 53.3 59.4 58.4 51.4 53.2 51.3 54.9 84 Political crises, social conflict and economic development Perception of corruption To measure the perception o f corruption, we w ill use the data collected by Transparency International between 1996 and 2001. Transparency structures its indices on the basis o f weighted indices o f public opinion surveys and surveys o f experts. In the case o f Bolivia, the source o f inform ation has changed over the course o f recent years, but today the indices are based on the 1999 and 2000 W orld C om petitiveness R ep o rts, the services o f the Economist Intelligence Unit, and the University o f Syracuse’s Political Risk Service. In general terms, Bolivia is among the countries with the strongest perceptions o f corruption in the country. It is consistently found in the bottom fifth o f the countries surveyed. Table 4.4 shows the evolution o f perceptions o f corruption from 1996 to 2001 in the Andean countries. There are tw o interesting patterns in the com parison o f the region’s numbers. First, throughout the time measured, B olivia continues to be one o f the countries with greatest perceptions o f corruption in the Andean region. The only comparable case in this period is Ecuador, which showed a sustained fall from the levels registered in 1996. Second, there is a slight oscillating tendency in the perceptions o f corruption: in the best year (1996) Bolivia reached 3.4 points, whereas in the worst year (2001), it scored a 2.0. Despite the data collected by Transparency, Bolivian public opinion seems to have grown less tolerant o f corruption in recent years. The convergence o f the political crisis and distrust in traditional political actors in 2002 made the issue o f corruption a pivotal one in the year’s presidential elections. Strikes, slowdowns, and social violence In looking at this variable, we w ill use some comparative data on strikes and slowdowns collected by the M inistry o f Labor for the period o f 1982­ 2000. Th e data registers episodes o f strikes or slowdowns on the basis o f information from newspapers with greater national circulation and is therefore susceptible to a publicity slant, especially in relation to the strikes and slowdowns that occurred in capital cities. Nevertheless, the data is a proxy for social discontent with the policies o f the state or with the political actors o f different time periods. Figure 4.2 organizes the episodes o f strikes and slowdowns according to the administration in which they occurred. There are two im portant tendencies in the registered information. First, the episodes with the most social protest occurred during the government o f Hernán Siles Suazo (1982-85) and that o f H u go Banzer Suárez (1997­ 2001). There were 959 registered episodes in the form er period, compared to 822 in the latter. Second, the administrations o f Paz Zam ora (1989-93) and Sánchez de Lozada (1993-97) showed only moderate levels o f protest, despite the fact that both governments instituted states o f emergency that suspended civil liberties. Table 4.4 Corruption perception index C ountry 1996 1997 1998 1999 2000 2001 2002 2003 (54 countries) (52 countries) (85 countries) (99 countries) (90 countries) (91 countries) (102 countries) (133 countries) Bolivia Index Ranking Ecuador Index Ranking Peru Index Ranking Colombia Index Ranking Venezuela Index Ranking Source: 3.40 36 2.05 51 2.8 69 2.5 81 2.7 71 2.0 85 2.2 89 2.3 106 3.19 39 (s-d.) (s-d.) 2.3 77 2.4 82 2.6 74 2.3 79 2.2 91 2.2 114 (s-d.) (s-d.) (s-d.) (s-d.) 4.5 41 4.5 40 4.4 41 4.1 44 4.0 48 3.7 62 2.73 42 2.23 50 2.2 79 2.9 72 3.2 60 3.8 50 3.6 57 3.7 59 2.50 46 2.77 44 2.3 78 2.6 78 2.7 73 2.8 69 2.5 84 2.4 104 Transparency International, 1996-2003. Political crises, social conflict and economic development 86 2000 1800 1600 1400 1200 1000 800 600 400 200 0 -, - 1825 1364 1180 968 - 631 355 c d c o S sS o S 3 3 Source: 508 481 CO u c a e® o s m 5 á Q JZL 3h •3 5 — Q U C E R E S (2004). Figure 4.2 Slow dow ns a n d strike s 1 9 8 2-2000 The high degree o f social polarization registered during the administration o f Hugo Banzer Suárez is due as much to transitional factors as to structural ones: W ithin the structural factors there emerges a change in the pattern o f social and political intermediation. The progressive fragmentation o f corporate negotiations between workers’ unions (C O B ), farm ers’ unions (C S U T C B ) and the government in the 1980s and the 1990s undermined any capacity to govern during times o f crisis. There was a simultaneous rise o f multiple sources o f social discontent (about conflicts over water, land, transportation, urban and rural teaching, regional power, and problems related to universities). The second structural factor is the wearing away o f the legitimacy o f the institutions and democratic actors - such as traditional parties - that, after 15 years o f political rotation, existed with a growing loss o f credibility. W ithin the transitional factors, a combination o f adverse macroeconomic shocks (natural disasters, reduced coca-cocaine, the struggle against illegal products) stand out, as does the general incapacity o f the government to anticipate, prevent or resolve foreseeable social conflicts. Determinants of Governance W e w ill analyse four o f the key determinants o f the political crisis and recovery: (i) the structural weakness o f the Bolivian state, reflected in its Bolivia: political economy o f the crisis 87 sporadic bureaucratic/territorial presence and weak authority in the exercise o f rule o f law: (ii) the growing political fragmentation observed over the previous decade, that accentuated the fragile nature o f the political coalitions in the country; (iii) the growing ethnic divisions, exemplified in the rise o f nationalist/ethnic voices within social movements, and (iv ) an ever growing increase in the absolute number o f p o or people and homes, as well as an increase in levels o f inequality as registered in the surveys o f homes. In their indication o f the profound weakness in the Bolivian democracy in recent years, these determinants are fundamentally reflecting a crisis o f governance. Th e weakness o f the principle mechanism o f political and social governance has immediate consequences on public opinion about the executive’s capacity to design and implement social and econom ic reform. M any o f the determinants o f governance analysed in this subsection show that in the medium and long runs there are serious restrictions on the governm ent’s ability to create areas o f governance in Bolivia. A s ethnic divisions and social and econom ic inequality increase, so, too, does the propensity towards political fragm entation in the party system. This propensity itself causes difficulties in the construction o f governable coalitions both inside and outside the form al political system. State weakness Guillermo O ’Donnell (1993 and 1996) notes three types o f weaknesses in the configuration o f Latin Am erican states undergoing democratic transitions, including B olivia. Th e first type o f weakness comes from the irregular bureaucratic extension o f the state in certain geographic areas o f the country - rural and p eriu rb a n a areas - and fo r certain groups o f the population - indigenous and p o or people. This means that the bureaucratic and legal workings o f the state are based neither in institutions nor in the political culture o f the society. Second, the irregular extension o f the state is made up o f a particular set o f institutions - clientilism, nepotism, local boss-rule (caciquism o) - that produce a dynamic hybrid o f political intermediation between ‘form al’ and ‘inform al’ actors in civil and political society. Third, the irregular extension has the later effect o f weakening the construction o f a shared political culture - the ideological dimension and the national cohesion o f the state. This weak legal bureaucracy and political culture manifests itself in some o f the perverse patterns o f political development that were explained in the first part o f the governance analysis. Th e continuous pendulum o f political negotiations between form al and in form al actors - coalition politics and street politics - generates high transaction costs fo r the design and im plem entation o f public policy reform . Th e additional effort o f sustaining viable coalitions inside o f a form al system - made more difficult by the high level o f political fragmentation - or even o f sustaining viable Political crises, social conflict and economic development 88 coalitions inside o f an inform al system o f intermediation - made more difficult by the strong social and ethnic divisions - describes a centripetal dynamic that creates incentives to continuously negotiate rather than work to forge a lasting consensus. The structural weakness o f the Bolivian state, therefore, plays a critical role in transitional policies, particularly during crisis periods. Political fragmentation The Latin Am erican literature on the politics o f representation underlines the presence o f unstructured (in ch o a te), fragm en ted, and vo la tile systems that hinder the construction o f stable systems o f governm ent (see M ainw aring and Shugart 1997). Th e quintessential example o f the paradigm o f unstructured, fragmented, and volatile systems is B olivia that in the last 20 years has shown grow ing levels o f multipartisanship and political disintegration. In the last five elections, fo r example, more than 20 different political parties participated, and yet the maximum level o f popular support was never more than 35 per cent. Figure 4.3 has the Volatility1 N ote: (E N P V is the Laakso-Taagepera Index o f the Effective N um ber o f Parties, based on votes). Source: Coppedge (1998). F igure 4.3 P olitical fra g m e n ta tio n : B olivia a n d L a tin A m erica , 1979-97, the d ynam ic diversity o f L a tin A m erica n p a r ty system s, 95% confidence intervals Bolivia: political economy o f the crisis 89 effective number o f parties on the vertical axis and the volatility o f the popular vote o f these parties during the previous 19 years (1979-97) on the horizontal axis. B olivia’s pattern forms an ellipse with a wide base at an average level o f multipartisanship for the region. It also shows high levels o f fragmentation and political volatility in recent years In the 2002 elections, 19 political parties were registered and 13 more were trying to be recognized by the N ational Election Court. Although public opinion has baptized many o f these new political movements ‘antisystem’ , the inform ation suggests a systemic process o f political fragm entation within the system. One o f the central ingredients that contribute to the disintegration o f the system is the existence o f hereditary or personal parties with a particular platform (G am arra 1997). In a system that does not act according to ideological directives, hereditary parties function within coalition politics through a strict discipline that is maintained by the party leader/party boss. In the previous five elections, only one o f the traditional parties had experienced a change in leadership (the M N R ). Two others experienced the death o f their founding leader (the U C S and the C O N D E P A ) that caused the gradual splintering o f both parties. Ethnic fragmentation One important cause o f the political fragmentation in Bolivia lies in the social and ethnic divisions o f civil society. Bolivia is, in this respect, one o f the countries with the most ethnic fragmentation o f the region. Table 4.5 shows the proportion o f the population that speaks a native language, according to the 1992 N ation al Census o f Population and Housing. O f the total population o f Bolivia, 60 per cent speak Quechua, A ym ara or Guaraní, among other indigenous languages. A n interesting statistic from the housing survey M E C O V I suggests that the proportion o f individuals that see themselves as indigenous has grown in recent years and is higher today than the proportion that speak a native language in their home. According to the 1999 survey, 32 per cent o f the population speak a native language in their home, but 57 per cent see themselves as belonging to an indigenous group. A n im p ortan t consequence o f the grow in g significance o f ethnic fragmentation is the politicization o f ethnicity within social movements in recent years. ‘A ym ara nationalism’ , that was led by the executive secretary o f the U n io n C on fed era tion o f B olivian Farm W orkers (C S U T C B ), emerged from the crises in A p ril and September o f 2000 that ended in long roadblocks, violent confrontations between farmers and the army, and the restoration o f a state o f emergency. Aym ara nationalism distinguishes itself from other indigenous movements that reclaim their ethnic rights, in that it maintains an ambivalent position o f inclusion/exclusion o f the Political crises, social conflict and economic development 90 political system and the Bolivian state. The 2002 presidential elections were anticipated to both incorporate one or more candidates from an indigenous party and also reap the condemnation o f the traditional political parties from movements and unions o f farmers and indigenous people outside o f the form al system. Table 4.5 E th n ic fra g m e n ta tio n M ost-spoken language ( 6 years old) 1992 % 2001 % Spanish 4 594 110 58.3 Aym ara 1 237658 Quechua Guaraní 1 805843 15.7 22.9 49 618 0.6 57 218 0.6 29 582 0.4 43 953 161 056 2.0 241417 0.4 2.4 Other native languages Foreign language 6097122 60.8 1462 286 14.6 2124040 21.2 Source: N ation al Institute o f Statistics, N a tion al Census o f Population and Housing, 1992-2001. Poverty and inequality A determ ining fa cto r in the actual disenchantment w ith political and econom ic institutions is the increase in the concentration o f assets and income. G ray M o lin a ’s recent study (2001) estimates an increase in the absolute number o f impoverished people - 30 000 people between 1990 and 2000 - despite both the 4 per cent growth throughout the decade and a decline o f about approximately 7 percentage points in the relative incidence o f poverty. The factors that contribute to the paradoxical result are as much about the increase in the concentration o f income as they are about the high rate o f population growth, especially in p o o r homes. Between 1990 and 1999, the rate o f income concentration, measured by the gini coefficient, increased from 0.42 in 1990 to 0.51 in 1999 (W orld Bank 2002). In the last three years at the time o f writing, it is estimated that there w ill be a temporary increase in the incidence o f poverty as an effect o f the economic recession that affects the particular way the informal urban and agrarian sectors, that make up the m ajority o f the people in poverty in Bolivia. The 2000-01 recession also provided evidence o f the fragile nature o f the productive business base. The actual structure o f the productive base accentuates this fragility and creates some problems in the medium and long­ term for the poverty reduction agenda. The m ajority o f G D P is produced by large businesses and the m ajority o f employment is created by micro­ businesses. Small and medium-sized companies are almost non-existent. Bolivia: political economy o f the crisis 91 W hile micro and big businesses contribute together more than 90 per cent o f G D P, small and medium-sized businesses - the center o f enterprise distribution - only contribute a little more than 6 per cent o f G D P. The microbusinesses contribute 25 per cent o f G D P but provide employment to m ore than 83 per cent o f the econom ically active population (P E A ). From the opposite point o f view, big business contributes 65 per cent o f G D P, but employs only 9 per cent o f the P E A . In the pyramid, the unequal distribution o f econom ic resources becomes patently obvious. Table 4.6 shows the distribution o f m oderate and extreme poverty, arranged by urban and rural areas and by prim ary language spoken. Three characteristics are particularly notable. First, there is a significant Table 4 .6 P overty according to eth n icity a n d urban/rural geography Area/ethnicity Urban area Quechua Aym ara Spanish Guaraní and other native language Foreigner N o n e o f the above U rban population Rural area Quechua Aym ara Spanish Guaraní and other native language Foreigner N o n e o f the above Rural population Total Quechua Aym ara Spanish Guaraní and other native language Foreigner N o n e o f the above Population Source: Poverty indices Extreme poverty indices 55.87 61.45 48.86 92.90 11.44 28.04 64.90 51.50 36.08 21.08 69.05 3.02 31.05 23.63 87.50 89.08 65.84 78.85 50.00 86.62 81.58 68.67 70.43 35.20 49.12 80.19 78.29 51.80 83.84 13.32 74.67 62.64 59.28 57.02 23.53 56.19 2.87 46.43 36.76 National Institute o f Statistics, M E C O V I 1999 0.00 65.23 59.06 92 Political crises, social conflict and economic development gap between incidences o f rural and urban poverty. Although today there are more people living in urban poverty in absolute numbers, there is still a gap o f more than 30 percentage points in the incidence o f poverty between rural and urban areas. Second, the significant gap between people who speak native languages and those that speak Spanish is as prevalent in urban areas as it is in rural areas. Between 78 per cent and 80 per cent o f the population that speaks Aym ara and Quechua live in poverty, compared to 51 per cent o f the people that speak Spanish. Third, it is clear that the gap between language and geographic location is most severe for indigenous people living in rural areas. 4.3 ECONOMIC BLOCK The five periods o f government from 1982, when the democratic period began, had three basic economic policy objectives: Between 1982 and 1993, controlling inflation dominated the public policy scene. Three governments were determined to implement and consolidate monetary-financial stability (Siles Suazo, Paz Estenssoro, and Paz Zam ora). A fte r 1993, the recovery and sustainability o f econom ic growth became an axis o f econom ic policy, although near the end o f the 1990s the struggle against poverty also became an important point on the agenda. Sánchez de Lozada, Banzer and Quiroga all tried to push through these policies. It is im portant to clarify at this point that this does not mean that other issues were not relevant during the indicated periods, but the aforementioned objectives were without question the goals that dominated the public agenda. The Hyperinflation Crisis Throughout almost all o f the 1980s, the Bolivian econom y went through intense fiscal and monetary imbalances whose more evident manifestations were the process o f hyperinflation, the drastic reduction in growth, and the powerful deterioration in the terms o f trade. A t the beginning o f the 1980s, it was possible to identify the first symptoms o f exhaustion o f the econom ic growth model, as could be seen in the gradual contraction o f the global supply o f goods and services and the imbalance o f the principle macroprices. The type o f exchange rate had stayed fixed and overvalued and the public tariffs and prices were artificially low. W ages had been systematically controlled by the military regime o f General Banzer. During almost the entire decade o f the 1970s, the union movement had been unable to recover the loss in wages. The struggle to distribute income and wealth had been systematically repressed. Bolivia: political economy o f the crisis 93 A t the beginning o f 1982, the Bolivian peso devalued by 43 per cent and a double exchange rate was introduced. In a context o f high levels o f political uncertainty, the actions o f economic agents diminished, generating defensive and speculative attitudes in the establishment o f prices and returns, and this process rapidly produced an inflationary mentality in the Bolivian econom y that drove the econom ic community to inform ally adopt diverse mechanisms o f indexing to protect real income. The inflation initially passed the index o f the price o f gasoline and finally even the exchange rate o f the parallel market. W hen Siles Suazo assumed the presidency in October o f 1982, he found himself faced with an econom y in a process o f accelerated inflation and serious fiscal imbalances, in a context o f exhaustion o f the econom ic growth m odel.2 The principle challenges o f the political econom y o f the incoming government were price stabilization and the maintenance o f the democracy, but in the meantime the six programs that had been implemented to further these goals were ineffective and actually accelerated inflation. During the Siles Suazo administration, the salary-price run concentrated around decreasing public sector resources; the non-cooperative game o f restructuring salaries and establishment o f speculation with w ider margins o f profit was validated by an accommodating monetary policy and a wage policy that attempted to improve the wages o f workers. Both types o f policy contributed to a rapid inform al indexing o f the Bolivian economy. Siles Suazo’s own political structure prevented him from doing anything but moderating the distribution conflict by expanding the monetary base; the alternative was to permit a greater contraction o f GDP. The stabilization packages were basically made up o f relatively slight price adjustments, including the exchange rate, the prices o f fuel, public tariffs, and wage compensations, and were accompanied by a freezing o f partial or general prices. The strategies that were adopted had internal contradictions that made them fail, because they repressed an inflation (trying to freeze it) that they were themselves accelerating through the relative price shocks m entioned above and through the creation o f higher expectations o f inflation. The relative prices shocks and the intense distribution struggle, amplified both by growing mechanisms o f indexing and a strong monetary expansion drove the Bolivian econom y into hyperinflation. The New Political Economy (N PE) Th e stabilization program im plem ented by the V ic to r Paz Estenssoro administration, also known as the N P E , was based on three fundamentals: an anti-inflationary shock, internal and external economic liberalization, and the restructuring and downsizing o f the public sector. The most important 94 Political crises, social conflict and economic development anti-inflationary measure was the stabilization o f the exchange rate, which was the principle index (indexador) o f the inform al inflationary process, supported by intense fiscal policies and contractive m onetary policies. The stabilization program consistently combined contractive fiscal and m onetary policy, accompanied by a strong devaluation and, later, by a stabilization o f the exchange rate. It also simultaneously prom oted the liberalization o f internal and external markets. Th e program strongly reflected the regime’s message o f a change in econom ic policy and relied on the administration’s credibility. A m o n g the most important fiscal measures was a strict control o f public spending. Wages in the public sector were frozen and a process o f dismissals was initiated in a m ajority o f the state firms. The most extreme action taken was the closing o f the M in ing Corporation o f Bolivia (C O M IB O L ), an administrator o f various state mines, which implied the dismissal o f nearly 21 000 mineworkers. In terms o f spending, the government eliminated the Central Bank’s internal credit and imposed a rigid control o f the bank’s operations by the General Treasury o f the N ation. To recover some revenue, the government introduced significant changes in the prices and tariffs o f public sector goods and services. Th e most notable increase was in the price o f gasoline, which was readjusted nearly 800 per cent. A new system was also created to transfer the Y P F B to the T G N (Tesoro General de la N ación - Treasury), equivalent to 65 per cent o f its revenues from foreign sales. Th e fiscal shock policy was successful because it reduced the public deficit in relation to G D P to single digit levels (2.7 per cent), after previous years when it had been around 20 per cent. The stabilization plan allowed monetary policy to recover its independence from fiscal management. The liberalization o f the interest rate and the acceptance that the government could make contracts and operations in foreign currencies were key in the stabilization o f the exchange rate. Nevertheless, it is clear that the stability achieved was the result not only o f the stabilization program, but also, and more importantly, o f the dynamic itself o f the hyperinflationary process which, on provoking the dollarization o f the economy, gave rise to a stable new relative price structure in a foreign currency. A s high inflation became hyperinflation, the prices o f goods and services stabilized, creating the illusion o f an abrupt end to B o livia ’s inflation. Th e efficiency o f the orthodox shock also had other benefits in the inflationary process (Chávez 1989). Structural Reforms and Stabilization A lo n g with the stabilization measures, the Paz Estenssoro administration also initiated a series o f structural reforms destined primarily to contribute Bolivia: political economy o f the crisis 95 to the control o f inflation and to create better market conditions. The most im portant o f these reforms include tributary reform, com m ercial and financial liberalization, and changes in the structure o f the state. First generation reforms T ax reform The hyperinflationary process that passed through the Bolivian economy in the middle o f the period was the result o f an intense distributive struggle that degenerated into a fiscal crisis. Excessive spending based on the emission o f currency without the support o f real resources, the drastic reduction o f revenue due to the collapse o f the tax system, and the negative effect o f inflation on tax collection,3 all contributed to the collapse o f the Bolivian public sector. One o f the pillars o f the stabilization program in August o f 1985 was the fiscal adjustment that was based on the drastic rationalization o f public spending and the rapid increase in revenue. In 1986, to consolidate stability and to balance the public accounts, the N ational Congress passed Law 843 o f Tax R eform . The law created a tax structure o f eight primarily indirect taxes on consumption and some on the wealth o f businesses and people.4 The tax reform also established a system o f coparticipation in tax collection that established that 75 per cent o f the revenue would go to the Central Government, that 20 per cent w ould go to municipalities, and that 15 per cent would go to public universities. U ntil the end o f the 1980s, the reform did not have a significant effect. Government revenue continued to depend on the sale o f goods and services o f state-owned businesses, especially in the oil sector. The spending fram ework remained relatively stable, thanks to better access to external financing. In the 1990s, tax reform began to finally bear fruit. Tax revenue increased from 7.2 per cent o f G D P in 1990 to 14.5 per cent o f G D P in 1998. On the spending side, the governm ent im plem ented adm inistrative changes that helped improve the execution o f public investment, fo r which they created a budget system organized by programs. The results o f these institutional reforms were not encouraging at the time o f writing. C om m ercial liberalization The N P E eliminated the dispersion o f tariffs that varied between 0 per cent and 150 per cent, and established single uniform ta riff o f 20 per cent, to be applied to all imports. T h ey also abolished all the institutional and administrative distortions that hindered foreign consumption. Th ere were no clear guidelines on the issue o f exports and, in the beginning, the N P E opted for policies that would guarantee a certain tax neutrality. Th e diverse mechanisms o f compensation that were applied5 Political crises, social conflict and economic development 96 were harmed by the lack o f liquidity o f the T G N and by administrative difficulties. In 1987, the governm ent also established price and ta riff subsidies fo r hydrocarbons, railroad transportation, electric energy, and air transportation with which it hoped to increase productivity o f the export sectors. These instruments were eliminated as they began to put the fiscal balance at risk. A n oth er reform that sought to prom ote exports began with the creation o f an institution o f export support, first in the form o f the N ational Institute o f Exports (IN P E X ) and then later with the Center o f Bolivian Prom otion (C E P R O B O L ). F inancial liberalization This began in 1985 with the N P E and, in its first stage, tried to eliminate the repression o f the financial sector and promote better financial intermediation. To achieve these objectives, the government freed interest rates, opened the capital account o f the balance o f payments, authorized the opening o f the accounts to foreign currencies, and, last but not least, reduced the use o f internal credit fo r the financing o f the public sector. A s part o f the financial reform, the public commercial bank was closed.6 The financial system also went through profound legal and institutional transform ations that were aimed at developing and strengthening the supervision and financial regulation and included the creation o f the Bank Superintendent and then later the independence o f the Central Bank. The achievements o f the stabilization programs were as important as the first generation structural reforms. Inflation was controlled, the public deficit was reduced, and the econom y started to slowly recover, as is observed in Table 4.7. Table 4 .7 M acroeconom ic indicators 19 8 5 -9 0 Indicator Inflation rate (% ) G D P growth (% ) Public balance N e t international reserves (millions $) Lending rates $ (% ) Saving rates US$ (% ) D ebt (% P IB ) Terms o f trade Source: 1985 1986 1987 1988 1989 1990 8170.5 66.0 10.7 21.5 16.6 18.8 -1.7 -9.8 -2.6 -2.7 2.5 -7.7 2.9 -6.3 3.8 -5.5 4.6 -4.4 136.2 21.6 246.6 22.6 168.4 160.9 25.7 18.6 24.3 132.3 29.6 10.8 106.1 174.4 14 96.0 17.8 99.3 16.7 88.5 15.7 73.9 77.5 149.0 132.0 123.7 116.7 100.0 U D A P E and National Institute o f Statistics. 23.0 14.7 Bolivia: political economy o f the crisis 97 The Search for Growth Second generation reforms In the 1990s, the government tried to consolidate macroeconomic stability and give a new push towards econom ic growth through reforms that tried to reshape the role o f the state, restructure and open the public services markets, and create the legal and institutional conditions to attract private investment. A m o n g the most important measures o f the second generation reforms are capitalization, pension reform , education reform , popular participation, administrative decentralization. A m o n g the m ost im portant reform s to create better conditions fo r investment and the prom otion o f development are: the Law o f Investment, passed in September o f 1990, that granted a series o f guarantees to foreign investment and strengthened definitions in reference to a free market, the convertibility o f currency, and the free circulation o f merchandise, services, and capital. C a p ita liza tio n a n d p en sio n reform One o f the objectives o f the second generation structural reforms was to substantially increase the growth rate o f the country, based on private investment and efficient state actions. To reach this goal after having consolidated monetary-financial stability, the administration implemented changes in the diverse markets o f public services, created a new regulatory fram ework, and capitalization o f the principle public businesses in electricity, telecommunications, transportation, railway, and hydrocarbon sectors. Capitalization emerged as an alternative to privatization. The objective o f capitalization was to maximize the efficiency and production o f public businesses. Th e strategy o f capitalization allowed the transfer o f 50 per cent o f the ownership o f the state businesses to strategic partners (private investors), in exchange for which the partners were committed to injecting fresh capital into the business. The strategic partners also got control over 100 per cent o f the administration o f the newly capitalized businesses. The rest o f the 50 per cent o f the ownership was distributed among Bolivian citizens older than 21 years in Decem ber o f 1995. The Bolivian citizens’ assets were managed by pension funds through a trust account. The capitalization process o f the m ajor state-owned businesses,7 which also included a restructuring o f the industries and the deregulation o f prices,8 was one o f the most controversial reforms. A m o n g the issues that are still debated from the reforms are its fiscal impact (especially in the capitalization o f the Y P F B ), the challenges o f the new corporate heads o f the businesses, alternative uses o f the financial revenue going to Bolivian citizens, and the destiny o f the pension system. 98 Political crises, social conflict and economic development Before its reform in 1997, the pension system in Bolivia was based on a simple distribution system (the P A Y G O system). The system broke down as a consequence o f the contraction o f the public production apparatus. In 1993, the co tiza n te relation fo r retired people went from three to one. The system was also badly administered and tolerated rampant corruption. The pension reform sought to resolve the financial crisis and the deficit o f the pay-as-you-go system; it also tried both to increase the coverage o f a pension system that only included 10 per cent o f the economically active population and to stimulate internal savings. W ith part o f the assets that belonged to Bolivian citizens from the capitalized businesses, the government created individual pension accounts fo r citizens and established resources to pay the B O N S O L (see below). Th e reform had an im portan t fiscal im pact. Th e governm ent to o k charge o f the pension payments to retired people and compensations for the eventual retirement o f still-active workers who had contributed in the past. Part o f the financing o f this reforms was achieved with an increase in public debt. B O N S O L , B O L I V ID A , a n d p o p u la r a ctio n s Th e capitalizations were connected with the pension reform that transferred the non-contributive fund with the assets o f Bolivians from the capitalizations (collective capitalization fund) and another fund constructed by contributions to long-term social security (individual capitalization fund) to private administration. W ith the profits from the collective capitalization fund, the government created the Solidarity Bond (B O N S O L ), an annual transfer o f m oney to be distributed to all Bolivians that had reached 21 years o f age by 31 Decem ber 1995, beginning when they turn 65 and continuing fo r the rest o f their life. Th e Paz Z am ora administration changed the benefit mechanism by m aking the recipient’s age younger (50 years old ) and naming it B O L IV ID A . Popular A ction (the name o f the property from the capitalized companies) was distributed to all o f the remaining beneficiaries between 21 and 50 years old. T he sy stem s o f regulation The sector system o f regulation (S IR S E ) was created with the Law o f the Republic to regulate, control, and supervise the activities o f the telecommunications, electricity, hydrocarbons, water, and transportation sectors. The laws o f the S IR S E and the laws o f the sectors9 had new economic and institutional rules that sought to prom ote competition and to correct the failings o f the market arising from natural monopolies. Specifically the legal frameworks have different incentive systems such as: the fixing and approval o f tariffs, the mechanisms for granting concessions and licenses, Bolivia: political economy o f the crisis 99 the prom otion o f com petition, the supervision o f services, attention to complaints and controversy, the proposition o f norms, regulations, and other techno-administrative rules. A s a result o f the process o f deregulating the public service markets, and the capitalization and privatization o f state-owned businesses, the industrial structures o f the hydrocarbon, telecommunications, electricity, transportation, and water sectors have all been m odified in Bolivia. Table 4.8 presents the m ajor characteristics o f the post-reform markets. The S IR E S E is a regulatory agency with very particular characteristics in part because it is a multisector entity that simultaneously deals with the industries fro m hydrocarbons, telecom m u nications, electricity, transportation, and water sectors, and also in part because it is a system that regulates each industry in a specific way through sector superintendents (unisector). The hybrid character o f the S IR E S E allows it a lot o f flexibility and offers it the chance to create conditions o f regulatory governance through mechanisms o f agreement. The S IR E S E in an agency with multiple objectives. Through the sector superintendents, it must carry out tasks o f regulation, p rom otion o f competition, supervision o f services, and o f the creation o f new rules. The general superintendent coordinates, fiscalizes, and meets the appeals from the actors in the regulation process. From a more administrative point o f view, the general superintendent performs the functions o f appeal, fiscalization, and coordination of, in this case, the superintendent o f electricity. In terms o f the environment and natural resources, the governm ent created a system o f regulation o f renewable natural resources w ith the objectives o f regulating and supervising the sustainable use o f non-renewable resources. Another important change came with the establishment o f a legal fram ework (the I N R A L a w ) to guarantee the ownership and use o f the land. Some o f these changes in Bolivian agriculture are controversial and have caused intense social conflict. This second stage o f reform was also trying to m odernize the public administration, but produced few significant results. A t various points the composition o f the executive branch changed with a constant putting in and taking out o f various ministries. There were also various failed attempts at creating a public bureaucracy through a program o f civil service. Only in 2001 was the Statute o f Civil Service created to institutionalize a career path in the public sector. A t the beginning o f the 1990s, mechanisms for the administration and control o f public resources were created through the Law o f Systems o f Adm inistration, Fiscalization, and Governm ent Control (the S A F C O Law). Table 4.8 Structure o f the markets, post-reform Sector M o n o p o ly services Water Drinkable water Sanitary sewage system Distribution Transmission Electricity Elydrocarbons Airports Railways Notes: * In the Bolivian case, given rights are nonexclusive. ** Until 2001, this activity was done by a m onopoly established by law. * * * In the sectors where means o f land transport exists. Source: General Superintendent (1999). Potentially competitive services Production o f fresh water Generation Integration o f isolated systems Comm ercialization Transport through ducts Natural gas distribution through mains Telecommunications Tocal telephone Transportation Com petitive services R adio Television T o n g distance telephone Cellular phones A ir navigation Railroads * * * Transmission* Non-regulated consumers (large consumers) Transportation through ducts* Bolivia: political economy o f the crisis 101 E ducation reform This reform focused on the elementary school teaching and acknowledged the multicultural and multiethnic character o f Bolivia, which means that cultural and regional diversity was taken into account in new educational curriculums. The reform also incorporated qualitative changes, like a new curriculum design, bilingual education, better teachers, and also improved delivery o f equipment, school supplies, and o f a new infrastructure. The financing o f fiscal education in all stages is handled by the General Treasury o f the N a tio n and by local governments. This was one o f the reforms that exerted the most pressure on public resources. The education reform creates a strong incentive for community participation, especially fo r fathers, in the process o f educating children. Despite the im portant advances made by this reform , two challenges are still loom ing ahead. First: better operation o f the decentralization and participation is needed, especially in the poorest communities. Second: absenteeism must be reduced both in primary and secondary education. This would represent action in response to the demand fo r basic education. P opular p articipation a n d adm inistrative decentralization Both measures ended the centralized state. The first outlined the transfer o f the physical infrastructure (health, education, local roads, and micro-irrigation) to local governments. The national government increased local government resources so that they would be able to carry out their new functions, distributing 20 per cent o f the internal tax and customs collection under the principle o f per capita distribution. The administrative decentralization law transferred the achievements o f national works o f infrastructure (construction and maintenance o f roads, rural electrification, infrastructure o f irrigation, and support o f production) to the regions. The public resources that finance regional action come in large measure from the departmental exemptions in the production o f minerals and hydrocarbons. Popular participation changed the direction o f public investment in an important way. A fter 1996, public investment reached over 50 per cent when until recently it had barely reached 20 per cent. The Achievements of the Reforms The results o f both the first and second generation reforms show important advances on the issues o f monetary-financial balance, important but still incomplete institutional changes, and a better functioning o f some markets. A fte r 1990, econom ic growth was high, with an annual average o f 4.5 per cent, single digit inflation, and a substantial improvement in the financial indicators, with the exception o f deteriorating terms o f trade, as can be seen in Table 4.9. Table 4.9 M acroeconomic indicators 1991-2001 1991 Inflation rate (% ) G D P growth (% ) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 14.52 10.46 1.65 -4.4 9.31 4.27 -6.1 8.52 12.57 4.68 -1.8 7.95 4.36 -1.9 6.73 4.95 -3.3 4.39 5.03 3.13 0.43 -3.5 3.41 0.92 4.67 -3.0 2.28 -3.7 1.51 -6.9 2.45 2.75 -9 2.45 -8.1 5.27 -4.2 102 Public balance (% P IB ) N e t international reserves (U S$ millions) 200.3 258 370.9 Lending rate U S$ (% ) 21.5 19.1 18.5 11.4 11.2 Saving rate US$ (% ) 12.9 D ebt (% P IB ) 68 67.1 69.9 87.14 76.34 67.26 Terms o f trade Sources: U D A P E and National Institute o f Statistics. -4 .1 3.94 502.4 650.2 950.9 1066 1063.7 1113.6 1084.8 1077.4 853.8 975.8 16.3 17.0 17.6 16.3 15.6 15.8 18.0 13.7 8.2 9.9 10.5 9.9 8.0 6.5 7.8 2.3 71.4 62.9 56.6 53.2 64 75 54.8 55.3 55.1 55.2 68.86 69.01 67.51 67.47 63.73 60.62 62.49 59.87 60.1 63.89 - - Bolivia: political economy o f the crisis 103 The structural reforms, however, did not have the same positive impact in the social sphere that they had in the econom ic sphere. W hile there were some important advances, the indices o f poverty and social exclusion are still very high and, in large measure, have been the origin o f political and social instability in recent years. Table 4.10 presents a summary o f the social situation in Bolivia. Table 4.10 Bolivia: selected social indicators Position index o f human development Poverty index 63.2% Urban Rural 51.5% 81.6% Extreme poverty 36.5% A du lt illiteracy Life expectancy at birth Infant m ortality 5 years, per 1000 Health Physicians per 10 000 population Health centers per 10 000 population Distribution cities’ revenue 104 15% 62.92 67.0% 3614 3 Perecentage o f revenue received By richest 20% o f households By poorest 20% o f households Gini coefficient Source: 54% 4% 0.51 I M F Bolivia Statistical Annex, 2001. Th e econom ic m odel effective in B olivia since 1985 has done little to advance the understanding and resolving o f the microeconomic restrictions on issues like produ ctivity in rural areas, technological developm ent, competition in exports, quality and use o f manual labor, the lack o f road infrastructure, integral institutional development, and the development o f the small and micro business, to mention a few o f the most relevant themes. M an y o f these restrictions significantly compromise economic growth and, even worse, deepen the social exclusion that lies at the heart o f a vicious cycle o f poverty and low growth. Historically, as Birdsall et al. (1998) indicates, in Bolivia, like the rest o f Latin Am erica, unequal access fo r the p o or to assets that generate revenue has created a political and econom ic context that limits even further the opportunities o f the poor. W ith ou t education and w ithout any kind o f productive activity, the p o or are condemned to low-productivity jobs and 104 Political crises, social conflict and economic development low income, and this excludes them from econom ic systems, reduces their political participation, seriously restricts their ability to choose, and limits their use o f freedom. This social exclusion in turn limits access to education, productive jobs, and basic liberties, and ultimately the employment o f their civil rights. A ccordin g to the figures from the Interamerican D evelopm ent Bank, if the per capita G D P (an indicator o f incom e) grows at the same rate as it did in the1990s, 1.43 per cent (the equivalent o f a 4.5 per cent growth in production), it w ould take B olivia 49 years to double its wealth and 139 years to reach the per capita incom e o f Argentina. W ith its current production profile, levels o f social exclusion and poverty, stock in human capital, and productivity, Bolivia is condemned, in the best-case scenario, to a growth o f around 4 per cent - not high enough to lift nearly 37 per cent o f the population out o f poverty. Challenges of Growth The central question o f econom ic policy in recent years is why, if it has implemented structural reforms, has adequate macroeconomic management, and has a very open econom y compared to the rest o f the region, Bolivia is not growing enough to be able to attack its problems o f poverty. W e will go through four explanations o f the insufficient growth in Bolivia: (1) The shortage o f savings and investment; (2) a production apparatus that is too dependent on the export o f natural resources and that is therefore very vulnerable to external shocks; (3) a complicated geography, and, last but not least; (4) a very fragile institutionalization that is rife with problems o f corruption. Savings and investment The stabilization and structural reform period have helped both savings and investment recover, although their average rates are still low compared to other countries in the region. Between 1986 and 1990 the internal savings rate represented 8.6 per cent o f G D P. In the 1990s, it rose to 11.1 per cent, as can be seen in Table 4.11. It is also w orth noting that the com position o f savings changed; the private sector has acquired m ore im portan ce as public savings have recovered. External savings have also increased in large measure because o f the capitalization process o f the state-owned businesses and have been intensely concentrated in the hydrocarbon sector. The investment rate also increased, passing 10 per cent o f G D P between 1981 and 1985 to reach close to 17 per cent in the 1990s (see Table 4.11). M acroeconom ic stability, Bolivia: political economy o f the crisis 105 more stable legal and econom ic rules, and a more competitive tax system, all largely explain the econom ic recovery. Table 4.11 Savings a n d investm ent in B olivia averaged by tim e p e rio d (p er cent o f G D P ) Factor 1981-85 1986-90 1991-2000 Savings 10.4 12.0 16.6 16.1 -10.8 6.7 1.9 6.3 4.8 5.1 10.4 3.4 12.0 5.5 16.6 5.4 4.8 8.3 5.0 -1.4 7.2 2.2 8.4 4.5 Private Public Foreign Investment Private Public G D P growth rate Sources: U D A P E and Vice-M inistry o f Investment. Nevertheless, it is worth mentioning that the lack o f dynamism in investment is explained by the problems o f governance described earlier in this chapter. Problem s o f the reform s’ incom plete credibility and social and political uncertainty have w orked to decelerate private investment. In summary, while the structural reforms have allowed levels o f savings and investment to improve, they are clearly insufficient. Both the savings rate and the investment rate are still low compared to other countries in Latin America. Foreign resources and vulnerability The growth rate o f the economy once it had recovered was being maintained until 1998, but then the crisis that began in 1999 showed the vulnerability o f the Bolivian economy to external shocks. This quality originates in a structure o f production in the Bolivian economy that continued to be concentrated in agriculture, natural resources (mining and oil), manufacturing (industrial agriculture, textiles, and oil refineries), and commerce. The production o f coca-cocaine and the natural gas sector have a particular importance in that they generate problems o f illness. Between 1990 and 1998, one o f the sectors with the most vitality was the production o f coca and its byproducts which grew more than 12 per cent, as can be seen in Table 4.12 and Figure 4.4. The growth in the construction sector was one direct effect o f this vitality and is explained by the theory o f Dutch illness. A t the end o f the 1990s, the Bolivian government pushed through a successful program o f coca lea f eradication that had important Political crises, social conflict and economic development 106 recessive effects on the economy. In this time period, the sector contracted by 25 per cent and dragged down the construction sector with it (see Table 4.12). The internal policy conflict shows how vulnerable the econom y is as a result o f its little diversity. Table 4.12 Bolivia: grow th by sector Average annual rates 1990-98 1999-2000 Var.1 N o t transferable -17.12 Construction and public works 8.78 -8.34 Housing property Government services 1.6 2.16 1.67 0.07 0.62 Personal services 3.98 2.78 4.18 Food, beverages, and tobacco 4.88 2.8 -2.08 Others industries 3.75 2.33 -1.43 -0.43 -24.84 -37.53 -2.48 -5.82 4.96 -1.08 0.2 Transferable Seasonal exports Industrial agricultural products 13.1 Cocaine M eta l and non-metal minerals 12.69 3.34 6.04 Gas N ote: Source: -13.52 1 in percentage points. National Institute o f Statistics. In the 1990s, investments in the natural gas sector and its exports were hugely impacted by econom ic growth. Th e average value o f natural gas in sales first to Argentina and then to Brazil was 93 million dollars a year (see Figure 4.5). The future econom y and wellbeing o f the Bolivian population is newly invested in a non-renewable natural resource, as it has been in silver and tin in the past. There is a large potential for the use o f gas in Bolivia. The level o f established reserves is up to 47 trillion cubic feet, and while natural gas exports are and will, w ithout a doubt, continue to be an engine for growth in B olivia’s economy, it is important to mention the collateral effects that concentrating expectations around natural gas could have. The international experience teaches us that countries that based their development on only natural resources experienced a short-term euphoria and then grew less in the long term than did other economies that didn’t have oil or minerals. Bolivia: political economy o f the crisis c\ Source: C\ C\ C\ C\ C\ C\ C\ o N 107 o o N N O N O N Nogales and Eduardo (2000). Figure 4.4 T he im pact o f drug traffic (narcotraffic in m illions o f U S $ ) 30 000 25 000 20 000 ^ 15 000 CO 10 000 O O H H M M r o c O ^ ^ ^ n O ^ h h O O O O O N ^ O C\C\C\C\C\C\C\C\C\0\C\C\C\C\C\C\C\C\C\C\C) Figure 4.5 Value o f natu ra l gas exp o rts (in m illions o f U S$), Bolivia: 1990-2000 Jul-00 5 000 Political crises, social conflict and economic development 108 Various explanations for this phenomenon exist. Rent-seeking behavior by elites, or when the government and the private sector are focused only on gains and tax exemptions, leads to the neglect o f other sectors. A nother reason is that the gas industry is not fixed to the rest o f the econom y and can end up strangling it. The most applicable explanation to Bolivia is the theory o f ‘Dutch disease’ . A s a result o f the reforms that were applied in Bolivia, the bulk o f foreign investment was concentrated in the oil sector to the tune o f two billion dollars in four years. Figure 4.6 illustrates the relationship between foreign investment, primarily concentrated in oil, and the growth rate. Source: National Institute o f Statistics Bolivia. Figure 4 .6 D irect fo re ig n investm ent 1996-2001 Geography and institutions One o f the m ost im p ortan t restrictions on grow th in B o liv ia is its complicated geography. The country does not have open access to the sea, which according to Sachs (1997), and measured in terms o f the growth rate, costs the Bolivian econom y close to one age point annually. The distance that separates it from the m ajor international markets and the lack o f road infrastructure both strongly condition growth. A pproxim ately 500 kilometers separates L a Paz from its closest ports. In the case o f Santa Cruz, the access to harbor routes is more than 800 kilometers away. Finally, it is worth mentioning that B olivia also has strong geographic divisions within its population - especially when compared to the rest o f Latin America. Bolivia: political economy o f the crisis 109 In terms o f institutional and legal developm ent, although B o livia advanced significantly in ways already described, much development in these areas is still lacking, especially relating to the control o f corruption. In Bolivia, the judicial system is still very weak and has many holes, and the provision o f public services (electricity, water, roads, and security) is, despite the fact that some services are under the control o f the private sector, overall very poor. In respect o f the regulatory framework, it is being constructed with serious limitations on financial resources and human capital. But the more complicated institutional weakness is corruption, which, as appears in Figure 4.7, is what most concerns businessmen. Corruption reduces levels o f foreign and domestic investment. The lack o f transparency tends to attract investors w ith suspicious reputations. C orru ption also distorts and often encourages the development o f an inform al economy, reducing the resources that go to the state and provoking the slow death o f dozens o f small businessmen who are trying to survive in a business world without clear rules. This kind o f corruption also expands public spending and public investment. Corruption I Credit 1 Political instability I Taxes I Anti-competitive practices 1 Street crime I Inflation I Judicial system I Infrastructure I Organized crimes I Exchange rate 1 1 0 Source : 0.1 1 1 1 1 0.3 0.4 0.5 0.6 1 ------ 1 0.2 0.7 W orld Bank (2000). Figure 4 .7 W hat m o st worries B olivian businessm en is corruption. Bolivia: obstacles to the grow th o f business 0.8 110 Political crises, social conflict and economic development Bribery decreases the governm ent’s income and limits and impoverishes state-provided public goods and services. Businesses that keep double accounts to evade taxes, elevated levels o f fiscal evasion, and little tax consciousness are at least a few examples o f weak public finances that translate into a very p o or supply o f roads, schools, and hospitals. 4.4 CONCLUSIONS The Bolivian experience in the last 15 years, like that o f other countries in the region, demonstrates a political econom y affected by relatively volatile changes, exposed to external m acroeconom ic shocks, and vulnerable to internal political and social shocks. A m on g the particular characteristics o f the Bolivian case are: a fragile system o f political governance that depends on coalition politics and a highly volatile econom y that is subject to price shocks o f non-renewable resources and o f the coca-cocaine cycle in both the form al and inform al economy. In this conclusion, we return to the paradox presented in the introduction to this chapter: H o w to explain the apparent contradiction between the ‘ success’ o f the econom ic institutional policies o f the reforms and the relative ‘failure’ o f the reforms to spark sustained econom ic growth, poverty reduction, and few er inequalities? H o w are political cycles that are open and closed to reform different from econom ic cycles o f stabilization, growth, and recession? In this chapter, we considered determinants o f this asymmetry in the short and long terms, distinguishing between transitional and structural factors that explain the current econom ic and political crisis. In the short term, three factors accentuate the asymmetry o f economic and political cycles in Bolivia. First, the space fo r governance, and the system o f c o a litio n p o litics its e lf depends on a h igh ly discretional system o f redistribution. There were two visible shocks to the inherited system triggered by the capitalization processes o f public businesses and administrative decentralization that did the prebendal cycle out o f more than 500 million dollars annually (around 200 million a year in T G N revenues and 300 m illion dollars a year in public investment). The immediate effects o f this drain on the governm ent’s resources were the visible weakening o f the system o f coalition politics, and its total collapse during the 1997-2002 administration, along with the growing disenchantment and disillusion o f public opinion about the effective political and econom ic model. Second, a weak system o f social protection and o f buffering economic shocks exacerbates social polarization in times o f econom ic crisis. The bipolar structure o f jo b creation - microbusinesses that generate 83 per cent o f employment but only contribute 25 per cent o f G D P and big businesses Bolivia: political economy o f the crisis 111 that only generate 9 per cent o f the em ploym ent and contribute 65 per cent o f G D P - guarantees that there is no buffer o f small and medium­ sized businesses to cushion the impact o f recessive shocks and economic deceleration. Th e high costs o f form alization , the m ultiple obstacles to capital markets access, the adoption o f technology, and com m ercial incorporation, all perpetuate a system o f fam ily microbusinesses that does not grow. This assets and revenue distribution structure also perpetuates a cycle o f ‘growing impoverishment’ , as can be seen in the experience o f the 1990s. Despite having an average growth rate o f 4 per cent between 1999 and 2000, the Bolivian econom y saw an increase in the absolute number o f people in poverty o f about 30 000 individuals per year. Third, a heavy dependence on non-renewable natural resources - first on tin, then on the coca leaf, and, most recently, on natural gas - conditions the possibilities fo r the development o f the rest o f the economy. In the future, the magnitude o f exports related to natural gas w ill have foreseeable effects on the overvaluation o f the exchange rate and the decrease in competition o f exports from other sectors o f the economy. In one way, this has been the historical pattern o f the Bolivian econom y in the last century. Measures attempting to buffer the new effects o f Dutch disease include plans to create stabilization funds and other measures that would neutralize the exchange rate and inflationary pressures. In the long term, the m ost im portant determinants o f the iterative cycles o f econom ic reform and social discontent w ould seem to point to three key structural factors. First, Bolivia has a history o f unequal access to assets that generate revenue (including human capital, property, and financial market assets). Bolivia lived through a cycle o f major redistribution around the middle o f the last century with the agrarian reform o f 1953. The redistribution o f land assets had the long-term effect o f creating conditions for urbanization and migration to lower lands in the 1960s and 1970s. A fter 50 years in the cycle o f redistribution, nevertheless, the coefficient o f income concentration, as measured by the M E C O V I surveys, suggests that today Bolivia is among the most unequal countries in the region (G in i o f 0.51). Paired with the empirical evidence is the public perception o f pronounced social and econom ic inequality. Second, there is a growing ethnic fragmentation that signifies the political disintegration o f the country. The ethnic and cultural diversity has a long history and, nevertheless, has been recently politicized in the course o f the primary and secondary generation reforms, The rise o f a ‘nationalist’ Aym ara movement suggests an inflection point in ethnic self-perception and in the consequences for a highly divided and volatile political system. A reading o f history implies that the politicization o f ethnicity occurs in moments o f transition from one mechanism o f social and political inclusion Political crises, social conflict and economic development 112 to another. The collapse o f the farm and party corporatism in the 1960s and 1970s created one o f these crises and simultaneously gave rise to a kata rism o within Bolivian union politics. In recent years the disenchantment with the ‘political class’ has manifested with a new ethnic political movement: the rise o f the M ovim iento Indígena Rachacuti, organized by the Aym ara leader Felipe Quispe. Third, B o liv ia ’s geography plays a determ ining role in prospects fo r econom ic developm ent and in the construction o f a realized state. The transportation costs that come from the accidental geography and the Bolivian m editerraneidad (land-locked situation) weigh on the competitiveness o f the export sector and on the capacity to attract foreign direct investment. The geography also has a dissuasive effect on the consolidation o f an effective state that guarantees its presence throughout the country’s territory. The weak and intermittent presence o f the state increases the transaction costs in the resolution o f social and political disputes, as well as on the presence o f effective rule o f law. The institutional reforms that were begun in the 1990s focused on the backbone o f the state as much as on the physical backbone o f the country in its attempts to reduce transportation costs. In this study, we considered two types o f determinants o f the political and economic crisis cycles. A m o n g the short-term determinants, there are a few that buffer shocks, particularly those that weaken or support the system o f coalition politics; among the long-term determinants, some o f the factors that affect governance emerge, including patterns o f inequality, ethnic fragmentation, and the geographic fragmentation o f the country. Bolivia must still confront formidable challenges in the construction o f political spaces to consolidate current reforms and to implement new econom ic and state reforms. The growing disenchantment with the econom ic model, social violence, and political polarization condition the governm en t’s capacity to respond to econom ic and political crises by sustaining a basis for redistributive growth in the future. The transitional fragility seems to match the fragile nature o f the long-term econom ic and political situation in Bolivia, and seems to foreshadow still another period o f social turbulence after the transitional recession. NOTES 1. 2. The opinion polls taken by the Latinobarómetro show that, despite a sustained ‘ support for democracy’ in the 1990s, Bolivians show less ‘democratic satisfaction’ , particularly related to economic achievements during the democratic period. See Latinobarómetro (2001). M orales (1987, 1988, 1989) and Sachs (1986) did an in-depth study o f the characteristics o f the Bolivian inflationary process with an emphasis on the fiscal problems. Bolivia: political economy o f the crisis 3. 4. 5. 6. 7. 8. 9. 113 W hen high inflation rates were registered and the tributary base was eroded, the government’s real revenue contracted. This phenomenon is known as the Olivera-Tanzi effect. The principle taxes created were: Value Added Tax (V A T ), Complementary Regime to the V A T (C R -V A T ), Transaction Tax (IT ), Consolidated T ariff Burden (G A C ), Tax on Presumed Rent o f Business (IR P E ), Tax on Specific Consumption (IC E ), applied to the sale o f alcoholic drinks, cigarettes, and jewelry, among others. The m ost com m only used mechanisms o f compensation were: Certificate o f T a riff Drawback (C R A ), Certificates o f Negotiable Lines o f Credit (C E N O C R E N ), Redeemable Treasury Bonds (B T R s), and Drawbacks and Certificates o f Tax Returns (C E D E IM ). The follow in g public banks were sold: Banco del Estado, Banco M in ero and Banco Agrícola. 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(1989), ‘La transición de la estabilidad al crecimiento sostenido en Bolivia’, in C IE P L A N - H ACH ETE (eds), Inflación rebelde en América Latina, Santiago, Chile. Nogales, X. and P Eduardo (2000), Aduana nacional: el contrabando en Bolivia, La Paz, Bolivia. North, D. (1990), ‘A transaction cost theory o f politics’, Journal o f Theoretical Politics, 2(4), 355-67. O ’Donnell, G. (1993), ‘Illusions about consolidation’, Journal o f Democracy, 7(2), 34-51. O’Donnell, G. (1996), ‘On the state, democratization and some conceptual problems: a Latin American view glances at some postcommunist countries’ , World Development, 21(8), 1355-69. Sachs, J (1986), ‘A new approach for managing the debt crisis’, Columbia Journal . o f World Business, X X I (3). Sachs, J and J Luke Gallup (1997), CAER II Discussion Paper 39, Harvard Institute . . for International Development, Cambridge, M A. Sachs, J and J.A. Morales (1989), ‘Bolivia’s economic crisis’ in Jeffrey Sachs (ed.), . Developing Country Debt and the World Economy , Chicago: Chicago University Press. Solimano, A. (2001), Can Reforming Global Institutions Help Developing Countries Share More in the Benefits from Globalization? World Bank, Country Economics Department. Whitehead, L. (1986), ‘Bolivia’s failed democratization: 1977-1980’, in Guillermo O’Donnell, Phillipe C. Schmitter and Lawrence Whitehead (eds), Transitionsfrom Authoritarian Rule: Latin America , Baltimore, M D: John Hopkins University Press, pp. 221-36. World Bank (2000), The World Business Environment Survey , (WBES). World Bank (2002), Sustained Macroeconomic Reforms, Tepid Growth: a Governance Puzzle in Bolivia? Daniel Kaufman, Massimo Mastruzzi and Diego Zaraleta. 5. The economy, conflict and governance in Colombia José Antonio Ocampo* 5.1 INTRODUCTION Colom bia crossed the threshold into the twenty-first century in the midst o f a two-pronged crisis. One facet o f this crisis stems from the serious problems o f governance generated, in large part, by the irregular armed conflict that continues to trouble the country. The other derives from the lingering effects o f the worst economic recession in the country’s modern history, which has resulted in the loss o f a full half-decade o f potential econom ic growth and in the deterioration o f social conditions. The country’s internal conflict bears some resemblance to other episodes in its history, particularly in terms o f the important role played by the zones open to colonization which, due to the peculiar features o f its geography, are located throughout its territory. The country’s traditional fragmentation o f power is another historical feature that has acted as a contributing factor. Nonetheless, the extent and intensity o f this conflict is associated with an entirely new phenomenon: the magnitude o f the existing drug traffic and the overwhelmingly degenerative effect it has had in terms o f the scale o f violence and its impact on Colom bian society as a whole. The second facet o f this crisis, the econom ic recession, involves elements that are new to a country which, until not long ago, was m oving forward with its econom ic development, albeit at a somewhat measured pace but avoiding the sharp business cycles that have troubled Latin America since the mid-1970s. Thus, unlike its predecessors, the most recent crisis has various elements in com m on w ith those experienced by other Latin A m erican countries. One o f those shared features is, in particular, the econ om y’s incomplete adjustment to trade liberalization and its excessive vulnerability to external financial cycles. Other elements are more specific to Colom bia, such as the critical situation that arose when, in an effort to resolve the internal conflict in the country, an attempt was made to combine the opening o f the econom y1 with an expansion o f the state’s spheres o f action. 115 116 Political crises, social conflict and economic development These two histories - the history o f the internal conflict and the history o f the economic crisis - are intertwined at some points, but they have primarily proceeded in parallel to one another. Th eir separation is a reflection o f structural features o f Colom bian society. In fact, C olom bia’s recent history can only be understood if it is viewed as the conjunction o f two dynamic systems that have existed side by side fo r many years. On the one hand, there is a relatively successful ‘form al’ economic, social and political system which is, nonetheless, subject to weaknesses and periodic crises much like those experienced by other Latin Am erican or developing countries. On the other, there is a violent, even gang-controlled ‘inform al’ system which has at times risen to a position o f dominance in different segments o f C olom bia’s complex geography and social structure. Th e existence o f this structural dualism and its intractability are in themselves a problem. The form er system has held sway throughout most o f the country’s history, but the latter’s expansion has threatened its hegemony at two critical junctures: during what came to be known as simply ‘The Violence’ , which broke out in the mid-twentieth century, and again during the closing decade o f the twentieth century and dawning years o f the twentyfirst. A t various stages, the informal system has performed a functional role for its form al counterpart - as, for example, when it has been used by largescale rural landholders or by political groups to ensure their dominance in certain parts o f the country’s territory - but this does not mean that the latter exists by virtue o f the functions it provides to the former. In fact, it would be more accurate to say that, on the whole, the informal system is dysfunctional in terms o f the form al system. This has only been evidenced, however, in extreme circumstances (as during the violence that erupted in the mid-twentieth century and in its closing years), due to the form al system’s tendency towards a deconcentration o f power and avoidance o f open conflict, both within its own confines and in its relationship with the informal system. In terms o f the dual crisis being discussed here, this separation between the tw o systems is manifested in a number o f dimensions. First o f all, although the internal conflict has indeed undermined econom ic growth in various ways, it cannot be convincingly argued that it is the main cause o f the recent econom ic crisis. By the same token, and as indicated by the voluminous literature on the causes o f the violence, nor are there grounds for identifying internal inequalities or deepening poverty - features clearly exhibited by the ‘form al’ system - as the fundamental causes o f the recent outbreaks o f violence. N o r should we lo o k fo r the underlying causes o f these problems o f governance in the various characteristics that Colom bia shares with other developing countries, such as a lack o f civic awareness or institutional Colombia: economy, conflict and governance 117 failings in the operation o f the political and judicial systems. In fact, in many o f these areas, C olom bia is better o ff than other Latin Am erican countries, thanks to such attributes as its strong republican tradition and the stability o f its party system, which set it apart in the regional and even global context. It is therefore not in the more ‘ Latin Am erican’ traits but rather in the m ore specifically C olom bian characteristics - such as the impact o f drug trafficking, the country’s open geography and its tradition o f fragmented power - that we should look for the causes o f the country’s recent problems o f violence and p o o r governance. N o r can it be credibly argued that Colom bian society has been remiss in striving to overcome its problems in the area o f governance. The decision to replace its century-old constitution with a new political charter in 1991 was the culmination o f a determined effort to find political solutions for the internal conflict. The peace processes undertaken by five presidents o f the republic, which succeeded in demobilizing a number o f guerrilla groups, provide further evidence o f this effort. One o f the explicit objectives o f the new political charter was, furthermore, to increase public social expenditure in order to help resolve the internal conflict. Other signs o f the efforts being made in this direction are the governm ent’s political commitment to international conventions on human rights (which, unfortunately, has not been fully rewarded by the results), court rulings that have helped thwart drug traffickers’ attempts to penetrate the political system and the frontal attacks launched against this activity during the last three administrations. In fact, view ed from this vantage point, the 1990s can be seen as an attempt to confront the country’s econom ic and political problems based on a combination o f measures designed to put the economy in step with the globalization process, steps to ensure that social services w ill reach a larger portion o f the population and efforts to consolidate democracy. This was a bold experiment which also sought to meet the central challenge facing all contem porary societies: to reconcile econom ic modernization with social equity and democracy. Like other countries, however, Colom bia has had great difficulty in achieving these objectives. This chapter w ill analyse this dual crisis o f the late twentieth and early twenty-first centuries. It is divided into four sections, the first o f which is this introduction. The second looks at aspects o f the economic crisis that are similar to those experienced by other Latin American countries, namely, the difficulties associated with trade liberalization and macroeconomic volatility. The third focuses on the critical situation created by the grow th o f the state and the contradictory social outcomes seen in the final decade o f the twentieth century. The fourth analyses problems that are more specifically associated with governance and the internal conflict. Political crises, social conflict and economic development 118 5.2 OPENNESS AND MACROECONOMIC VOLATILITY T h e record o f the C o lo m b ia n e c o n o m y ’s p erfo rm a n ce since the implementation o f measures aimed at opening up the econom y in 1990 are not encouraging. In fact, the only area in which progress has clearly been made is in bringing inflation under control. Th e econom y began the 1990s with a legacy o f over 15 years o f moderate but highly inertial inflation. W hat is more, the rate o f inflation was then trending upward and was starting to reach levels that were higher than those regarded in earlier decades as being manageable. The international comm unity’s experience has been that, when inflation is moderate and inertial, turning it around can be very difficult.2 H aving closed out the decade w ith single-digit inflation is, therefore, a noteworthy achievement. In terms o f econ om ic grow th, however, the results have been very disappointing (see Figure 5.1). Actually, the rate o f econom ic growth had been slowing down since the mid-1970s, primarily because the longlasting industrial boom that had underpinned the country’s growth since the 1930s was running out o f steam. The econom ic authorities had hoped that by opening up the economy, they could reverse this slowdown, but this expectation was not fulfilled.3 Between 1990 and 1997, the expansion o f economic activity was much the same as it had been in 1975-90, but activity in both the agricultural and manufacturing sectors fell o ff sharply, leaving 8n ■5 7 2 6­ e® 5 Q 5 °u 4 ^ □ ■ □ □ 1945-74 1975-90 1991-97 1998-2002 fc 3 c 9 d 13 I 1 GDP Agriculture Source: Manufacturing industry Calculations o f the author, based on data from D A N E and the Banco de la República. F igure 5.1 L o n g -te rm econom ic grow th Colombia: economy, conflict and governance 119 the services sector as virtually the sole mainstay o f econom ic growth. This indicates that, far from galvanizing tradables sectors, the liberalization of trade shifted the responsibility for maintaining growth to non-tradables, which were buoyed by an ultim ately unsustainable boom in aggregate domestic demand. This was followed by a ‘lost half-decade’ (1998-2002) in terms o f econom ic growth, with per capita G D P shrinking by 7 per cent - the m ost serious contraction ever recorded. A Slow and Costly Adjustment to an Open Economy Advocates o f the move to open up the econom y in Colom bia, as in the rest o f Latin Am erica, argued that the im port-substitution m odel had become an obstacle to economic development because it promoted a type of development that was based on the extraction o f econom ic rents generated by protection and other advantages granted by the state, rather than the developm ent o f com petitive econom ic activities. This was a one-sided and rather inaccurate version o f the country’s econom ic history, however. Colombia had, after all, succeeded in growing at a moderate but stable rate for six decades (from the 1930s to the 1980s) while avoiding any major crises or uncontrollable inflationary spirals. In order to accomplish this, it had combined its tradition o f macroeconomic pragmatism, which was marked by a mixture o f fiscal discipline (although with some lapses in this respect) with strong interventionism in monetary, exchange-rate and trade policy, and an active strategy for diversifying production.4 In the 1930s, this strategy had enabled the country to make a fairly sm ooth transition from an econom ic m odel based on the expansion o f coffee exports to a model based on manufacturing activities catering to the domestic market. Later, it allowed the country to make a transition from the classic import-substitution model to a mixed model that combined import substitution with the explicit objective o f export diversification. This second transition was made relatively early on, starting with the coffee crisis o f the mid-1950s, and then gathered steam with the implementation o f the 1967 econom ic reforms.5 Import substitution, as an objective to work towards, was explicitly abandoned in the early 1970s. In fact, every development plan introduced since President Pastrana Borrero unveiled his ‘Four Strategies’ plan in the early 1970s has taken a critical view o f import substitution. Consequently, stating that ‘import substitution’ was the predominant model prior to the opening o f the econom y is a glaring anachronism. It should be noted, however, that the abandonment o f import substitution did not mean that the econom y’s protectionist structure was dismantled, although a gradual rationalization o f this structure was undertaken during the 1970s and again since the mid-1980s.6 120 Political crises, social conflict and economic development In econom ic terms, the m ixed m odel used by the country before it opened up its econom y yielded exceptional results. Colom bia’s industrial developm ent process avoided lapsing into a bias towards branches o f heavy industry in which it had little chance o f becoming competitive, and a rapid modernization and expansion o f non-coffee agricultural activities began in the 1950s. Many new export activities arose in agricultural and manufacturing industries that had gone through an earlier productive and technological learning process while shielded by protective measures. N on-coffee exports grew swiftly when the exchange rate was competitive (especially in 1967-74 and 1985-91). H igh levels o f protection did not interfere with this expansion, thanks to the existence o f special mechanisms that gave export sectors access to duty-free imported inputs, preferential access to credit and tax incentives. By the early 1990s, as shown in Figure 5.2, the country’s exports had been growing rapidly for over five years. This upswing allowed it to finally break free o f its dependence on coffee exports, an accomplishment that, although certainly late in coming, was nonetheless an outstanding one in historical terms. There were, o f course, inefficient activities, protectionist excesses, and an anti-export and anti-agriculture bias, but by international - and, especially, Latin American - standards, the development pattern could hardly be regarded as inefficient.7 By the early 1990s, however, it was evident that, given the sweeping changes taking place in the world economy, government decisionmakers and entrepreneurs should direct their energies towards achieving fuller integration into the international economy. This is the reality that the move to a more open economy acknowledged. This change in direction called for a rationalization o f protection mechanisms, which had, in any case, ceased to perform a useful function as an incentive for new econom ic activities. Before 1990, the controversy regarding the need for trade reform revolved around different variations on the theme o f gradualism. Moreover, given the reactivation o f econom ic growth based on the traditional mixed model which began in the mid-1980s, there was little reason to advocate a sharp break with that tradition. Viewed from this standpoint, the move to open up the econom y arose, in its m ost radical form, out o f the ‘demonstration effect’ o f developments in other Latin American countries more than it did out o f a debate within the country. The preference for gradualism was also based on four sets of circumstances that were identified in the course o f the internal debate o f the 1980s and early 1990s. The first was that production sectors needed time to adapt; sectors that competed against imports needed time to modernize, and those that were capable o f developing an export capacity needed time not only to modernize but also to conquer new markets. The second was that a com petitive exchange rate was the best guarantee o f export success, as Colombia: economy, conflict and governance £ 40­ 35­ 30­ c □ ■ □ 121 (a) 1970-74 1974-80 1981-85 25­ i— ( 20 -t £ U W 15 ) c d S 10 I 5 0 -5 Quantum Total value Non-traditional 100 1 1 Coffee 1 Oil and minerals 1 _1Non-traditional _ (b) 70 40 30 c d 20 § s 10 u 0 1970 1 1974 1 1980 1 1985 i i 1991 1997 2002 Source: Calculations o f the author based on data from the Banco de la República, E C L A C and D A N E . F igure 5.2 E x p o rt grow th (a ) a n d export diversification (b ) demonstrated by the growth o f the country’s non-traditional exports. The third consideration was that, in order to compete successfully, supplementary elem ents were needed, particularly a technology developm ent strategy and suitable infrastructure. Finally, although the world had been moving in the direction o f free trade, there were some notable exceptions, where protectionism was still the rule. These exceptions included such sectors as agriculture, textiles and wearing apparel, and the automobile industry. In line w ith the gradualism and pragmatism typical o f C olom bian econom ic policy in the past, the plan for opening the econom y to trade was announced by the Barco administration, in February 1990, as a gradual strategy. The Gaviria administration, which took office in August o f that 122 Political crises, social conflict and economic development same year, committed itself to this approach initially, but soon thereafter replaced the Barco adm inistration’s plan with a much more fast-paced timetable for a more radical trade liberalization, which, for all that, was abandoned in August 1991 as part o f its price stabilization programme. From the standpoint o f political economy, the reasons why the gradualist school of thought was defeated so easily have not been exhaustively analysed.8 Internal divisions within the industrial entrepreneurial organizations were certainly a decisive factor, as were the great credibility enjoyed at that time by President Gaviria, the absence o f a true political opposition and the fact that the nation’s attention was focused on the debate concerning a new constitution. The opposition o f some sectors o f academia had little impact on the debate.9 The m ost important opponents were em ployers’ associations in the agricultural sector, and their resistance gave rise to som e m echanism s o f support.10 The autom obile industry succeeded in maintaining higher levels o f protection, including a variant o f the assemblyindustry regime in the context o f the Andean automotive agreement. Some industrial policy measures based on the concepts of production chains and clusters were introduced later on, during the Samper and Pastrana Arango administrations. The poor performance o f the agricultural and industrial sectors since the early 1990s shows just how costly these sectors’ adjustment to the rapid opening o f the econom y has been. The Colombian farm sector turned in one o f the worst performances o f any Latin American country; some of its subsectors (grains, oilseeds and dairy products) were on the list o f the m ost heavily protected industries during the late 1980s, and a number of them, as well as various export sectors (including, most particularly, coffee), were faced with adverse price conditions on international markets. Various manufacturing industries were confronted with the same problem, although in their case the m ost severe shock came from the contraction o f domestic demand in the second half o f the decade. The crisis in the agricultural and manufacturing sectors was reflected very clearly in employment, with these sectors going from accounting for 43 per cent o f national employment in 1991 to 36.8 per cent in 1997. Contrary to the expectations of the advocates of this course of action, the growth of exports slowed in comparison to its pace in 1985-91, especially in the case o f non-traditional exports (see Figure 5.2). The only two dynamic com ponents o f the export sector were petroleum and sales to other Latin American countries, especially the Andean nations. The slump in oil prices, first o f all, and the reduction in the output o f crude and in exports that followed, together with the ups and downs o f the Andean countries’ trade performance since 1998, were therefore particularly unfortunate, since they hurt the only dynamic com ponents o f the export sector. The rapid growth Colombia: economy, conflict and governance 123 o f im ports was thus not m atched by similar progress in the country’s export performance. In the vocabulary o f the Colom bian debate on the issue, the fact that the process o f ‘inw ard-looking’ liberalization was more forceful than its ‘outward-looking’ counterpart eventually led to a deterioration in the balance-of-payments current account and generated a net recessionary effect. O bviously, one o f the decisive factors in this ou tcom e was real exchange rate appreciation. The heated controversy about the causes of this phenom enon focused on three main determinants, to which different authors ascribed varying degrees o f importance during the debate:11 (a) the avalanche o f capital inflows and the boom in private and public spending that accompanied it; (b) the increase in public expenditure and the resulting fiscal deficit; and (c) the exchange-rate p olicy’s bias towards revaluation. There is a com pelling reason for thinking that the first o f these factors was the m ost decisive one. After all, the largest real appreciation took place between 1991 and 1994, which were the years when total (public and private) expenditure rose the m ost. The rate o f real revaluation started to slow somewhat in 1995, despite further increases in public expenditure and a deepening fiscal deficit. In addition, the currency experienced a real devaluation when the flow of external finance began to dwindle, even though the adjustment in public spending was moderate and the fiscal deficit grew. Obviously, Banco de la República’s exchange-rate policy determined the exact timing o f the real appreciations and devaluations o f the peso. Capital Flows and Macroeconomic Instability The econom y’s growth rate was also much more unstable in the 1990s. In this respect too, there was a break with Colom bia’s traditional gradualism and pragmatism. The cyclical swings in aggregate domestic demand were particularly intense. A s shown in Figure 5.3, nothing like the 1992-94 spending boom or the 1998-99 bust had ever been seen before in Colombia. The great expectations sparked by the discovery o f the Cusiana oil deposits and the opening o f the economy at the start o f the decade, as well as by the flood o f capital that started to pour into Latin America at that time, set the stage for the boom in spending that occurred in the early 1990s. A s is dem onstrated by the abundant literature on the subject, the international com m unity’s experience shows that boom s and busts are interrelated. The ‘speculative bubbles’ generated during boom s in external finance eventually burst, giving way to economic adjustments whose severity is in direct proportion to the size of the bubble. Colombia had partly avoided being drawn into this pattern in the late 1970s and early 1980s,12 but fell victim to it in the 1990s.13 Both the crisis o f the early 1980s and the bust Political crises, social conflict and economic development 124 15 -10 Aggregate demand growth f ON ON Source: ir¡ ON ON DANE F igure 5.3 Growth a n d dom estic d em a n d volatility o f the late 1990s were preceded (with a lag in relation to Latin American patterns in the first case) by an expansion in internal and external borrowing which had financed a sharp upswing in public and private spending. In addition, in both cases there was a real appreciation o f the peso and an accompanying balance-of-payments current account deficit. The relative severity o f the problems faced by the public and private sectors differed in the two cases, however. This difference did not have as much to do with the behaviour o f public expenditure as it did with the problems confronting the private sector. As will be discussed later on, in the 1990s public spending expanded in similar magnitudes as it did in the late 1970s and early 1980s, and the fiscal deficit was lower than it had been during that earlier period. On the other hand, the problems associated with private spending and the private sector deficit were much more severe during the more recent crisis. A comparison o f the external debt statistics leaves no doubt about the nature o f the situation. Colom bia’s external debt swelled by $14.7 billion between 1991 and 1997, and $13.4 billion, or 90 per cent, o f that amount was private debt, which increased sevenfold during that period. On the other hand, in 1979-83, the private sector accounted for less than one third of the increase in external indebtedness. What is more, the private sector’s total (domestic and external) debt rose by the equivalent o f 24.7 points o f G DP between 1991 and 1997, or almost twice as much as in 1979-83 (see Figure 5.4). The country’s spending spree (1992-95) also occurred during the same Colombia: economy, conflict and governance 125 time that the private sector’s surplus, which it had maintained since 1975, turned into a deficit, as private saving dropped below the level needed to finance private investment.14 This was the major difference between the two crises: whereas the private sector had always run a surplus for more than a decade prior to the crisis o f the early 1980s, 1998 was the sixth consecutive year in which it posted a deficit. Source: Calculations o f the author based on data from the Banco de la República. Figure 5.4 P rivate indebtedness Thus, the reason why the crisis o f the late 1990s was more severe than the crisis o f the early 1980s was not so much because o f its fiscal dimension (although this also played a role, as will be discussed later) but because it took place at a time when the private sector was financially fragile. The domestic and external debt overhang made the economy extremely sensitive to interest-rate increases and to devaluations. Eventually, both o f these things occurred. This did serious harm to the private sector’s equity position and thus led to a sharp adjustment in private spending. The domestic financial crises during these two episodes were similar in scale, in both cases being equivalent to a cost o f 5-6 per cent o f GDP. However, in the first, failings in terms o f prudential regulation and banking practices were a relatively more important factor, while in the second the deterioration in the private sector’s equity position was the determining element. There are, o f course, two additional factors underlying macroeconomic instability in the 1990s. The first is the political econom y dynamics that makes it difficult to im plem ent restrictive m acroeconom ic measures at times when external financing is in abundant supply. The second, which 126 Political crises, social conflict and economic development arose with the creation o f an autonom ous central bank under the 1991 constitution, is the difficulty o f coordinating monetary and exchange-rate policy, which is managed by Banco de la República, with fiscal policy, which is the responsibility o f the government. C olom bia’s relatively successful record in terms o f m acroeconom ic stability indicates that it was able to manage the first o f these factors before this institutional duality arose, but doing so required a complex apparatus through which the authorities could intervene in the foreign-exchange and financial markets. This system o f intervention was eliminated by the financial and foreign-exchange reforms o f the 1990s, which coincided with the conversion o f C olom bia’s central bank, Banco de la República, into an autonom ous institution. As in the case o f trade reform, it can be argued that there was not really any authentic demand for change in this area, apart from the type o f demand that was in keeping with the country’s gradualist tradition. In fact, just a few years earlier, in 1987, when the exchange controls created by the well-known Decree-Law 444 o f 1967 celebrated two decades, the evaluation o f this instrument had been very positive.15 The actual scope of the autonomy granted to Banco de la República under the constitution has also been a subject o f debate. Some constituents contend that the explicit reference to ‘coordination with general economic policy’ in the article o f the constitution that grants autonomy to Banco de la República is an express acknowledgement o f the limits placed on its independence and, in some measure, even a subordination to the government, which determines general econom ic policy.16 What is more, in response to the polemics surrounding Banco de la R epública’s m anagem ent o f m onetary and exchange-rate policy during its early years, in a 1999 ruling the Constitutional Court17 determined that central bank autonomy is limited, since management of monetary, credit and exchange rate policy must be done subject to the way Congress legally regulates the constitutional provisions, and in coordination with the general econom ic policy that the national government determines. It also emphatically determined that, although curbing inflation was the central objective o f exchange-rate policy, Banco de la República should also pay heed to the impact its policies have on the real econom ic variables, particularly on econom ic activity and employment. It should be recalled, however, that as part o f its tradition o f control and gradualism, the Banco de la República itself m aintained exchange controls when it established new foreign-exchange regulations in 1993 (the requirement that m ost foreign exchange had to be channelled through the regulated market and the possibility o f returning to a fully regulated market if circumstances so warranted) and adopted a Chilean-style system for regulating capital flows. The reserve requirement for external borrowings was strictly applied during some periods - especially 1994-95 and 1997 Colombia: economy, conflict and governance 127 - and proved to be fairly effective.18 In any event, in line with the political econom y dynamics m entioned earlier, the C olom bian financial sector opposed measures aimed at constraining the credit boom and especially the lending caps established in 1994, whose effectiveness was limited. The problems encountered in coordinating the policies o f the country’s two macroeconomic authorities were clearly reflected in the management o f exchange-rate policy throughout the 1990s. Banco de la República’s appreciation bias became evident in late 1991 and again when it revalued the currency band in December 1994. On the other hand, when the market exerted downward pressure on the peso in 1998-99, Banco de la República opted instead for a drastic increase in interest rates to defend the band and waited as long as it could before finally adjusting it. The costs of this decision were considerable. Given the sharp increase in domestic credit that occurred between 1991 and 1997, the interest-rate hikes undermined borrowers’ financial standing and had a contractionary effect on the non-financial private sector to an extent not experienced before in the country.19 Banco de la República was afraid that an early devaluation w ould jeopardize the gains that had been made in reducing inflation, since these accom plishm ents had been quite precarious before the crisis broke out (1997 was the first year in which Banco de la República’s inflation target had been met). The fear that a devaluation would fuel inflation may have been unfounded, since the rapid expansion o f demand had abated in 1996 (see Figure 5.3), and, in the end, this actually did prove to be the case, but at the time m ost economists shared Banco de la República’s views. Once the crisis erupted, it was also feared that if the exchange rate were freed, it would spiral out o f control, as it had initially in various Asian countries in 1997. In Banco de la República’s favour, it can be said that the real devaluation was carried out in an orderly fashion without disrupting the downward trend of inflation and without sacrificing its high level o f international reserves. The recession that was triggered, in large measure, by the deterioration o f the private sector’s equity position and the external financial crisis was followed by a slow recovery. The steep decrease in inflation and the strong performance o f the flexible exchange-rate system introduced in 1999 allowed Banco de la República to abandon its procyclical policy bias that had marked it in its early years as an autonom ous institution and adopt a countercyclical approach in the first years o f the current decade. 5.3 AN ACTIVE SOCIAL POLICY AND INCONCLUSIVE SOCIAL RESULTS If the move to open up the econom y was the villain o f the 1990s in the eyes o f the econom ic reforms’ critics, for their defenders the fundamental 128 Political crises, social conflict and economic development cause o f all the econom y’s problems was the increase in public expenditure. The expansion o f public spending was certainly rapid and disorderly, and it led to a crisis caused by the excessive growth o f the state, which was reflected in fiscal disequilibria and the explosive growth o f the public debt. These effects have continued to influence macroeconomic behaviour years after the first fiscal adjustment efforts were launched. This expansion also adversely affected coordination between the government and Banco de la República and, in the latter’s view, justified, first, a policy stance in favour o f revaluation and, later, a contractionary one. An outright condemnation o f the increase in the public debt, however, overlooks the fact that it was part o f a strategy which blended econom ic modernization with a more active social policy and enhanced democracy. In point o f fact, the decision to increase public expenditure adopted by the 1991 constitution was based on two different justifications, about which there was a broad consensus at the time: the need to address the serious social lags that marked the country then and continue to do so today; and the importance o f consolidating democracy by delegating more functions and assigning more resources to departmental and municipal governments. An Active Social Policy and the Upsizing of the State G iven the heated controversy surrounding the expansion o f public expenditure, it is odd that there are such strikingly different calculations o f the size o f that increase during the 1990s. A report prepared by the N ational Planning Department (D N P 2000, Table 26) cites a figure for the increase in public spending, based on data from the National Department o f Statistics (D A N E ), o f slightly less than 6 percentage points o f G D P between 1990 and 1998 (as the net result o f higher spending in some sectors and lower spending in sectors where firms were privatized). IM F data give a somewhat higher figure for the increase in the primary expenditure o f the consolidated public sector (10 percentage points o f G D P during the same period, according to Table 5.1). The largest increases in central national government expenditure occurred between 1991 and 1996. The austerity measures adopted in 1997 halted the increase in the central government’s primary expenditure, but the public sector’s rate o f expansion held steady that year owing to the growth of social security expenditure and spending by local governments. Social security was the only item o f public expenditure in which steady growth continued to be seen in later years. In any case, the fiscal adjustment measures adopted since 1997 became permanent features o f the economy, but they did not translate into a downsizing o f the state. The sharp increase in debt service (and particularly that o f the central national government) also has to be considered, however, since these payments have Table 5.1 Public finances 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 17.3 17.6 18.7 20.7 22.2 23.9 26.6 28.8 27.5 29.5 27.3 28.0 29.2 8.3 8.8 9.6 10.7 11.4 12.1 14.9 14.4 15.3 16.8 15.4 16.0 17.1 -0.5 -0.8 0.3 1.1 45.2 0.4 -0.2 -0.1 -1.7 -0.6 1.0 33.7 0.2 0.1 -0.7 -1.4 0.4 -0.2 1.2 1.1 33.8 27.2 -0.8 -2.2 -2.4 -3.9 -3.4 -2.2 1.2 34.2 ^1.6 -5.4 -6.5 -7.4 27.3 29.8 -5.3 2.1 49.4 37.2 -3.5 -5.8 -2.3 3.5 -4.4 -3.5 1.9 39.2 -3.5 -5.8 -2.8 3.0 42.3 45.8 50.2 Prim ary non-financial public-sector spending Prim ary central government spending Non-financial public-sector balance Central government balance (Prim ary deficit) (Interest payments) Gross public-sector debt N e t public-sector debt1 N ote: 1.0 1.2 39.8 1 Excludes debt held by other public-sector entities. Sources: Colombian Government and IM F. -1.0 1.2 29.2 -4.5 -3.4 1.1 30.3 -6.5 -3.1 3.4 130 Political crises, social conflict and economic development climbed from slightly over 1 per cent o f G D P in the years leading up to 1997 to over 3 per cent in recent years. Interestingly enough, and contrary to what is often claimed in national debates, the extent o f the increase in public expenditure during the 1990s was not very different from what it was in the late 1970s and early 1980s, when it rose by 9 percentage points o f GDP, according to data published by D A N E . The difference is that, in the 1990s, the increase was concentrated in government administration rather than in public-sector enterprises and, in particular, in the central national government’s transfers to departmental and municipal governments for social spending and to the social security system for the payment o f public-sector pensions, as well as in the rising self-financed expenditure o f the public social security system. In addition, the increase in spending was financed much better in the 1990s than it was in the earlier episode. This is because a conscious effort was made to cover the upturn in expenditure through a series o f tax reforms, an increase in social security contributions and a suitable managem ent o f the prices charged by public sector enterprises. Thus, although, as it turned out, the revenues generated by these efforts fell short o f the mark, the Gaviria and Samper administrations did not set out to increase the fiscal deficit; their objective was to bring about an orderly upsizing o f the state.20 Consequently, it would be inaccurate to say that this episode was an instance o f ‘macroeconomic populism ’ in the sense that the term is used by Dornbusch and Edwards (1989). Thanks to these increased revenues, the fiscal deficit was substantially lower prior to the 1998 crisis than it had been before the outbreak o f the 1984 fiscal crisis. In the five years leading up to 1984, the cumulative fiscal deficit amounted to 23.5 per cent o f GDP; during the three years prior to the 1998 crisis, it was a mere 7.1 per cent (and had been quite similar - 7.2 per cent - for the five years prior to the crisis). As a result, while public-sector borrowing climbed sharply prior to the crisis o f the 1980s, the national public sector debt was much smaller in 1997 than it was in 1990 (see Table 5.1). Obviously, privatizations helped to curb the increase in the national public debt in the 1990s. Nevertheless, government transfers of the profits on Banco de la República’s special exchange account had had a similar (or even greater) effect in the 1980s, as had the low interest rates that the government negotiated with the central bank as the holder o f a large portion o f the domestic public debt (a practice which came to an end when Banco de la República became autonom ous).21 In fact, in the more recent episode, the fiscal deficit and the public debt did not skyrocket until 1998-99, once the adjustment process was already in full swing and the upswing in expenditure had come to a halt. The recession’s effects on public-sector revenues and Colombia: economy, conflict and governance 131 the explosive growth o f the debt service that was triggered by high interest rates and the devaluation, taken together, account for this outcome. As foreseen in the constitution, the steeper increase in public expenditure was concentrated in the social sector. The N ational Planning Department data quoted earlier indicate that social spending had risen from 8.2 per cent of G D P in 1990 to 14.4 per cent by 1998, or by 6.2 percentage points, which is slightly higher than the figure for the increase in total public expenditure given by the same source. Colom bia’s upturn in social spending was actually one o f the steepest in Latin America. As a result, the country went from having a level o f social expenditure below the Latin American average in the early 1990s to having an above-average level (ECLAC 2001). There were, o f course, increases in expenditure on other items as well, some o f which turned out to be permanent (defence and the justice system) and others which did not (the road system, science and technology), but there were also cuts in some areas (sectors where privatizations were undertaken). It is interesting to note, however, that despite this increase in public spending, Colombia has continued to have one o f the lowest levels o f public-sector employment in Latin America (9.5 per cent o f urban employment versus the regional average o f 13.7 per cent in 1998). What is more, this ratio actually fell during the 1990s (from 11.6 per cent in 1991 to the 9.5 per cent mark posted for 1998) (ECLAC 2000b). It has repeatedly been claimed that the increase in transfers to departmental and municipal governments was not accom panied by spending cuts by the central governm ent in the corresponding areas. This allegation is unfounded. In the areas that have been decentralized, especially in education and health, the items o f direct expenditure that became the responsibility o f departmental and municipal governments were taken off the national government’s budget altogether, although they are funded, in large part, by central government transfers. There are, however, specific items within these sectors that remain the responsibility o f the national government (university education and national health campaigns, for example). What proved to be a much more serious problem were the wage hikes given to all public employees during the boom years in public-sector spending. This was a very disorderly process. It began with a very expensive ‘wage realignment’ in defence that was passed by Congress in 1992. This was accompanied by steep salary hikes in the judiciary and for senior posts in the executive and legislative branches. These increases created imbalances in the relative wage scales which, in turn, led to a chain reaction o f wage demands in the rest o f the public sector - particularly in education and health care - in subsequent years. The increase in public social expenditure achieved its objective o f broadening social service coverage. Educational (especially secondary Political crises, social conflict and economic development 132 education) coverage and health care coverage under the social security system expanded rapidly between 1993 and 1997, rising from 48 per cent to 61 per cent in the first case and from 23.9 per cent to 57.1 per cent in the second (see Table 5.2). The coverage o f public utilities also increased and, as a result, the sector o f the population with unmet basic needs shrank considerably, from 37.2 per cent to 25.9 per cent, which meant that as much progress was made in this respect in those four years as had been made in the eight years before that. Since this process coincided with a phase of econom ic growth, the human development index also improved markedly. Furthermore, as indicated in a recent D N P /U N D P study, although the progress made in terms o f human development at the start of the 1990s was produced by improved econom ic conditions, the inroads made in 1993-97 were directly attributable to the country’s social policy (D N P /U N D P 2003). In all o f these cases, greater advances were made in rural areas that in urban zones.22 Table 5.2 S o cia l indicators 1985 Unsatisfied basic needs Total Urban Rural N et scholarity coverage Primary Secondary Income poverty line % o f population below poverty line Social security health coverage % o f population insured Sources: D N P and U N D P . 1993 1997 2001 0.763 0.567 0.699 0.52 0.774 0.658 0.728 0.60 0.779 0.654 0.739 0.62 0.811 0.69 0.776 0.72 0.794 0.698 0.771 0.68 1985 Human development index Urban Rural Total Combined scholarity 1991 1991 1993 1997 2000 45.0 32.3 71.8 37.2 26.7 59.4 25.9 17.8 46.5 23.0 16.4 40.0 61.6 32.8 75.2 47.8 83.5 61.1 83.6 62.7 51.7 50.3 59.8 23.9 57.1 52.6 53.8 Colombia: economy, conflict and governance 133 The targeting o f social expenditure for the poorest segm ent o f the population also improved thanks, among other reasons, to the concentration of spending increases in redistributive items, the allocation o f transfers to municipalities where the proportion o f unmet basic needs is the greatest and the implementation o f the Beneficiary Identification System (SISBEN). This combination o f increased social expenditure and improved targeting resulted in a significant redistribution o f income (based on estimates o f the income-equivalent o f the social services received by households) (Sánchez and Núñez 1999). In fact, social expenditure’s contribution to the effective income o f the poorest 40 per cent o f C olom bia’s population now exceeds the Latin American average (ECLAC 2000a, Chapter 7). The Social Effects of Economic Change When the 1990s began, trends in the labour market were favorable. Since 1987, the steep rise in open urban unemployment that had occurred in the first half o f the 1980s had been reversed. In 1992, as trade liberalization was com pleted, the trend shifted again, reflecting the severe blow that it generated on agricultural and manufacturing employment. Although urban employment was buoyed for some time by a boom in other sectors (construction and som e services), it weakened overall from 1992. The interruption o f the upward trend in the labour participation rate prevented the sluggish employment situation from being reflected in unemployment for several years. In fact, the jobless rate for urban areas in 1993-95 averaged 8.7 per cent, the lowest since the start o f the 1980s. The deterioration in the labour market started to become evident in the mid-1990s, when the structural effects o f economic openness on agricultural and manufacturing employment were com pounded by a renewed upturn in the labour force participation rate and by the effects, first, o f slackening aggregate domestic demand and, later, of an outright recession. Open urban unemployment jumped in 1996 as economic growth slowed and then began to shoot up even more steeply in 1998, rising to record-breaking figures for the country and to one o f the highest levels o f Latin America in 1999-2002. Informal em ploym ent had been declining quite rapidly until 1996, but that trend also came to a stop and was followed by a sharp upswing from 1998 on. The progress that the country had been m aking in terms o f incom e distribution since the 1970s - which was more rapid, in any event, during that decade than in the 1980s - came to an end in the late 1980s (that is, before econom ic reforms, as such) and gave way to a deterioration in income distribution during the 1990s.23 The m ost important element in this process was the massive redistribution o f income between the city and the 134 Political crises, social conflict and economic development countryside, with the big winners being high-income sectors in urban areas and the big losers being high-income sectors in rural areas. The moderate deterioration in income inequality coefficient that occurred at the national level during the decade was thus the net result o f opposing trends in the urban and rural zones. In urban areas, distribution worsened significantly, primarily because o f the increase in the relative labour income o f the most skilled workers, while in rural areas, the crisis in agriculture brought about a ‘downward levelling’ o f incom es which translated into a reduction in income concentration, but amidst an escalation in poverty. A number o f studies have linked the widening o f the urban wage-income gap to a relative increase in the demand for skilled labour as a result o f trade liberalization and technical change, higher wages for civil servants and a relative expansion o f the private services sector, where, as in government, skilled jobs account for a large proportion of total employment. Even though income distribution worsened, poverty declined substantially in urban areas between 1991 and 1997 - from 47.3 per cent to 39.1 per cent, according to data from the N ational Planning Department, but this improvement was not matched in rural areas. Instead, as a result o f the severe agrarian crisis o f those years, rural income poverty increased. The reduction in urban poverty was associated not only with the econom ic growth but also with a sizeable decrease in the cost o f the food basket, which obviously had opposite impacts on income levels in urban and rural areas. The crisis that broke out in 1998 clearly led to setbacks in various areas (see Table 5.2). The expansion o f social services coverage ceased both because o f cutbacks in social public spending and as a consequence o f the growing econom ic needs o f the population (as, for example, when young people drop out o f school in order to contribute to household income). As a result o f this and the reduction in real income, C olom bia’s human development index declined in 1997-99 and showed no progress for the crisis period as a whole (up to 2001), in contrast with the strong improvement posted between 1991 and 1997. The most obvious setback was the increase in the percentage of the urban population falling below the poverty line, which in just two years reversed the gains o f the previous six. The quality o f life index for the poorest 40 per cent o f the population also worsened (D N P 2000). These trends were closely linked to the dramatic surge in open unemployment discussed above. The 1996 slump had added alm ost 400 000 persons to the ranks o f the unem ployed, while the 1998-99 recession caused unemployment figures to swell by another 1.4 million persons. Informal employment, which had run counter to the overall pattern in Latin America by shrinking during the boom years, soared during the recent crisis, thereby reversing the gains o f an entire decade. Colombia: economy, conflict and governance 135 Viewed in terms o f C olom bia’s history, these opposing results suggest that there are three prerequisites for sustained social progress: (a) an active social policy; (b) stable economic growth, and (c) a reduction in the dualism o f production structures leading to a fall in the productivity and income gaps separating different activities and econom ic agents. U ntil the 1950s, Colombia had fulfilled only the second o f these requirements, and social progress was slow; incom e distribution worsened and poverty remained at very high levels. In the 1960s, thanks to the consensus reached during the N ational Front (1958-74), state social services were expanded and the m odernization o f rural areas proceeded more rapidly, and urban/rural productivity differentials began to narrow as a result. The combination of these three factors accounts for the improvement in income distribution and the significant decline in poverty levels achieved in the 1970s. The inroads made in all of these areas were less noteworthy in the 1980s, and the improvement in social indicators consequently lost momentum. In the 1990s, social services coverage expanded a great deal, but the significant widening o f the urban/rural divide, uneven progress in the modernization o f urban areas (in which certain sectors and workers with university education have emerged as the main winners), and the crisis that began in 1998 combined to create a mixed social situation. These factors partially blocked the results expected from the political consensus that shaped the 1991 constitution, which had led to an active social policy. The expectation that an active social policy w ould help reverse the escalation o f conflict indicators was not borne out either, largely because the root causes o f this conflict are o f a different sort, as will be seen in the following section. Instead, and contrary to initial expectations, some o f the social effects o f econom ic changes may have actually exacerbated the country’s violence indicators. Effects o f this sort that may have had a particularly strong influence include the decline in rural incom e levels seen throughout the 1990s and the more widespread deterioration in social conditions that occurred during the recent lost half-decade. 5.4 VIOLENCE AND THE GOVERNANCE CRISIS In addition to the uneven progress made in terms o f social indicators, Colom bia has been witnessing a deterioration in social cohesion and is facing difficulties in turning its political system into an effective mechanism for social articulation. The phenomena occurring in this and many other sociop olitical dim ensions are, however, quite sim ilar to those being experienced by other Latin American nations. In fact, in some o f these spheres, Colombia has undeniable advantages over other countries o f Latin Political crises, social conflict and economic development 136 America, thanks to its strong republican tradition and the stability o f its party system. Its extremely high levels o f violence, on the other hand, are a more specifically Colom bian problem. It is, in part, associated with long­ standing conflicts, but in recent decades drug trafficking has had a stronger impact in this regard. Another factor is the country’s entrenched tendency towards negotiation and the fragmentation o f power, which is deeply rooted in its history o f regional heterogeneity. Colombia in the Light of Selected Comparative Indicators of Governance Table 5.3 shows C olom bia’s relative position as measured by the World Bank’s governance index (Kaufmann, Kraay and Zoido-Lobatón 2002). This information highlights two fundamental aspects. One is the serious deterioration o f all these indicators in the last few years, with the sole exception o f that for perceived corruption. This fact can be interpreted in various ways, but perhaps it is best to regard it, in the light o f recent C olom bian debates, as the outcom e o f a com bination o f the econom ic crisis, a feeling that the problem o f public order is slipping out o f control because o f the failure o f the Pastrana Arango (1998-2002) administration’s peace initiative and the decline in the political influence wielded by the traditional parties (more in the case o f the Conservative Party than in that o f the Liberal Party, judging by voting patterns), coupled with the failure o f other political forces to emerge that could offer stable alternatives to the country’s traditional two-party structure. Table 5.3 W orld B a n k governance indicators 1997-98 Voice and accountability Political instability and violence Government effectiveness Regulatory quality Rule o f law Control o f corruption Sources: 2000-01 46.5 9.1 52.9 58.8 22.4 33.8 35.5 7.5 40.5 44.9 22.0 44.7 Kaufmann, Kraay and Zoido-Lobatón (2002). Data provided by the Latinobarómetro survey, which are shown in Figure 5.5, back up this interpretation. Even in 1997, when the controversy about the illegal funding o f President Sam per’s election campaign was in full swing, C olom bia continued to exhibit levels o f trust in democracy and Colombia: economy, conflict and governance 137 satisfaction with its results that were similar to or higher than the Latin American average. The same can be said about Colom bians’ perception of their country’s future. One peculiarity o f Colombia in this regard was the disparity between the respondents’ perception o f their personal outlook for the future (much higher than the average for Latin America) and their feeling about their country’s future prospects (similar to the results for other countries).24 The worsening o f these indicators, in some o f which Colombia now ranks below the averages for Latin America, is therefore a very recent phenomenon. The 2003 survey results may show major changes in these areas, however, since President Andrés Pastrana Arango, whose popularity ratings in the polls were very low for the last three years of his administration, finished his term in office in 2002, and his successor, President Álvaro Uribe, is held in very high esteem. Interpersonal trust 1997 1999-2000 1 32 Colombia Latin America I1 6 13 2 1 10 0 1 20 2002 I1 7 I 19 16 1 30 1 40 0 10 20 30 40 0 10 20 30 40 Support for democracy 1997 1999-2000 169 Latin America 40 50 60 39 I50 I63 30 2002 0 1 0 Colombia 70 80 30 40 50 60 56 70 80 30 40 50 60 70 80 Satisfaction with democracy 1997 1999-2000 Colombia 127 40 Latin America 2002 41 0 Source: 10 20 30 40 32 17 3 50 0 1 10 1 20 1 30 1 40 1 50 0 10 20 30 40 50 Latino barómetro. Figure 5.5 L a tin o b a ró m etro com parative results Table 5.3 also shows that even as far back as 1997-98, Colom bia ranked poorly in the international indices for political stability and violence and for the maintenance o f the rule o f law. This was also the case for perceived corruption, but, as noted earlier, considerable progress has been made in this regard. It is difficult to interpret these data accurately because o f the 138 Political crises, social conflict and economic development structural dualism o f Colombian society. On the one hand, both indicators clearly reflect the extremely high levels of violence found in Colombia. They also show that in areas where the violence is intense, basic human rights violations are occurring. This includes violations o f the most basic right of all - the right to life - which the state has been incapable of safeguarding. On the other hand, it is difficult to argue convincingly that violence in Colombia is a general problem o f political instability or o f a limited application of the rule o f law. By contrast, Colombia has excellent indices o f political stability, and this includes the stability o f its party system (Colombia and Uruguay are the only two countries that have maintained the same party system that they had in the nineteenth century), its constitutional framework, its strong electoral tradition and elections-based system o f alternation in power (which was interrupted for a total o f only five years during the twentieth century).25 The indicator on the application o f the rule o f law is also difficult to interpret. The conflict zones are, of course, characterized by difficulties of this type. In addition, the country’s judicial system suffers from problems o f inefficiency and there is a tendency to use the constitutional provision regarding states o f emergency or exception as a tool for managing the internal conflict.26 A t the same time, however, part o f C olom bia’s national political culture is a strong tradition o f the division o f power and o f respect for that division even during difficult political circumstances.27 Thus, Colom bia certainly has problems with violence, structural dualism and, as a corollary o f the latter, an inability on the part o f the ‘formal’ system to guarantee the full strength o f its institutions, but it clearly does not suffer from a broad lack o f political stability or a failure to uphold the rule o f law. In fact, from a comparative standpoint, just the opposite may be true. The formal political system has, o f course, experienced problems that have limited its ability to m obilize the population. These problems have included the exclusion o f groups outside the two traditional parties during the National Front (although some opposition groups did succeed in voicing alternative approaches within the two-party system) and a tradition o f power sharing between the two parties that arose during that period and survived in various forms after the Front’s disappearance. This created a political system in which formal opposition has often been non-existent or has surfaced only in preparation for the form ation o f two-party (or now, perhaps, broader) governing alliances that include dissenting groups. In addition, the absence o f a broader spectrum o f political com petition has curbed certain forms o f political m obilization (programmatic and ideological confrontations) and maximized others (patronage). This problem may have grown more serious in the 1990s because o f the centrifugal forces exerted on the traditional parties as a consequence o f electoral rules and Colombia: economy, conflict and governance 139 practices that create powerful incentives for individual rather than partybased congressional representation (‘electoral microenterprises’, to use the Colombian expression). Although, judging from their results, the attempts made in Colombia to remedy these problems through political reform have certainly fallen short of the mark, they have been undertaken in earnest and have been more ambitious than those seen in other Latin American countries, especially because they have built upon a much sturdier republican tradition. M anifestations of the nation’s political institutional soundness and, hence, o f its political stability and the applicability o f the rule o f law include: the revitalization o f local politics and affairs since the mid-1980s; the robust balance of power, which the 1991 constitution reinforced, including more control by the Constitutional Court over the use of states of emergency; the creation of new machinery for political participation within the framework o f participatory democracy (a deeply rooted concept in the country’s political vocabulary) as a means o f complementing its representative democracy; the creation o f a powerful constitutional instrument - the right o f am paro (refuge) - to safeguard basic human rights; the judicial system’s demonstrated ability to initiate proceedings to combat political corruption and to bring them to completion; and the country’s success in dealing with the political turbulence o f the 1990s without disrupting its institutional structure. The formal system’s inability to safeguard its institutions has, o f course, taken a heavy toll. What is more, at certain points in time and certain locations, some segments o f the formal system have, either implicitly or explicitly, forged alliances with segments o f the informal system which have proven to be extremely costly. The massacre o f leaders o f the Patriotic U nion28 - the group formed by the Revolutionary Armed Forces o f Colombia (usually known by the Spanish-language acronym, FARC) to prepare the way for its re-entry into politics during the peace negotiations with the Betancur Administration (1982-86) - perpetrated by paramilitary groups29 has not only impaired the country’s democracy but has also reduced the chances o f holding successful negotiations with the major guerrilla group in the country. The use o f assassinations as a means of suppressing the expression of certain types o f political views also impacted other political parties. This tactic reached its height during the 1990 presidential campaign, when three candidates for president (including Luis Carlos Galán, who would probably have won the election) were assassinated and attempts were made on the lives o f various other political leaders, including a future president (Ernesto Samper). The murder o f numerous union leaders has greatly weakened this form of social mobilization and organization. Alliances formed by segments of the economic, political and military power structure with drug traffickers and paramilitary groups have left a trail o f weakened institutions and 140 Political crises, social conflict and economic development human rights violations in their wake. These processes have also tarnished the country’s international image. N onetheless, although their response was delayed somewhat, formal institutions have moved to suppress these alliances and illicit activities and have staunchly upheld their commitment to human rights, even though, unfortunately, their efforts have thus far not had the hoped-for results. In addition to the foregoing considerations, it should be noted that some well-known interpretations o f the situation in Colombia have characterized the country’s main problem as being a lack o f civic awareness, which is in turn an outgrowth o f a private rationale’s predominance over a public rationale.30 This is no doubt true, and it points to the absence and, hence, the importance o f constructing a soundly based public ethic. One o f the m ost pernicious sym ptom s o f this syndrome is mistrust o f others. The Latinobarómetro data summarized in Figure 5.5 indicate, however, that distrust o f others - and, perhaps, the broader problem posed by the predom inance o f a private rationale - is no more marked in C olom bia than it is in other Latin American countries. Violence and the Drug Trade The image o f Colom bia as having a long history o f violence frequently appears in analytical studies on the country, but a number o f prominent historical essays31 have cast some doubt on the accuracy of this depiction. There has, indeed, been recurrent violence, but its nature and intensity have varied significantly over time, and its historical continuity is therefore debatable. The history o f the nineteenth century was marked by the difficult task of building a nation out o f a disconnected set o f regions. This process triggered nine national civil wars and 50 or so regional armed conflicts. However, with the exception o f the last o f the civil wars - known as the ‘War o f a Thousand D ays’ (1899-1902) - these wars were limited in scope, with uprisings overlapping with armistices and elections in what was, in a sense, a collection o f alternative and essentially political mechanisms for negotiation in the presence o f a chronically weak state.32 After the outbreak o f the War o f a Thousand Days and the national trauma caused by the subsequent secession o f Panama (1903), the country’s regional heterogeneity came to serve as the cornerstone for a strong democratic tradition and - apart from the period during which ‘The Violence’ broke with that tradition - a civil one as well. Thus, throughout the twentieth century, Colom bian democracy was the main institutional mechanism for negotiations among the regional élites represented in the two traditional political parties, Congress and the Cabinet. Colombia: economy, conflict and governance 141 The Violence was, o f course, the glaring exception to this rule. The country underwent a severe institutional crisis between 1948 and 1957 in which the m ilestone events were the assassination o f the Liberal Party leader, Jorge Eliécer Gaitán, in 1948; the Liberal Party’s abstention from the 1950 elections on the grounds that sufficient guarantees were lacking; and the overthrow o f President Laureano Gómez in 1953 and o f General Gustavo Rojas Pinilla in 1957. The undeclared civil war between the two traditional political parties and its disintegration into what came to be known as ‘bandolerism o’ immersed the country in levels o f violence it had never experienced before except during the War o f a Thousand Days. The 1957 plebiscite, which led to the formation o f the National Front (1958-74), signalled Colom bia’s return to its civil tradition. The violence then abated, although it remained at higher levels than those that had existed in the four decades o f peace that preceded The Violence.33 The Violence brought to light the persistence o f other forms o f conflict that were very closely linked to regional processes. The m ost intense conflicts o f this sort were land disputes along the agricultural frontier. The occurrence o f frequent conflicts in areas where new land is being placed under cultivation is not a characteristic specific to Colombia. What is more specifically Colombian is the existence o f an open frontier in many regions, and even in the heartland o f the country, as well as the limited presence o f the state and military forces in those zones. Given Colom bia’s complex geography, it is possible for frontier zones to exist just kilometres away from major urban centres. The highly conflictive nature o f C olom bia’s agricultural frontier zones throughout the nineteenth century and in the early decades o f the twentieth has been documented in various studies.34 In the 1930s and again in the 1960s and in the final two decades o f the twentieth century, the Colombian state responded to these rural disputes by instituting three agrarian reform programmes. These programmes were notable for their lim ited scope and lack o f continuity, the im portance they placed on handing over state land rather than redistributing existing farmland, and their close links to efforts to pacify rural areas. This last feature was particularly noticeable in the third agrarian reform initiative, which began with the N ational Rehabilitation Plan in the 1980s and then carried over into the 1990s as a formal agrarian reform process.35 The map o f violence in Colom bia since the 1980s has, however, been much m ore com plex due to the presence o f shifting com binations of these frontier-zone conflicts with long-standing agrarian disputes (the indigenous population’s struggle for land in some regions o f the country) and an interwoven maze of guerrilla movements, compounded by the more recent, devastating effects o f the drug trade.36 Some guerrilla movements (FARC, in particular) are a direct outgrow th o f these long-standing Political crises, social conflict and economic development 142 agrarian disputes, and som e o f them have survived for decades thanks to the remoteness o f many o f the country’s rural areas, although at times they have certainly come close to annihilation. It should be noted that, with the partial exception o f M-19 before its integration into civil affairs in 1990, the country’s guerrilla movements have generally been incapable o f developing any sizeable urban front apart from a few redoubts manned by radical students and labour unions. Within this com plex framework, however, there is consensus as to the crucial role played by drug trafficking and, in particular, the cocaine trade in recent patterns o f violence. The steep increase in violence during the 1980s (see Figure 5.6) coincided with the establishment o f the large-scale drug cartels involved in the cocaine trade.37 The country’s location along the transit route between cocaine-producing South American countries and the principal market for cocaine (the U nited States), coupled with such factors as the existence o f a long agrarian frontier over which the state exercises very lim ited control and an ‘inform al’ sector involved in contraband trade, explain how these illegal business dealings developed so quickly in Colombia. The 1980s boom in the cocaine trade followed a short-lived upsurge in marihuana cultivation and trafficking in the 1970s and was based on the processing o f coca paste brought in from Bolivia and Peru, since the cultivation o f coca plants was not a traditional farming activity in Colom bia. This crop began to increase in the 1980s, however, u a 00 0 \ 0 \ 0 \ 0 \ G \ 0 \ 0 \ 0 \ G \ 0 \ 0 \ Õ \ Õ \ Õ \ Õ \ Õ \ Õ \ Õ \ Source: o N o o o N o N o United Nations Office on Drugs and Crime (U N O D C ), Coca survey for 2002, Bogotá, DC. F igure 5 .6 Coca p roduction area vs sp rayed area Colombia: economy, conflict and governance 143 and then underwent an extremely rapid expansion in the 1990s as coca farming was successfully reppressed in Bolivia and Peru (see Figure 5.7). The existence o f illegal networks already in operation also paved the way for the introduction o f poppy cultivation in the 1990s, but the scale o f this crop has been limited. O H (S rr)^iO ^O h O O O N O H (S n^iO ^M )O ^O H (S cfi^iO ^O M X )0O rH r ^r^r^r^r^r^r^r^r^r^ooooooooooooooooooooc^c^c^c^c^c^c^chchchoo ChChChChChChChChChChChOM ChChChChChChChChChChChChChChChChChChOO Source: National Police. Figure 5 .7 M urder rate The drug trade has not only infiltrated the pattern o f confrontations found along the agrarian frontier, but has also caused the conflict to spread to what had been fairly peaceful parts o f the countryside and has sparked urban violence o f the type associated with drug wars and the recruitment o f these illegal groups’ henchmen.38 It has also played a central role in the creation and financing o f paramilitary organizations. Their coexistence with guerrilla groups in various locations around the country prompted the latter to finance their operations by levying taxes on the drug trade and eventually going into business for themselves, although the extent o f their involvement continues to be a subject o f debate. More generally, it has helped, both directly and indirectly, to finance the main forms of violence present in Colom bia and has had a direct hand in the formation o f criminal groups. The practices o f these groups have also been a decisive factor in the intensification o f all the various forms o f violence. The most significant manifestation o f this deterioration is the frequency of massacres and kidnappings and the terrorization o f the civil population by violent bands or gangs, which is part o f the reason for the mass displacement o f population groups within the country. Colombia accounts for a large 144 Political crises, social conflict and economic development percentage o f these problems at the international level. One of the results of the interaction between drug trafficking and acts of violence is the increasing importance, within the context o f this conflict, o f the possession o f control over territories where coca is grown and processed, given the decisive role that such control plays in providing funds for the armed groups. The corruption fueled by the drug trade and the murder of honest judges by assassins in the pay o f drug traffickers during the 1980s dealt a severe blow to the judicial system. More generally, the upsurge in violence as a direct and indirect result o f the drug trade overwhelmed the justice system and undermined its response capacity, which in turn acted as an additional incentive for the growth o f illegal activities and violence.39 The devastating effects o f the assassination o f leaders o f the Patriotic U nion party and of other political and trade union leaders were a concrete manifestation of the spiraling violence triggered by drug traffickers and paramilitary groups. D rug m oney was also used to corrupt a large part o f the political and econom ic system. All o f these impacts greatly outweigh the sometim es exaggerated statistics concerning the econom ic dimension o f these illegal activities. In this regard, it is important to differentiate between the inflow o f funds to Colom bian drug dealers, many o f whom invest their money outside the country, and the effective inflow o f resources brought into the country by these illegal activities, which, according to the best estimates available, may have peaked at 4 to 6 per cent o f G D P in the mid-1980s but have generally hovered around 2 to 3 per cent o f G D P over the past two decades.40 By comparison to the drug trade’s impact on the levels o f violence, the effects o f traditional forms o f rural violence and the sharp social inequality characteristic o f the country have been less significant. Colombia does, of course, have severe problems with regard to poor income distribution and high poverty levels, and these problems are particularly serious in rural sectors, but these are difficulties that they share with other Latin American countries.41 The intensification o f violence in the 1980s cannot be accounted for by a deterioration o f these variables, since they actually improved during those years (M ontenegro and Posada 2001). By the same token, an explanation for the considerable decline in the homicide rate registered in the 1990s (see Figure 5.7) cannot be derived from the trends in social indicators, since they were quite mixed, with some improving while others worsened (see section 5.3). In fact, the disbanding o f the most violent drug cartel o f them all, the Medellin cartel, may be one o f the most important reasons for that decrease, given the steep reduction in that indicator posted by Antioquia. In any case, the increase in rural poverty during the 1990s and the upward trend in urban poverty seen during the m ost recent economic crisis may have set the scene for the expansion o f coca cultivation, as well Colombia: economy, conflict and governance 145 as for com m on delinquency. More generally, the possibility cannot be ruled out that a combined impact may have been generated by the convergence of the more traditional sorts o f social problems with the explosive conditions typical o f a country subject to so many different manifestations of violence. In addition, it is important to bear in mind that the improvement in the homicide rate shown in Figure 5.7 has not been mirrored by other indicators o f violence, such as the frequency o f massacres and kidnappings. The extensive literature on the subject indicates that violence increases in different parts o f the territory when violent agents o f drug traffickers or members o f paramilitary or guerrilla groups are present in those locations. The presence o f such agents is, in turn, associated with access to wealthgenerating assets (the drug trade itself, petroleum, emeralds). Social factors of a more traditional sort are also a factor, however. Such factors include an uneven distribution o f econom ic opportunities (measured by inequalities in the quality o f life index for the inhabitants o f a given area), low educational levels and low rates o f political participation.42 Apart from the specific costs o f the drug trade, acts o f violence have also taken a heavy toll. Econom ic costs include the loss of human capital, added public and private expenditure on security and the distortions generated by illicit transfers o f wealth, either by direct means (via kidnappings and extortion) or through indirect channels (for example, via the concentration o f rural property in the hands o f drug traffickers). Detailed calculations indicate that the net annual costs are around 3 per cent of G DP and the gross costs (net costs plus transfers o f wealth) about 4 per cent o f GDP.43 These costs have no doubt impaired econom ic growth. The strongest argument on this point has been made by Cárdenas (2002), who contends that the increase in violence in the 1980s interrupted the overall rise in productivity and thus slowed the econom y’s growth. Expressed in these terms, the argument does not seem very convincing, since there are other purely economic explanations for this slowdown and for the econom y’s poor performance during the 1990s. What is more, Colom bia’s experiences during that period are fairly similar to those o f other Latin American countries in which violence has not been so much o f a problem (see sections 5.2 and 5.3). This appears to indicate that, although violence may have influenced econom ic trends, in the final analysis is has simply reinforced (to an undetermined extent) trends for which an econom ic explanation exists. The Nature of the Conflict, the Propensity to Negotiate and the Fragmentation of Power A nalyses o f the origin and characteristics o f the internal conflict in Colom bia have generated an interesting body o f literature on its nature, 146 Political crises, social conflict and economic development which defies classification in any of the internationally established categories for describing conflicts. One of the points made most often in this connection concerns the inappropriateness o f describing it as a ‘civil war’, given the absence o f a large-scale collective division into two bands. Instead, C olom bia’s internal conflict is characterized by the predominance o f a few violent agents or bands that have the capacity to threaten the ‘formal’ system’s hegemony. The citizenry does not identify with those agents. On the contrary, the populace feels threatened and defenceless in the face of violent groups’ systematic use o f terror to intimidate the civil population. This has prompted a prominent French student of the situation in Colombia to describe the conflict as a ‘war against society’ (Pécaut 2001) and has moved another scholar to reject not only the concept o f ‘civil war’ but also to rule out ‘generalized violence’ as a suitable description o f the conflict in the country (Posada Carbó 2001b). One o f the essential elements in these analyses is an awareness o f the fact that, although the state has been threatened and is incapable o f guaranteeing social order, it nonetheless does maintain and exercise its legitimacy. Hence, the concept o f a ‘regime breakdown’ cannot be properly applied to Colombia either. In view o f this situation, the ‘formal’ system ’s propensity to avoid open confrontation and to rely instead on dialogue and negotiation is somewhat surprising. These traits were reflected in the peace initiatives launched by five presidents, starting with the Betancur administration (1982-86) and ending with the Pastrana Arango administration (1998-2002). These initiatives enjoyed the support o f the citizenry, as demonstrated by opinion polls taken at the time, which indicate that a majority o f the population systematically preferred negotiation to conflict during the 1980s and 1990s. In fact, Álvaro Uribe is the only president to have achieved a resounding electoral victory and to have maintained his popularity based on a confrontational platform. This, however, can be accounted for by the conspicuous failure o f the Pastrana A rango adm inistration’s peace initiative. The Turbay administration (1978-82) also adopted a confrontational stance at an earlier stage in the country’s contemporary history, when violence had not reached its current proportions. He, however, encountered staunch opposition. Late in his presidency, this opposition led him to design the first peace initiative and then paved the way for the electoral victory o f Belisario Betancur, one o f whose main campaign promises was to undertake an ambitious effort to make peace with armed groups. This strategy o f offering non-confrontational formulas has been used even in the case o f the drug trade.44 Assassinations o f important political leaders drove both President Betancur (1982-86) and President Barco (1986-90) to outright confrontation, but these reactions were invariably part o f a cycle which regularly involved a renewed search for alternatives Colombia: economy, conflict and governance 147 to repression. The m ost significant o f these formulas was the policy of having drug traffickers agree to stand trial in exchange for reduced sentences (and even special privileges while in prison) implemented by the Gaviria administration (1990-94). The provision contained in the 1991 constitution which prohibits the extradition o f C olom bian nationals was partly a reflection o f the widespread intimidation by violence perpetrated by drug traffickers, but it was also partly due to the population’s rejection of the idea o f using extradition as a means o f suppressing the drug trade. It was not until the Samper administration (1994-98) that a sustained, frontal assault was launched against this illegal activity. This effort took the form o f the reintroduction o f extradition, the curtailment o f the policy regarding the use o f incentives for standing trial and the increasingly intensive spraying o f illegal crops. As shown in Figure 5.6, this policy and the disbanding o f the major cartels in the m id-1990s did not really begin to bear fruit in terms o f the reduction o f illicit crops until 2001 and especially 2002 (U N D C P 2003). This policy o f repression has garnered support from the international community and particularly the United States, even during the years o f confrontation with the Samper administration. The administration o f President Pastrana Arango then formalized the ‘Plan C olom bia’. After 11 September 2001, this plan increasingly became part o f the international offensive against terrorist groups, which now include all the irregular armed groups in Colombia. This propensity to negotiate is surprising, given the lim ited success attained by various adm inistrations in this area. The m ost significant achievements were those o f the Barco administration, which succeeded in negotiating the dem obilization o f two major guerrilla groups - the M-19 and the Popular Liberation Army (ELP) - along with two smaller movements - the Quintin Lame and the Corriente de Renovación Socialista. The reasons for this success have to do with other factors, in addition to Colom bia’s civil tradition, which, as noted above, until quite recently has been reflected in majority support for negotiation rather than confrontation. This tradition has also, until quite recently, been reflected in a rejection o f the idea o f having a strong national army. The opposition to this idea dates back to the disputes that arose in the early years o f the republic, when the civilist band won out over the militarists, represented by a large number o f mainly Venezuelan generals who had taken part in the fight for independence. A s a matter o f fact, the divergence o f C olom bia’s and Venezuela’s historical paths can be attributed to the way in which these initial disputes were resolved. As has been noted, in the nineteenth century this was no obstacle for Colombians wishing to take recourse to uprisings as a means o f pursuing political negotiations with a chronically weak national government. The frailty o f the state and o f its armed forces in many parts 148 Political crises, social conflict and economic development o f the nation’s territory has been a constant feature o f the national scene up to and including the present and has facilitated the spread o f violence. Many authors have interpreted this tendency as a sign that the formation o f the Colombian nation is not yet complete. While this may be the case, it is equally true that it is a reflection o f the Colombian tradition o f fragmented power. This phenom enon is rooted in the country’s regional heterogeneity, which, ever since the birth o f the republic, has led to a rejection o f any sort o f centralized hegem ony or strong national power, even after the promulgation o f the constitution o f 1886, which spelled the demise o f the nineteenth century’s federalism. Eventually, this characteristic came to be one o f the strongest pillars o f the country’s democratic tradition. Indeed, democracy has historically been the system o f government used in Colombia to permit its regional élites to negotiate with one another. This is the source o f its historical fortitude, but it is also the origin o f C olom bia’s tradition o f maintaining a weak state. The powerful centrifugal forces to which the traditional political parties have been exposed in the past decade and the proliferation of new movements which have not managed to form strong, nationwide organizations are more recent expressions o f this revealed preference for a fragmented power structure. Another such manifestation is the further fragmentation of power engendered by the 1991 constitution, which provides for more checks and balances of national powers, including some new actors (the Constitutional Court, Banco de la R epública, the N ation al Television C om m ission), together with a radical system of decentralized revenue sharing that is similar to systems used in countries o f the region having a strong federal tradition (Argentina and Brazil) and that is broader in scope than the systems used by some other federal republics (M exico and Venezuela). As new social m ovem ents and actors have emerged, the tendency to avoid the formation o f a central authority in any sector (manual workers, cam pesinos , civic organizations or even business associations) has remained strong. Furthermore, because o f the reproduction of these structures, the violent conflicts that have arisen have continued to be essentially local in nature. This has helped avert the disintegration o f the ‘form al’ system ’s national structures, but many times (including the present) it has also resulted in a perception of chaos owing to the existence o f so many different pockets o f disorder. This was an even greater problem in cases where traditional regional power structures’ intolerance o f new social forces erupted into local conflicts that were so fierce that the adversaries were sometimes annihilated. Just as FARC has its origins in local conflicts, the history o f paramilitarism in recent decades and even the destruction o f the Patriotic U nion in the 1980s reflect processes that have probably been more o f a summation of Colombia: economy, conflict and governance 149 local conflicts than a coordinated nationwide offensive. Even the classic era o f violence corresponded, in large part, to conflicts o f this sort. This interpretation o f the situation indicates that any solution for the current crisis must necessarily entail a consolidation o f democracy that will provide broader opportunities for participation by a wide range o f local stakeholders. Today, as in the past, the country’s diversity is an expression of its deeply rooted democratic forces. The expansion o f democratic channels must, however, be coupled with the development o f effective governance, whose core components must be consensus building, respect for differences, an effective justice system capable o f overcom ing intolerance, and a legitimate m onopoly o f force. NOTES * 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. This chapter was originally prepared for the Project on Economic Policy in the Andean Countries being executed by the Inter Am erican Dialogue and E C L A C with funding from the Ford Foundation. I am grateful to Juan Carlos Ramírez, Joshua M itroti and M aría An gela Parra for the collaboration in the preparation o f this material, and to Genaro A m agada, Andrés Solimano and Anthony Tillet for the comments concerning an earlier version o f it. In this chapter we w ill follo w the Colom bian tendency to use the term ‘ opening o f the economy’ (apertura económ ica) to refer to reforms aimed at liberalizing economic activities. See, for example, Dornbusch and Fischer (1992). The D evelopm ent Plan issued by the Gaviria Adm inistration (see D N P 1991) stated that it was necessary to open up the economy in order to counteract the trend towards economic stagnation. This statement gave rise to a great deal o f controversy in the country. A number o f authors (including the author o f this chapter) questioned the validity o f that statement. See, in this regard, the essays presented in Lora (1991). These observations and those made in the follow ing paragraphs are based on various essays on economic history written by this author. See, for example, Ocam po (1994). E xport incentives were first created in the late 1950s and early 1960s (the Vallejo Plan in 1957, the establishment o f the first tax incentives in 1960 and the introduction o f the first preferential credit mechanisms in 1963). Decree-Law 444 o f 1967 refined these incentives and supplemented them with the introduction o f a crawling peg. For a historical account o f these attempts at trade liberalization, see Garay (1991) and Ocampo (1990). For an interesting comparison o f changes in Colombian and international production patterns, see Syrquin (1987). See Cepeda U llo a (1994), who examines the reform package as a whole, and Ocampo (1993) on the more specific topic o f trade reform. The main, and m ost influential, critic o f this approach has been Eduardo Sarmiento Palacio. See Sarmiento Palacio (1996 and 1998). See Jaramillo (1998) and Ocampo and Perry (1995). See, in this respect, the essays included in M ontenegro (1997). For an analysis o f what occurred during those years, see Lora and Ocampo (1986). There is a wealth o f literature on this last point. See, among others, Banco de la República (1999), Carrasquilla (1990), Echeverry (2002) and Villar and Rincón (2003). See Ocampo and Tovar (1999 and 2003). See, for example, Fernández (1987). 150 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. Political crises, social conflict and economic development See Palacio Rudas (1995). This interpretation differs from others presented in Steiner (1995). Corte Constitucional, Sentencia C-481/99. See references in note 14 and Villar and Rincón (2003). A less favourable assessment o f the effects o f the reserve requirement can be found in Cárdenas and Steiner (2000). A few simple calculations can be used to corroborate these statements. Whereas the real interest paid to the national financial system during the 1982-88 adjustment amounted to 3.1 per cent o f G D P per year, in 1998-99 the figure was 6.4 per cent. Just the opposite occurred in the case o f exchange losses, even though the external debt was larger in the 1990s. Cumulative exchange losses totalled 4.6 per cent o f G D P in 1984—86 versus 2.7 per cent in 1997-99. The most prominent critic o f this procyclical approach to the management o f monetary and exchange-rate policy has been Javier Fernández, who has aired his opinions in his weekly publication P rospectiva económ ica y financiera. See, in particular, Fernández (2000). This is made clear by the developm ent plans o f these tw o Adm inistrations (D N P 1991, 1995). The Samper administration aimed at maintaining more or less balanced consolidated public accounts by covering large deficits o f the central government with surpluses generated by the rest o f the public sector, including both public-sector enterprises and the social security system. For a detailed analysis o f these matters and o f the problems regarding the comparability o f the fiscal deficit figures, see Ocampo (1997). See D N P / P N U D (2000 and 2003) and D N P (2000). Longer-term income distribution trends are discussed in Londoño (1995). M ore recent trends are analysed in O cam po et al. (1998 and 2000) and in Sánchez and N ú ñez (1999). C olom b ia shares this peculiarity with Brazil. See, in this regard, Latinobaróm etro (2000). See Posada’s C a rb ó ’s excellent essay (2001a) on this subject, as well as Solim ano’s comparative analysis o f the Andean countries (2003). See, inter alia, García and Uprimny (1999). See the essay by Posada Carbó cited above (2001a). Between 1985 and 1992, the Ombudsman’s Office recorded 717 homicides o f members o f the Patriotic Union, including two presidential candidates, four members o f Congress and more than 50 people who had been elected to various public offices. This analysis will continue the convention o f using the term ‘paramilitary’ to refer to rightwing armed groups. It should be noted, however, that the connotation o f ‘paramilitary’ in Colom bia is very different from what it is in other Latin American countries where there has been a much closer connection between m ilitary and paramilitary groups. In Colom bia, it might be more accurate to call these groups ‘right-wing guerrillas’ . G óm ez Buendía (1999). In a similar formulation, this trait has been described as ‘rent seeking’ or, in other words, the pursuance o f individual privileges at the expense o f the collective (Garay 1999). A very similar argument is made by Kalm anovitz (2001). These works include the extraordinary essay written by the British historian, M alcom Deas (1995), which begins with a statement that to some extent provides a synthesis o f his book: ‘Colom bia has been, at times, a violent country.’ See, in this connection, Sánchez (1991, Chapter 2). For a discussion o f m ortality rates during these wars and throughout the twentieth century, see Gaitán D aza (1995). See Gaitán D aza (1995). See, in particular, LeG rand (1988). For an overview o f these agrarian reform efforts, see Ocampo (1994). The following discussion cannot do justice to the complex issue o f violence in Colombia. See, from am ong the works m aking up the voluminous literature on the subject in C olom bia, the above-cited essays by Deas (1995), Gaitán D aza (1995) and Sánchez (1991); the studies included in Sánchez and Peñaranda (1986), Camacho Guizado and Leal Buitrago (1999) and Deas and Llorente (1999); the report issued by the Comisión de Estudos sobre la Violencia (1987), Pizarro (1996), M ontenegro and Posada (2001), Colombia: economy, conflict and governance 37. 38. 39. 40. 41. 42. 43. 44. 151 Pécaut (2001) and Palacios and Safford (2002, chapter X V ). The study prepared by Reyes and Bejarano (1988) includes maps o f violent incidents which illustrate the complex confluence o f drug traffickers, guerrilla battles and long-standing disputes about agrarian issues and the rights o f indigenous groups. For the history o f drug trafficking in Colom bia, see Thoumi (1994) and Rocha (2000). This kind o f problem , which has been particularly serious in M edellin, has been documented in all its crudity by Salazar (1990). See M ontenegro and Posada (2001) and Rubio (1999). On this last point, see G óm ez Restrepo (1988), G óm ez Restrepo and Santa M aria (1994) and Rocha (2000). D A N E estimates put the coca crop’s contribution to the portion o f G D P corresponding to the agricultural sector at around 1.25 per cent o f G D P in 1994-2002, at a high o f 1.48 per cent for 1999 and at 0.89 per cent for 2002. In terms o f income concentration, C olom bia’s level o f inequality is exceeded only by Brazil, but it is fairly similar to those found in Bolivia, Chile, Guatemala, Honduras, Nicaragua and Panama, while inequality levels in Argentina and Venezuela are fast approaching those o f the group o f countries with extremely p oor income distribution patterns (E C L A C 2001). See, among many other studies, D N P / P N U D (2000), M ontenegro and Posada (2001), Sánchez et al. 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(1991), Apertura y protección: evaluación de la política de importaciones, Bogotá: Tercer Mundo-Universidad Nacional de Colombia. Garay, L.J. (1999), ‘Construcción de una nueva sociedad’, Libros de la M esa 2, Bogotá: Tercer Mundo Editores-Cambio. García, M. and R. Uprimny (1999), ‘El nudo gordiano de la justicia y la guerra en Colombia’, in Camacho Giuzado and Leal Buitrago (1999). Gómez Buendía, H. (1999), ‘La hipótesis del almendrón’ , in Hernando Gómez Buendía (comp.), ¿Para dónde va Colombia?, Bogotá: Tercer Mundo EditoresColciencias. Gómez Restrepo, H.J. (1988), ‘La economía ilegal en Colombia: tamaño, evolución, características e impacto económico’, Coyuntura Económica, September. Gómez Restrepo, H.J. and M. Santa María Salamanca (1994), ‘La economía subterránea en Colombia’, in Gran Enciclopedia de Colombia, Tomo 8, Bogotá: Círculo de Lectores. Jaramillo, C.F. (1998), Liberalization, Crisis, and Change in Colombian Agriculture, Boulder, Colorado: Westview. Kalmanovitz, S. (2001), Las instituciones y el desarrollo económico en Colombia, Bogotá: Editorial Norma. Colombia: economy, conflict and governance 153 Kaufmann, D., A. Kraay and P. Zoido-Lobatón (2002), ‘Governance matters I I ’, Policy Research Working Paper 2772, World Bank. Latinobarómetro (2000), Informe de Prensa, Latinobarómetro 1999/2000, Santiago de Chile. LeGrand, C. (1988), Colonización y protesta campesina en Colombia (1850-1950), Bogotá: Universidad Nacional de Colombia. Londoño, J.L. (1995), Distribución del ingreso y desarrollo económico: Colombia en el siglo X X , Bogotá: Banco de la República/Fedesarrollo/Tercer Mundo Editores. Lora, E. (ed.) (1991), Apertura y crecimiento: el reto de los noventa, Bogotá: Fedesarrollo/Tercer Mundo Editores. Lora, E. and J.A. Ocampo (1986), ‘Política macroeconómica y distribución del ingreso en Colombia: 1980-1990’ , Coyuntura Económica, October; and in Eduardo Lora (ed.) (1988), Lecturas de macroeconomia colombiana, Bogotá: Tercer Mundo-FEDESARROLLO. Montenegro, S. (ed.) (1997), Los determinantes de la tasa de cambio real en Colombia, Bogotá: Universidad de los Andes-Facultad de Economía-CEDE, Debates no. 1. Montenegro, S. and C.E. Posada (2001), L a violencia en Colombia, Libros de Cambio, Bogotá: Alfaomega-Cambio. Ocampo, J.A. (1990), ‘La apertura externa en perspectiva’, in Florángela Gómez (ed.), Apertura económica y sistema financiero, Bogotá: Asociación Bancaria de Colombia. Ocampo, J.A. (1993), ‘Economía y economía política de la reforma comercial colombiana’ , Serie Reformas de Política Pública, no. 1, Santiago de Chile: ECLAC, April. Ocampo, J.A. (1994), ‘La formación de la economía moderna desde 1930’ , in Gran Enciclopedia de Colombia, Tomo 8, Bogotá: Círculo de Lectores. Ocampo, J.A. (1997), ‘Flujos de capital, ahorro e inversión en Colombia, 1990-1996’, in Ricardo Ffrench-Davis and Helmut Reisen (eds), Flujos de capital e inversión productiva: lecciones para América Latina, Santiago de Chile: ECLAC/OECD, McGraw-Hill. Ocampo, J.A. (1997), ‘Una evaluación de la situación fiscal colombiana’, Coyuntura Económica , 27(2), Bogotá, June. Ocampo, J.A. and S. Perry (1995), E l giro de la política agropecuaria, Bogotá: Tercer Mundo-FONADE-Departamento Nacional de Planeación. Ocampo, J.A. and C. Tovar (1999), Price-Based Capital Account Regulations: The Colombian Experience, ECLAC, Serie Financiamiento del Desarrollo, no. 87, October. Ocampo, J.A. and C. Tovar (2003), ‘Managing the capital account: Columbia’s experience with price-based controls on capital inflows’ , CEPAL Review, 81, December. Ocampo, J.A., M.J. Pérez, C. Tovar and F.J. Lasso (1998), ‘Macroeconomía, ajuste estructural y equidad en Colombia: 1978-1996’, in Enrique Ganuza, Lance Taylor and Samuel Morley (eds), Política macroeconómica y pobreza en América Latina y el Caribe, PNUD -CePAL-BID , Madrid: Mundi-Prensa. Ocampo, J.A., F. Sánchez and C. Tovar (2000), ‘Cambio estructural, mercado laboral y distribucion del ingreso: Colombia en la decada de los noventa’, Revista de la CEPAL, 72, December. Orozco, I. (1990), ‘Los diálogos con el narcotráfico: historia de la transformación fallida de un delincuente común en un delincuente político’, Análisis Político, 11, September-December. 154 Political crises, social conflict and economic development Palacio Rudas, A. (1995), ‘Los instrumentos que maneja el Banco de la República como autoridad monetaria, cambiaria y crediticia’, in Roberto Steiner (comp.), La autonomía del Banco de la República: economía política de la reforma, Bogotá: FEDESARROLLO/Tercer Mundo Editores. Palacios, M. and F. Safford (2002), Colombia: país fragmentado, sociedad dividida, Bogotá: Colección Vitral, Editorial Norma. Pécaut, D. (2001), Guerra contra la sociedad, Colección Espasa Hoy, Bogotá: Editorial Planeta Colombiana. Pizarro, E. (1996), Insurgencia sin revolución: la guerrilla en Colombia en una perspectiva comparada , Bogotá: IEPRI/Tercer Mundo Editores. Posada Carbó, E. (2001a), ‘Reflexiones sobre la cultura política colombiana’ , Cátedra Corona, 2, Bogotá: Universidad de los Andes. Posada Carbó, E. (2001b), ¿Guerra civil? E l lenguaje del conflicto en Colombia, Libros de Cambio, Bogotá: Alfaomega-Ideas para la Paz-Cambio. Reyes, A. and A.M . Bejarano (1988), ‘Conflictos agrarios y luchas armadas en la Colombia contemporánea: una visión geográfica’, Análisis Político, 5, SeptemberDecember. Rocha, R. (2000), La economía colombiana tras 25 años de narcotráfico, Bogotá: U N D C P and Siglo del Hombre Editores. Rubio, M. (1999) Crimen e impunidad:precisiones sobre la violencia, Bogotá: CEDE/ Tercer Mundo Editores. Salazar, A. (1990), No nacimospa semilla, Bogotá: CINEP. Sánchez, F. and J Núñez (1999), ‘Descentralización, pobreza y acceso a los servicios . sociales. ¿Quién se benefició del Gasto Público Social en los noventa?’, Coyuntura Social, 20, May. Sánchez, F., A. Solimano and M. Formisano (2002), ‘Conflict, violent crime and criminal activity in Colombia’, Research Program of The Economics and Politics of Civil Wars, Yale University, mimeo, November. Sánchez, G. (1991), Guerra y política en la sociedad colombiana, Bogotá: El Áncora Editores. Sánchez, G. and R. Peñaranda (eds) (1986), Pasado y presente de la violencia en Colombia , Bogotá: CEREC. Sarmiento Gómez, A. (1999), Violencia y equidad, in Camacho Guizado and Leal Buitrago (1999). Sarmiento Palacio, E. (1996), Apertura y crecimiento económico: de la desilusión al nuevo Estado , Bogotá: Academia Colombiana de Ciencias Económicas/Escuela Colombiana de Ingeniería/ECOE Ediciones. Sarmiento Palacio, E. (1998), Alternativas a la encrucijada neoliberal: mercado, narcotráfico y descentralización, Bogotá: Academia Colombiana de Ciencias Económicas/Escuela Colombiana de Ingeniería/ECOE Ediciones. Solimano, A. (2003), ‘Governance crises and the Andean region: a political economy analysis’, Santiago de Chile: ECLAC, Economic Development Division, Serie Macroeconomía del Desarrollo, 23, February. Steiner, R. (comp.) (1995), La autonomía del Banco de la República: economía política de la reforma , Bogotá: FEDESARROLLO-Tercer Mundo Editores. Syrquin, M. (1987), ‘Crecimiento económico y cambio estructural en Colombia: una comparación internacional’ , Coyuntura Económica, December. Thoumi, F. (1994), Econom ía política y narcotráfico, Bogotá: Tercer Mundo Editores. Colombia: economy, conflict and governance 155 Trujillo, E. and M.E. Badel (1997), ‘Los costos económicos de la criminalidad y la violencia en Colombia: 1991-1996’, Planeación y Desarrollo, XXVIII(4), Bogotá, October-December. U N D C P (United Nations Office on Drugs and Crime) (2003), Colombia: Coca Survey fo r 2002, Preliminary report, New York. Villar, L. and H. Rincón (2003), ‘The Colombian economy in the nineties: capital flows and foreign exchange regimes’, in Albert Berry (ed.), Critical Issues in Financial Reform: A View from the South, New Brunswick, New Jersey, Transaction. 6. Political economy of Ecuador: the quandary of governance and economic development Gustavo Arteta and Osvaldo Hurtado* 6.1 INTRODUCTION Ecuador’s social and economic development o f the last two decades fell short o f what was required to fulfill the needs o f its population. Despite arguably abundant natural resource endowments, per capita income has barely grown since 1980. This stagnation is often related to the return to democracy in 1979 by important portions o f the constituents. From time to time dictatorship is yearned for, based on the premise o f a spurious correlation between this form o f government that prevailed in the 1970s and the prosperity afforded by the beginning of oil exploitation in that decade. Despite this simplification o f the complex dilemma that econom ic development poses, it makes evident that many Ecuadorians do not feel that democracy has brought them improved welfare. It is just as troubling that the feeling is partially backed by many indicators o f econom ic and governance performance. Culprits o f the lackluster performance are widely debated. Many blame the political system, regional conflicts, cultural idiosyncrasies, (oil) resource curse, poverty, inequality, corruption and others. While probably each of these contributes to the stagnation to some degree, m ost corrective efforts have concentrated on econom ic reform and policies. Often, the latter have ignored political considerations and governance problems. But at the heart o f the successes and failures in the efforts to improve conditions most surely lies a combination o f both. The basic problem in Ecuador has been the failure o f the democratic system to articulate social dem ands and channel corrective responses promptly and efficiently. The failure is systemic and cuts through several administrations. Despite limited positive results, economic volatility, political instability and policy disagreement usually derail constructive initiatives. As a consequence, econom ic growth has been insufficient to reduce poverty, improve income distribution and eradicate other basic socioeconom ic ills. 156 Ecuador: political economy 157 The root cause o f the governance and econom ic troubles lies in the prevailing incentives and institution al structures that exacerbate the problems o f the entire chain o f principal-agent relations in a representative and indirect democracy. The conditions for interest group influence and concentration o f power are overwhelming. Aristocratic and oligarchic legacies, social class divisions, and narrow trade associations are all elements that facilitate political action as a byproduct o f their principal motive of association. Further strength o f interest group power is derived from asymmetry in firm sizes, products, and high industry concentration that dominates econom ic organization in Ecuador. The governance problems o f fractionalized political parties, populism and regional conflicts are expressions o f interest group influence. What many judge as corruption, a rampant ill in the country, in many cases is a manifestation o f extreme rent-seeking activity by interest groups that use legal and illegal means for their benefit. The reign of interest groups both contribute to and prey upon the weakness of economic and political institutions. In some cases, interest groups capture public institutions or influence their design to serve their purpose. An optimal-policy-seeking econom ist or a comm on-good-interested observer would describe a weak institution that doesn’t execute policies in the public interest as a failure. Yet, this would not be the perspective o f the pressure group that influenced its design. For example, the apparent problem o f a banking superintendency that fails to oversee problem banks may in fact be the desired condition for an oligopolistic banking industry. The power o f a few bankers can influence the selection o f superintendents that serve banks and not the public. A t the extreme, the influence can reach the corruption stage when the authority covers-up and protects specific institutions at the cost o f general financial stability.1 Weak institutions contribute to low policy credibility. W ithout it, the economy falls vulnerable to shocks because contingent policies that require planning and extended time horizons for implementation are difficult to sustain. The aim o f this chapter is to explore the conundrum o f E cuador’s econom ic underachievement and troubling governance through a political economy perspective. By focusing on both political and economic problems, we strive to gain a better understanding o f econom ic performance under the Ecuadorian political umbrella, and political behavior resulting from the underlying econom ic conditions. The chapter is organized as follows. Section 6.2 briefly describes the country’s political system’s performance under the current democratic period. Section 6.3 recounts recent economic performance and conditions. Section 6.4 attempts to analyse the interactions between the econom y and politics to explain the governance problems and econom ic woes. 158 Political crises, social conflict and economic development We wish to recognize at the onset that the chapter does not aim to prove or disprove specific theoretical hypotheses o f the political economy literature. Instead, it provides a sort of tour de force o f applications of various political and economic theories to the governance problems found in Ecuador and its consequences for econom ic performance. Thus, in some cases the approach bears the cost o f providing less than desirable rigor in substantiating some assertions. In spite o f this, our principal objective is to document and open the discussion over the governance problems and econom ic problems from a political economy perspective in Ecuador to stimulate further research. 6.2 POLITICAL PERFORMANCE: RETURN TO DEMOCRACY Ecuador was the first country in Latin America to re-establish democratic rule in 1977-79 after a prolonged struggle with dictatorships o f one form or another. The democratic hiatus began after President José Maria Velasco Ibarra, in office for the fifth time, in 1970 proclaimed himself dictator with the support o f the military. Two years later, General Guillermo Rodriguez, chairman o f the Joint Chiefs o f the Armed Forces led a coup that toppled Velasco. Toward the end o f 1975, the commanders o f the three branches o f the A rm ed Forces overthrew R odriguez. A fter taking over, they announced their intention to surrender back the power to civilian rule within two years. During discussions to re-establish democratic rule, the political, economic and social forces divided into three camps. Those w ith M arxist views asked the military to continue in power until a military-led ‘nationalist revolution’ (that had been proclaimed earlier) would be completed. ‘Rightw ing’ groups demanded the immediate return to civilian rule through a provisional president who would call for a Constitutional Assembly. A ‘progressive faction’ proposed a civilian-military agreement that would seek an organized transition toward democracy, which would entail a referendum over the constitutional reforms that would be needed to secure the future o f the constitutional system. In the afterm ath o f extended discussions, the M ilitary Triumvirate proposed a com plex process that they called ‘The Legal Restructuring Plan o f the State’ (Plan de Reestructuración Jurídica del Estado), whose execution called for establishing three com m issions com posed o f political parties, labor union leaders, entrepreneurs and constitutionalists. The commissions had to prepare three proposals: one for a new constitution, another for a new version o f the 1945 constitution, and lastly a draft bill with proposals for a set o f statutes that would govern the constitutional Ecuador: political economy 159 referendum, elections and political parties. The two constitutional projects were voted upon in a national referendum. Then, a new president was elected according to the new constitution’s electoral rules. Jaime R oldós trium phed in a two-round election that took place in 1978 and 1979, despite conspiracies orchestrated by a sector o f the Army connected with the political right and delays o f nine months between the first and second rounds. He took office on 10 August 1979. Fourteen Latin American countries later adopted this transition model from dictatorship to democracy, which relied on a civilian-military agreement. Huntington (1968) calls this process the ‘third wave o f Dem ocratization’.2 Ecuador was the first country in Latin America to begin the transition to democracy, and one o f the first countries to restore m acroeconom ic equilibrium (1983) and recover growth (1984). But that momentum was lost as political and econom ic stagnation has prevailed. W hat caused the inefficient functioning o f the democratic system and poor social and econom ic performance, to the extent that it is one o f the three countries on the continent that lost two decades o f econom ic and social development? This question is challenging and complex. In the following subsections we venture to provide answers for the failures o f the political system. Governance Problems Political - governance - problems have stalled improvements in citizens’ welfare under the current Ecuadorian dem ocratic system . These are expressed through the failure o f the system to articulate social demands and channel corrective responses prom ptly and efficiently. D esp ite limited positive results, the failure is systemic. Ecuador has not sustained macroeconomic stability as a result. In a few short episodes, stability was briefly obtained through enormous sacrifices, but these were never durable. Promising periods o f econom ic and social growth were halted by crises that not only would lose previous gains but their severity would exacerbate the prevailing social inequities. Moreover, various foretold econom ic and social conflicts that were carried over from the past snowballed into crises that were unable to find solutions through consensus and negotiation. As a consequence o f these series o f events, the country was trapped in a vicious crisis-adjustment-crisis cycle. Political Instability The major governance problem throughout E cuador’s history has been political instability. However, this problem is not new since it has been a repeated occurrence in the country’s history.3 U ntil 1996, the current 160 Political crises, social conflict and economic development democratic period (the longest in national history), it seemed that the Ecuador had rid itself o f presidential turnover. All heads o f state until 1996 com pleted their terms and passed on power to elected successors.4 However, o f the nine presidents in the last democratic period, only two belonged to the same political party (one o f them by succession). The rest belonged to different parties. High turnover of ministers Highly volatile governments masked presidential stability. Between 1979 and 1996, finance and oil ministers, the most important policy-setting ministries had an average term in office o f one year. The high turnover is very similar in the Petroleum Corporation (PETROECUADOR), the most important and largest company, which is responsible for over one-third o f fiscal revenues and total export earnings. Although the stability o f the education minister was higher, their average time in office was only 16 months. Averaging these four ministries’ terms in office, in the Roldos-Hurtado5 administration, the average ministerial tenure was 13.3 months, in the Febres Cordero administration 18.6 months. The average tenure o f the ministers increased slightly during the Borja government to 21.9 months, but declined again in the Durán government to 16.9 months.6 One Vice President, Alberto D ahik, was forced to resign in 1995, which was particularly unsettling because he headed econom ic policy issues in the Duran administration. Since 1996, political instability has sharply deteriorated. President Abdalá Bucaram, who was elected for a four-year term, held office for only six months after Congress impeached him through a very dubious interpretation o f the constitution. He was succeeded by a congressman and not by the Vice President because when codifying a constitutional reform Congress had ‘inadvertently’ suppressed the text outlining the appropriate legal succession procedures. Congress entrusted the administration to Fabián Alarcón for 18 m onths as Interim President, a designation not contem plated by the constitution. In 1998 Jamil Mahuad was elected president and all thought that Ecuador was back on the democratic track. However, he was forced to leave office after 17 months because of an indigenous insurrection supported by a group o f army officers. M ahuad’s Vice President, Gustavo N oboa, took office following the now clearly established succession procedures, and finished the constitutional term on 15 January 2003. Lucio Gutiérrez, one o f the colonels that led the insurrection against Mahuad in 2000, took office after winning the second-round elections in 2002. A fter receiving a pardon for his participation in the insurrection, Gutiérrez formed his own party (January 21-Patriotic Society Party) and aligned with Pachakutik, the political arm o f indigenous groups. He ran an anti-corruption, anti-establishment campaign that yielded him the first Ecuador: political economy 161 place in the first-round elections with 21 per cent o f valid votes and 54 per cent in the second round. The extreme presidential instability we have described between 1996 and 2003 influenced all other levels o f public administration, especially for ministers and heads o f public companies whose stability is precarious at best. Between 1996 and 2001, the average time o f the ministers o f economy was 185 days, and oil ministers nine months. These facts explain, in part, why Ecuador is among the 30 per cent o f more unstable countries in the world (and certainly in Latin America), in a 155-country sample (Figure 6.1). 2.000 1.500 1.000 g 0.500 0.000 M -0.500 -1.000 -1.500 -2.000 1 2 u .a N 3 4 5 1 5 u N u 23 30 48 51 58 67 72 81 93 96 97 99 101109112116121141148 o O u s S OS -D ■ Mo 2 -â 3 a a 2 2 60 U = 2 ï §0 U 6 TS p¿ m cd 3 Ph 2 N O O •a S 3 cd cd »» S £ ^ Ü O 2® o a 73 u a C m § a a -.a £ c5 aa o * 1 o 5 P -i ¿5 U £ c Sources: D el Búfalo and R ios (2002). Figure 6.1 P olitical instability Volatility of Laws and Reforms The instability o f ministers is mirrored by similar repeated legal changes. Constitutional reforms, econom ic initiatives and others have experienced perm anent changes. For exam ple, the E lections Law o f 1978, which established lim its on electoral advertising expenditures, was declared unconstitutional in 1984, due to lobbying from a right-wing candidate and the media. It was again re-established 16 years later, in 2001. During the last 22 years, Ecuador has had two constitutions, one in 1979 and one in 1998. The 1979 constitution suffered continuous amendments, sometimes coming from the executive branch, sometimes through national 162 Political crises, social conflict and economic development referendums and other times through legislative action. The reforms were motivated, in the majority o f the cases, by partisan interests or ad-hoc demands by politically strong pressure groups. In search o f stability o f constitutional reforms, the 1998 Constitutional Assembly established that reforms require a one-year period between first and second debate.7 The Political Parties Law of 1978 established the requirement that political parties that do not obtain 5 per cent o f the total votes in two consecutive elections would disappear. The norm was repealed in 1983, re-established in 1992, repealed in 1996 and re-established in 1997. Between December 1998 and April 2002 Ecuador made six significant fiscal reforms.8 Fragmented and Conflictive Politics The incapacity o f the political system to resolve the differences to ensure the proper functioning o f a democratic society is due to the conflictive relationships between parties and leaders, the zero-sum-game attitudes, and the populist behavior of the political organizations. Lack o f consensus, entrenched conflicts amongst political parties and their leaders, destructive clashes between the executive and legislative branches, regional differences, and class struggles have been the norm in Ecuador. It has even been difficult for agreements to com e about between workers and entrepreneurs, and between them and the government about basic policies, such as keeping m acroeconom ic stability and growth. The conflictive nature o f the Ecuadorian political landscape has contributed to a deeply fragmented system o f political parties. The fragmentation is both a cause and an expression o f the governance problems. During the current democratic period, Ecuador has had about a dozen political parties, most of them founded after 1977.9 A large number of political parties would not pose any governance problems to the Ecuadorian democracy if two or three parties could reach majority status in legislative bodies. But none o f them have ever reached such representation, and the president has always held minority support in the legislature. In a few cases, the president’s party has obtained enough votes to command the largest legislative block; however, even in the best case it didn’t represent more than one third o f the seats (Table 6.1). This weak legislative support held by the governments’ parties contrasts with other Latin American countries, where the executive branch holds much m ore congressional control (Table 6.2). The lack o f m ajority political forces is confirmed by the fact that only one party has been in the presidency twice, Popular D em ocracy (DP); the second com ing 14 years after the first one. Ecuador: political economy Table 6.1 Year 1979 1984 1988 1992 1996 1998 2003 163 S e a ts in Congress o f governm ent p a rty President Government party Seats in Congress (% o f total seats)1 Jaime Roldós2/Osvaldo Hurtado CFP/DP León Febres Cordero PSC ID Rodrigo Borja PU R Sixto Durán PRE Abdalá Bucaram DP Jamil Mahuad PSP/M UPP-NP Lucio Gutiérrez 44.9 12.7 42.3 15.6 23.2 27.6 16.0 Notes: 1 2 A t time o f election. Passed away while in office in 1981. Sources: M ejía (1998); for 2003, the authors. Two factors have contributed to the large number o f parties. On one hand, the disposition requiring a minimum threshold o f votes needed to remain as a sanctioned party has been revoked several times. Often influenced by minority organizations on the verge o f disappearing, the disposition has not been enforced by the Electoral Tribunal, in clear violation o f the constitution and election laws. On the other hand, renewed ideologies have emerged, leading new personalities to form new social and political groups to participate in elections. Some have evolved into formal political parties. The electoral system based on proportional representation used in the country has com pounded the fragmentation o f political organizations. It prevails because there is a widely held belief that minorities should not be excluded from representation; even those that do not quite surpass the minimum vote count requirement. For this reason, efforts to adopt a system that favors majorities have failed, either because there have not been enough votes in Congress (as was the case in the Constitutional Assembly of 1998), or because citizens have not approved a change in referendums. Ecuadorian parties also face the constraint o f a still maturing political society. That is, one where there is strict adherence by voters to a given set o f political ideas and policies. The adherence ought to be expressed by the people’s vote for the party’s candidates in good times and bad times. This weak constituency relation between political representatives and voters further contributes to political volatility. The instability o f the constituents’ vote preferences is more noticeable in presidential elections, where candidates can win or lose the support o f 45 Political crises, social conflict and economic development 164 per cent o f constituents, and it is less noticeable in congressional elections, where preference swings between 1979 and 1996 are 50 per cent lower.10 Table 6.2 Country C ongressional seats h eld by governm ent party, selected L a tin A m erica n countries Period Argentina 1983-93 Bolivia 1980-93 Brazil 1985-90 Chile 1989-93 1945-49,1974-94 Colombia 1953-94 Costa Rica Dom inican Republic; 1962,1966-90 1978-94 Ecuador El Salvador 1985-91 Honduras 1981-93 M exico 1982-91 Nicaragua 1984-90 Paraguay 1993 Peru 1984-90,1995 1942-71,1984-94 Uruguay Venezuela, RB 1958-93 N ote: Source: Num ber of elections Seats in Congress (% o f total seats)1 6 4 4 2 11 11 8 7 4 4 4 2 1 3 11 8 48.3 33.9 26.9 31.7 55.2 49.6 55.6 22.0 47.5 54.2 65.8 65.4 47.5 47.1 45.6 41.1 1 House o f Representatives only. Banco Mundial (1998). Regional interests and differences Since the nineteenth century, when Ecuador emerged as a nation, marked differences have been evident between the peoples from the Coastal region (Costa) and those o f the Highlands (Sierra) in entrepreneurial tendencies, ideologies and W eltanschauung.11 The regional differences trespass into the political environment. They have hindered the emergence of national parties with countrywide representation. Party constituency is alm ost completely limited to regional space in the Coast and Highlands. Parties that predominate in one region tend to hold small or minimal voter adhesion in the other. The Social Christian Party Ecuador: political economy 165 (PSC) and the Ecuadorian Roldosista Party (PRE) have predominated in the Costa, whereas the Popular Democracy (DP), the Democratic Left (ID) and a number o f small extreme left and labor parties have prevailed in the Sierra. Despite the supremacy o f the four large parties during the current democratic period, none was able to achieve a legislative majority because they could not attract enough votes from regions outside their domain. Since the early 1980s, the PSC and the PRE have become the majority forces in Congress with populist platforms and clientelistic policies. Their strength has increased as a result o f adherence to populist attitudes of other parties on specific issues when approving the government budget, logrolling to increase public spending projects, enacting unpopular but necessary reforms. The populist positions have complicated econom ic and fiscal management, causing repeated fiscal crises, increasing public debt, chronic high inflation and devaluation, and o f course, low growth. W hile in office, parties succumb to the need for im plementing tough and unpopular policies such as increasing fuel prices (which are set by the government) and taxes to raise revenues or cut subsidies, but when they are out o f office, political party leaders adamantly oppose these same policies. The actions of the PSC are one o f the clearest and most consistent examples o f this, although all parties are guilty o f this double standard. The Social Christian Party has successfully opposed raising new taxes or imposing tax increases since the end o f its administration in 1988, despite doing those same things when it governed. Conflicts between a weak executive branch and an obstructing congress T hroughout the current dem ocratic period, the party in office has held m inority representation in Congress. This has resulted in weak administrations and antagonistic legislatures. The weakness could have been resolved through permanent alliances or specific agreements to approve certain bills. In both cases, political parties, due to electoral considerations or their populist characteristics, tended to be reluctant to commit to ongoing agreements, and if they did so, the alliances were brief. With the exception of the first two years o f the Borja administration (1988-90) when the president managed to assemble a majority through an alliance between his party (the ID) and the DP, alliances tended to breakup quickly, forcing administrations to govern without majority support in Congress. The minority condition o f the administration in office and the transitory nature o f alliances contributed to habitual confrontation between the executive and legislative branches in power struggles. Presidents tend to refuse congressional decisions, while opposition blocks obstruct the approval o f bills presented by the executive branch. A com mon practice (until 1998) was for Congress to impeach ministers for mere political considerations. 166 Political crises, social conflict and economic development Presidents, in order to overcome their minority condition in Congress, develop tactics to divide parties by offering individual legislators sinecures if they abandon their parties and change to the administration’s side.12 T hrough this practice, governm ents form subordinated groups o f congressm en from diverse political parties with w hom they can pass legislation or confront the opposition. Often there are also dissidents from political parties due to differences in points o f view, but these do not necessarily align with the administration. During 1993, 1997 and 2001, the number o f congressmen who had abandoned their parties accounted for nearly 27 per cent o f all representatives.13 Class and interest group conflicts Private (that is special) interests have biased policy decisions since the country’s founding, but even more so in the last few years. Presidents, ministers, congressmen, judges, superintendents and political leaders either through direct involvement or indirect influence have governed for the benefit o f private instead of public interests. The policies, laws and judicial decisions have led to fiscal and financial crises, misappropriation o f public funds, and tax and tariff evasion causing large welfare losses. The m ost significant set o f events that exemplify this is the financial crisis o f 1999-2000 that cost the country an estimated 4 billion dollars (20 per cent o f GDP); partially because the bank superintendent and other authorities covered up bank fraud related to enorm ous campaign contributions. At times, special interests hide behind regionalist chatter. Interested parties and their godfathers pressure decisions or criticize measures alleging that these are directed to harming a specific region, province or city. They accuse government policies to correct econom ic problems, prevent financial crisis, control corruption, and those that are in general in the national interest o f being regionally biased and intended to harm the locality. Encased in regionalist talk, special interests, through political parties and leaders, have often obtained support to obstruct sound policies seeking the national interest. A case in point is what happened in 1998-99 when several banks became insolvent due to their bad management and corruption. Repeatedly, the mayor o f Guayaquil declared that he would ‘rise-up’ the Costa against the ‘centralism in Q uito’ if those banks were closed. The threats produced the desired effects temporarily. That is, the banking superintendency delayed interventions and corrective prudential measures were not implemented. Eventually, of course, all the protected institutions failed anyway. However, the actions allowed enough time for outrageous corruption to transfer funds, destroy documentation and for some bankers to flee the country. W ith these and other acts o f corruption driven by special econom ic interests - strongly tied to influential political parties - it should not be a Ecuador: political economy 167 surprise that according to Transparency International, Ecuador is perceived as one o f the m ost corrupt countries in Latin America. The country ranks barely better than Bolivia (Figure 6.2). 9 8 7 6 K 5 (j 4 -rt 4 3 2 nn nn S S s 1 i i la § -3 s a a is u c i- U — u Ë Ü N M 60 a o jh d o S So s Q iS P o U £ Source : c a O u a ^ -a a b a o op ^ a 2 c3 d Ch 73 l (Z2 W o w 0 ^ Z c Q Transparency International (2001). Figure 6.2 Perception o f corruption Political parties frequently receive fat sums o f money for campaigns from a small number o f contributors. When in office, or in Congress, elected beneficiaries o f the contributions tend to com pensate interest groups through public contract adjudication, regulation, permissiveness, approving laws that benefit them and other sorts o f boons. The political and econom ic network o f special interests also operates in the judicial system by obstructing sentences, nominating judges, bribes and other means.14 The pressure o f influential participants often distorts legal rulings. Procedures are complex and obscure to com m on folk. Cases can take years without end to be resolved. M ost Ecuadorians do not have much confidence in the judicial system (see Figure 6.3). In recent years, the political scene has become ever more complex due to the growing participation o f the indigenous communities. The political action by the Confederation o f Indigenous People o f Ecuador (CONAIE) began in 1990 with mass, and growing, indigenous activism. This marked a renewed use o f an old practice used to confront Spanish domination during colonial times. Originally C O N A IE came to be and acted as a political force opposed to the democratic system, which it considered foreign to the Political crises, social conflict and economic development 168 2.5­ 2.0­ 1.5­ 1.0­ u O 0.5 a 0.0 -0 .5 ­ -1 .0 ­ -1 .5 ­ -2.0- - More confidence Less confidence 122 among 166 countries n ELQ. g cd ° §• § CO tí g § 55 G cd u K £ i uyuuuuUUUU G cd ;tí tí s ^ tí tí 5ó 2 S P5 U 6 0 m cd c m a o cd h a ■â o •a c Q Sources: D el Búfalo and R íos (2002). F igure 6.3 C onfidence in the ju d ic ia l system indigenous communities and even contributed to the problems and was contradictory to their interests. Later, in 1996, CONAIE abandoned that view and founded Pachakutik, a political party that allowed indigenous people to participate in several elections. Indigenous people have been very successful. They have obtained mayorships in cities where they are the majority o f the inhabitants and also in a few where they are not. They have won seats in the legislature. One of their leaders and members o f Pachakutik became Vice President of Congress in 1998. Active participation in politics allowed indigenous communities to gain econom ic and social vindication. One o f the m ost significant achievements came in 1998 when the acknowledgment o f collective rights o f indigenous people was incorporated in the new constitution, which in fact they participated in drafting. The accom plishm ents o f the indigenous com m unities and evolution into a major political group have further added to the already conflictive political environment. CO NAIE is now one more effective interest group that influences policy decisions. Their strength was clearly revealed when they orchestrated an insurrection that finally overthrew President Mahuad. C O N A IE ’s president even formed part o f the short-lived dictatorship together with a civilian and an army officer. The latest, and pinnacle, of the indigenous group’s political success came after aligning with the new Patriotic Society Party (PSP) to support Lucio Ecuador: political economy 169 Gutiérrez in his presidential campaign. In 2003, members o f Pachakutik formed part o f the Cabinet in important ministries (for example, Foreign Affairs) and many m iddle-level posts in the governm ent’s bureaucracy. Thus, it can no longer be said that these social groups are still marginalized from political decisionmaking and process. D espite the success, and as at many times in the past, the weak interlinings o f the Ecuadorian system caused a rupture between the PSP and Pachakutik. Just as other parties had done in the past, Gutiérrez and the PSP ran on one policy platform and governed with another. From day one, President Gutiérrez implemented policies 180 degrees opposite to those he promised in his campaign. Fiscal policy followed a conservative path supported by an IM F program that sought Washington Consensus-type reforms. Instead of fighting corruption, he staffed an adm inistration replete with close relatives that gave rise to outcries o f nepotism . G uitérrez’s military background brought out authoritarian tendencies when, following m onths o f internal and public quarrels with his electoral allies, he forced members o f Pachakutik out of the administration. The 2002 election brought the military back to prominence. Gutirrérez appointed m any form er m ilitary officers to im portant posts in his administration. Additionally he has already given the military active roles in customs administration and announced their role in economic development projects such as rural roads construction. Even though Gutiérrez won in free elections and democracy continues, time will tell if his military background brings back greater military presence in policy making. Summary A political system gains social legitimacy when it has been able to protect civil liberties, human rights, and extends universal social participation through equal opportunities to all its citizens. Put in econom ic terms, the system - democracy in our case - gains legitimacy when the institutional system is able to resolve many of the principal-agent problems that arise; that is, when the system effectively makes compatible the interests of its citizens with those o f representative public officials, limiting the influence o f special interests, in an institutional framework that permits effective governance. Ecuadorian democracy has largely failed to gain legitimacy. Its institutions have conspired against governance; as a result, instead o f helping resolve econom ic and social woes, the poor results have made Ecuadorians distrust their institutions. According to the 1996 Latinobarómetro survey15 only 34 per cent o f the population were pleased with the democratic system, while 16 per cent were totally dissatisfied with the system. In December 2001, after overcoming the 1999 crisis, nine out o f ten Ecuadorians still 170 Political crises, social conflict and economic development expressed dissatisfaction with congressional actions, and six out o f ten were dissatisfied with the government’s performance.16 6.3 ECONOMIC PERFORMANCE The Ecuadorian democratic system managed to survive econom ic crises as well as social and political conflicts. However, the system has not contributed to spawning or facilitating sufficient and sustained growth. During the two decades o f democratic rule, illiteracy and mortality dramatically fell, access to schools increased, and life expectancy improved significantly. Nonetheless, G D P per capita is almost the same as that in 1979. In comparison, Chile’s per capita G D P in 1979 was 1.5 times higher than Ecuador’s; in 2000, the Chilean G D P per capita was 4.2 higher than the Ecuadorian one. Growing unemployment and stagnation o f real wages have spawned the emigration o f thousands o f Ecuadorians. G iven the size and variety o f resources, E cu ad or’s econom y has underperformed for many decades. The last 20 years, which coincide with the reign of democratic rule, present particularly troubling stagnation. Between 1950 and 2001 per capita income grew at an average o f 2.2 per cent per year but much o f it came during the oil-boom era o f the 1970s, which allowed a period o f very high per capita growth (6.2 per cent). Since 1980, however, the country has barely managed to grow at all. Average G D P growth in this period fell to 2.0 per cent per annum, below population growth. Sub-par growth has coexisted with high instability. Inflation escalated to an average o f 41 per cent between 1980 and 2000, from 12 per cent during the 1970s, and its volatility increased fourfold. The country regularly failed to complete policy reforms and structural adjustment programs sponsored by the IMF. Meanwhile, the 1980s and 1990s presented mixed results for social indicators o f development. Various econ om ic and external factors explain the deteriorating performance o f the Ecuadorian economy. The following sections review these factors. Low Growth E cuador’s econom y was shifted o ff its growth path by the large-scale exploitation o f petroleum in the early 1970s. In this decade gross domestic product (G D P) grew at an average o f 8.5 per cent per year, above the 3.8 per cent averaged during the 1960s. The boom experienced, however, lasted only until world oil prices fell, as OPEC was unable to enforce its cartel policies (see Figure 6.4).17 Ecuador: political economy Source: 171 Central Bank o f Ecuador, based on revised national accounts in U S dollars. Figure 6.4 Ecuador, G D P grow th 1965-2003 In the 1980s, G D P grew 2.1 per cent per year. This average fell further in the 1990s to 1.7 per cent per year. M ost o f the growth in the 1980s came from traditional agricultural sectors. In the 1990s, the sectorial contribution was more diversified. Oil, manufacturing, commerce and services explain over 60 per cent o f G D P growth. In this 20-year span the econom ic growth could not keep up with the growth o f the population (2.2 per cent) and could not absorb the growing labor force. As result, unemployment rates jumped from single digits in the 1980s to double digits in the 1990s. In the late 1990s, the economy entered a slow and painful deterioration. D om estic political instability combined with a series o f negative external shocks stalled key sectors. The Asian financial crisis halted the small (to international standards) but nevertheless im portant capital flows that generated a consum ption and credit b o o m .18 Firm s’ debt burden began to grow, which caused deterioration o f banks’ balance sheets. The El N iñ o weather phenom enon devastated coastal agricultural production and infrastructure. The falling world dem and depressed prices o f the leading export crops. G D P growth in 1998 fell to 2.1 per cent. In 1999, the accumulation o f negative factors pushed the Ecuadorian econom y into its deepest recession on record. G D P fell 6.3 per cent. The currency crisis 172 Political crises, social conflict and economic development (see below) contributed to a contraction o f G D P in U S dollars from $23.4 billion in 1998 to $15.6 billion in 2000.19 The stabilization induced by dollarization (established in March 2000), the recovery o f oil prices and the implementation o f generally adequate econom ic policies have allowed steady recovery. The economy grew 2.8 per cent in 2000; 5.1 per cent in 2001; 3.4 per cent in 2002; and 2.7 per cent in 2003. In the four years under dollarization real G D P has expanded at an annual average o f 3.5 per cent. This performance was also bolstered by relative political and social stability. Instability The lackluster econom ic performance was worsened by various significant shocks that to o k the econom y o ff its long-term path. This has been coupled with high and rising inflation and devaluation o f the currency. Price instability went along with a roller coaster o f attempts to control it. Policy efforts typically coincided with a new government’s initial efforts to implement stabilization programs that were alm ost never concluded. The whole array o f monetary and exchange rate policies were tried, from full fixed regimes to free floating and everything in between. However the fundamental problems that fed inflation were never controlled. Supply shocks Pure statistical time series analysis reveals that from 1965:01 to 1998:04, E cuador’s econom y was trend stationery.20 This means that the factors that have caused econom ic volatility in Ecuador have not altered the long­ term econom ic growth rate. Instead, the econom y has been subjected to permanent ‘shocks’ and transitory or cyclical events (Figure 6.5). It is possible to identify 11 ‘shocks’ that permanently altered the level of gross domestic product.21 All o f these can be defined as supply shocks. Only four of the shocks were positive and associated with petroleum events in the 1970s. The events in the 1980s and 90s were all negative. These events that have permanently reduced the level o f G D P were associated with natural phenomena (El N iño/debt crisis 1982, El N iño 1998, and 1987 earthquake) and the armed conflict in 1995. Controlling for these shocks, Fernández and Lara (1998) estimate that the long-term econom ic growth rate under stable conditions was 4.35 per cent between 1965 and 1997.22 Additionally, the movements in G DP around the long-term trend can be assigned to temporary demand shocks, cyclical variations or pure random elements. Fernández and Lara do not discriminate am ong these. However, they determine that the transitory Ecuador: political economy Source: 173 Fernández and Lara (1998). Figure 6.5 Ecuador, effects o f exogenous shocks in G D P (1 9 7 0 .0 1 -2 0 0 1 .0 3 ) shocks fade away (or revert to the long-term trend) within an interlude of eight to ten quarters (2 to 2.5 years). Comparing the average (compound) growth rate o f the last two decades of 2.2 per cent per year to the long-term stable growth rate, we can conclude that the economy severely underperformed as a result o f the volatility. Policy instability Just as external shocks contributed to economic instability and displacement from potential long-term growth, policy instability has contributed to short­ term instability. Aggregate demand policies and deficiencies led to price volatility. While Ecuador never experienced hyperinflation in the technical sense,23 it did present high chronic inflation from the 1980s. Average inflation jumped from 12 per cent per year in the 1970s to 37 per cent and 44 per cent during the 1980s and 1990s, respectively. Beginning in 1996, inflation began an escalating trend that accelerated upon the unfolding o f the financial and currency crises in 1999. Exchange rate policies were just as unstable: between 1995 and 1999, a system o f exchange rate bands designed to generate credibility was ‘adjusted’; P rice insta b ility 174 Political crises, social conflict and economic development in other words, the system broke down nine times. While the original idea was to stabilize prices through exchange rate management, the system lost the credibility it needed and unsuccessful stabilization efforts spiraled into additional volatility, which was com pounded by unwise fiscal policies. In late 1998, the government eliminated the income tax and introduced a highly distortionary tax on money circulation and adopted an unlimited d ep osit guarantee. The m oral hazard generated and incentives for disintermediation incited a growing demand for dollars. The central bank lost close to 30 per cent o f reserves and monetary deposits fell 24 per cent within 30 days after the law was approved. In early 1999, the central bank abandoned the exchange rate bands to float the sucre, com plicating an already rapidly deteriorating econom ic environment. On a weekly basis banks began to fail. The exchange rate fell 80 per cent in the first three months o f 1999. After the ‘bank holiday’ in April and subsequent freezing o f deposits the demand for dollars went out o f control despite the futile efforts o f the central bank to counter it by raising interest rates above 153 per cent. As 70 per cent o f the banking system failed or came under state control, the public liability acquired was monetized. The devaluation o f the sucre became a leading indicator o f the expected consumer price inflation that lags money creation by about 11 months. Between July 1998 and January 2000 the exchange rate fell 477 per cent. In the last three months alone, the sucre devalued 126 per cent. In a span o f about four m onths the central bank more than doubled base m oney to bail out som e banks and to pay the deposit guarantee. These factors outweighed the impact o f the huge contraction in domestic demand and the bank deposit freeze, leading consumer inflation to rise to 61 per cent by the end o f 1999 and cost inflation to 187 per cent (Figures 6.6 and 6.7). The downward spiral concluded only after the country abandoned its currency to adopt the U S dollar in March 2000.24 Once dollarization was established, prices raced to adjust to purchasing parity levels. Annual inflation reached its peak o f 108 per cent in September 2000. But since then it fell steadily to 2.2 per cent by July 2004 and was expected to reach about 2.8 per cent by the end o f 2004. The high rate o f inflation that prevailed until 2003 - by international standards - hides greater price stabilization. Inflation o f tradable goods inflation has averaged close to zero since the first quarter o f 2002. These represent about two-thirds o f the good s and services measured by the consumer price index. Additionally, since mid-2002, about 92 per cent of the overall inflation rate has been caused by price increases in five items: rent, electricity, water, education and transportation. With the exception Ecuador: political economy 175 100 90 80 70 60 % 50 40 30 20 10 0 Source: 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Central Bank o f Ecuador. Figure 6 .6 Source : Ecuador, inflation (year-end) Central Bank o f Ecuador. Figure 6 .7 N o m in a l exchange rates (su cre /U S $ ) Political crises, social conflict and economic development 176 o f rent, the problem lies in government public utilities and governmentregulated prices. Much o f the chronic inflation was the result o f parallel persistent fiscal disarray. For decades, the E cuadorian governm ent m ism anaged p u b lic a ccou n ts, generating co n tin u o u s d eficits and accumulating significant public debt, which has been defaulted on three times since 1980. Before 2000, the government carried fiscal deficits in 21 o f the previous 30 years. The ups and downs o f oil prices have led to boom and bust cycles in government coffers that have turned into a systematic source of debt accumulation with a bias toward increasing expenditures during oil upswings and not reducing them in down times, leading to a structural deficit. The correlation o f annual oil revenues and fiscal balance is 0.87 (see Figure 6.8). Oil revenues represent about 30 per cent o f fiscal takings. The fluctuations in its price autom atically generated volatility in other revenue sources and expenditure programs. More often however, this led to a tendency to finance the deficits through money creation, with the subsequent inflationary pressure. A s a result, the country suffered repeated currency and debt crises. In 1999 and 2000, these were pushed to the limit by a major financial crisis that strained the government finances, generating a severe acceleration o f inflation and devaluation. F iscal instability Source: Author. F igure 6.8 F iscal volatility a n d oil revenue volatility Ecuador: political economy 177 Beginning in the 1980s, various attempts at structural reform were made. However, these created a vicious cycle o f austerity packages, devaluations and public protests that were followed by a slackening o f fiscal policy and accelerating inflation. In this period, the average fiscal deficit was 7.3 per cent o f GDP.25 Total public debt ballooned from 38.8 per cent o f G D P in 1980 to 104.5 per cent in 1989. In the early 1990s reform efforts were deepened; however they were not sustained. In 1994, the government consolidated the foreign debt and through a Brady Plan, restructured its debt with commercial and official creditors. Lower interest payments, because o f partial debt servicing before the renegotiation and because o f better terms obtained afterwards, helped maintain a N F P S deficit o f 0.4 per cent o f G D P on average between 1990 and 1995. In the m id-90s a cascade o f negative external and dom estic events contributed to the derailment of the adjustment and stabilization process. A short border conflict with Peru in 1995 and its related military expenditures pushed the fiscal deficit over 1.0 per cent o f GDP. Then political instability and the El N iñ o phenom enon brought to the surface the accumulated structural deficiencies. The average annual deficit jumped to 3.4 per cent, while the accumulated fiscal deficit between 1996 and 1999 was 13.1 per cent o f GDP. The plummeting o f oil prices exposed a weak and narrow fiscal regime. In 1998 the new government unsuccessfully attempted to reach an agreement with the IMF. The projected deficit in mid-1998 exceeded 10 per cent o f GDP. Adjustm ent measures helped bring it down to 4.8 2.0- 1.5 0.7 1.00.0 H 01 02 0.0 Pi 8 -1 .0 -2 .0 -3 .0 -4 .0 - -3.9 -5 .0 -6.0 93 Figure 6.9 94 95 96 97 98 99 00 03 Ecuador, non-fina n cia lp u b lic sector balance, p e r cent o f G D P 178 Political crises, social conflict and economic development per cent. Nonetheless, the econom ic stagnation, policy errors and halfway reforms had severely deteriorated firms’ balance sheets in various sectors. The difficulties were passed onto the banking system, which because o f deficient prudential supervision and regulation did not present clear alerts o f the underlying problems. In 1999, the financial crisis was full blow n.26 The unlimited deposit guarantee created new government liabilities o f over $2 billion, which later increased to over $4 billion or about 20 per cent o f G D P (Figure 6.9). The fiscal deficit approached 4 per cent o f G D P for the second straight year. The government took desperate fiscal measures, some to correct its previous mistakes. Four major tax reforms in 12 months were not enough to prevent defaulting on its foreign and domestic debt in late 1999. Structural Weaknesses The heart o f the problem lies in the ineffective or inefficient institutions, policies and instrum ents to counter the volatility. Public expenditures exhibit extreme inflexibility because o f generalized earmarking and prefixed programs. The tax regime that prevailed before 2000 was weak, full o f loopholes and exemptions and inefficient. The only alternative open to the government was debt accumulation. Between 1990 and 1999, domestic debt ballooned from $213 million to over $3 billion. Foreign debt averaged 69 per cent o f G D P in the same period, and following the regularization of payments in 1994, rose from close to $10 billion to $16 billion. Fiscal structure - institutions Much o f the fiscal volatility is the result o f a deficient tax structure and weak fiscal institutions. In the 1980s, the government depended heavily on unstable oil revenues, up to 40 per cent o f its total revenues. In the 1990s this share dropped to 32 per cent. Table 6.3 summarizes period averages o f fiscal accounts. These help to view long-running tax and expenditure weaknesses. The more stable tax revenues only, however, did not increase significantly. A myriad o f loopholes, exemptions, sophisticated elusion and evasion prevailed in the tax system. Corrupt bureaucrats had captured the tax collection department o f the M inistry o f Finance. It had never established a tax-accounting system. Forms for filing tax returns were outdated. It did not have an inform ation-crossing system. In sum, the country did not have a modern functioning tax administration entity. This weak legal and institutional structure left the government vulnerable to the volatile oil revenues. Ecuador: political economy Table 6.3 Ecuador, consolidated non-financial p u b lic secto r 1990-2003, p e r io d averages Category 1990-94 1995-99 2000-03 Average 90-98 In per cent of total revenue TOTAL R E V E N U E 100.00 Oil revenue 35.77 Exports 26.63 9.14 D om estic sales o f fuels N on-oil revenue 52.87 VAT 12.25 Income (personal + corporate) 3.01 Excise 5.53 Import tariffs and surcharges 6.81 Social security contributions 10.44 CTT 0.00 14.84 Other Operating balance o f public enterprises 11.36 In per cent of total expenditure TOTAL E X P E N D IT U R E Current expenditure Interest payments Foreign D om estic Wages and salaries Consum ption o f goods and services Other Capital expenditure Overall balance (in per cent o f total revenue) Source: 179 100.00 28.4 15.1 13.3 65.0 16.2 2.4 7.2 8.8 9.6 1.9 18.8 100.00 27.2 20.5 6.8 70.0 25.7 9.6 2.9 6.2 10.0 1.1 14.5 100.00 32.35 20.85 11.50 58.09 13.94 2.79 6.64 7.71 10.41 0.00 16.59 6.6 2.7 9.56 100.00 72.95 19.69 17.75 1.95 29.00 100.0 75.8 20.1 14.9 5.2 29.2 100.0 75.7 18.6 14.6 3.9 26.8 100.00 74.07 18.72 15.98 2.74 29.74 10.44 13.80 27.05 9.6 16.8 24.2 12.9 17.5 24.3 10.11 15.50 25.93 -1.60 -13.6 3.7 -6.35 Original data Central Bank o f Ecuador. It wasn’t until after the crises that the creation o f an autonomous Internal Revenue Service (SRI) produced significant improvement in value-added and income tax collections. The series o f tax reforms mentioned above between 1999 and 2000 repealed a large part o f the exemptions and loopholes and raised the VAT rate from 10 to 12 per cent. These set of reforms added to the Political crises, social conflict and economic development 180 institutional changes and good and honest administration have increased tax revenues by more than 6 percentage points o f GDP. The S R I has effectively cracked down on evasion and implemented modern invoicing procedures. It set up a sophisticated computer network designed for information crossing. To clean up the inherited bureaucracy, the new administration in the S R I fired and laid o ff about 1000 tax administration employees within a year. Only two public officials were retained. These advancements on the revenue side have not been matched on the spending side. Expenditure policy in Ecuador is almost non-existent. A fter taking out the funds committed to debt service and wages, the government faces about 30 per cent o f earmarked or prefixed spending. Only about 10 per cent o f revenues are discretionary. This rigid expenditure situation also contributes to fiscal volatility since the margin for countercyclical policy is minimal. Spending control, ex-post evaluation o f projects has generally not been the norm. A s a result, there is no accountability over the efficiency and effectiveness o f public spending. Th e budgetary process boils down to m aking sure that the corresponding transfers to the prefixed spending programs and earmarking are planned and executed (Figure 6.10). Only Discretionary Source : G allardo (2001). F igure 6.10 D istribution o f expenditures Ecuador: political economy 181 in 2001, with the support o f the W orld Bank, the government began to implement an inform ation system to track expenditures. H owever, the results o f this are not evident yet. The constant fiscal ups and downs led to debt accumulation exceeded the fiscal capacity to service it. A s a result, and to further finance government grow th, governm ents resorted to central bank financing. Th e lack o f institutional independence o f the monetary authorities meant that they succumbed to government demands. A reform in 1992 prohibited credit to the government. However, the ban was circumvented through the banking system.27 Th e m onetization o f the fiscal deficits sustained the chronic inflation and devaluation rates described above. Th e recent transformation to a dollarized monetary regime should in part alleviate monetary instability. Between 2000 and 2003, various episodes evidenced the more strict fiscal financing constraint. The government has been forced to make adjustments and produce three consecutive years with fiscal surpluses. I f these trends along with the tax collection efforts are sustained, at least the sort o f instability that prevailed in the past should diminish. O f course much more needs to be done to protect the real econom y from the volatility that it will have to cushion in the absence o f nominal adjustment mechanisms. But this is beyond the scope o f this chapter. Low productivity From a simplified neoclassical growth m odel it is possible to synthesize the bottom line for the low growth rate o f the Ecuadorian economy, which is the absence o f productivity in the aggregate economy. Arteta (2000a) estimates the contribution o f total factor productivity (T F P ) from 1965 to 1997.72 Table 6.4 presents the contributions o f increases in capital, labor and total factor productivity for this period and various subperiods. M arked by changing trends in economic performance, the decomposition o f output growth yields significant differences in the contribution made by total factor productivity (T F P ). In the period 1965-97, labor contributed 39 per cent G D P growth during this period, while T F P contributed 33 per cent and capital 28 per cent. Thus, to an overwhelming degree, economic growth in Ecuador has been driven by factor accumulation, in particular labor. Even though for the entire period studied the increased participation o f labor is a bit higher than the growth in factor productivity, most o f the subperiods demonstrate that labor has played a much larger role. But marked changes are evident when the period is broken down into the three decades. In the 1970s T F P contributed to almost 50 per cent o f high output growth (8.4 per cent). This can be explained by the beginning o f large-scale petroleum exploitation. N o t surprisingly, this period follow ed a period at the end o f Table 6.4 Sources o f growth in Ecuador ( in percentage points) G row th Contribution by co m p o n en t rate o f output Period 1965-97 1965-69 1970-74 182 1975-79 1980-84 1985-89 1990-94 1970-79 1980-89 1990-97 Labor Physical capital 4.64 1.8 1.19 1.9 1.71 1.26 1.12 1.4 1.3 1.29 1.6 2.2 3.11 10.16 5.49 1.27 1.44 2.97 8.38 1.79 2.82 2.01 1.33 1.53 0.9 0.37 0.32 2.2 0.69 0.45 Per cent contribution to growthb Total factor productivity Labor Physical capital Total factor productivity 1.54 (-38.8) (-38.3) (-18.8) (-31.2) (-28.1) (-41.5) (-15.7) (-40.1) (-71.1) (-25.6) (-10.8) (-26.2) (-33.1) (-20.2) 0.63 6.65 1.58 -0.9 -0.05 1.26 4.18 -0.23 0.84 (-99.6) (-77.7) (-4 7 ) (-23.9) (-74.6) (-54.2) (-38.5) (-16) (-65.5) (-28.8) (-70.7) (-3.3) (-42.2) (-49.8) (-13.1) (-29.7) Notes: a b The contribution o f labor is its compound growth rate for the period multiplied by its share (1 -a = 0.70) and the contribution o f capital is its growth rate multiplied by its share (a = 0.30). Represents the proportional contribution o f each factor to the growth rate. Source: Author’s calculations based on Central Bank data. Ecuador: political economy 183 the 1960s when there was a large accumulation o f the capital stock. This trend however reversed in the 1980s when T F P was negative and most o f the scant growth (1.8 per cent) on the decade was attributed to ever-higher participation o f labor in the economy. Between 1990 and 1997, the growth in productivity rose and explains one third o f the econom ic growth. However, the accumulation o f labor still explains over 54 per cent o f recovery from the previous decade. A n effort is made to explain the variation o f aggregate TFP. Regression analysis suggests that over 47 per cent o f the variation in T F P over time is explained by petroleum production that commenced (on a large scale) in 1972. In addition, natural disasters explain another 40 per cent o f T F P growth. Taking these factors into consideration and incorporating them into a param etric estimate o f T F P reveals that there was no aggregate p rod u ctivity grow th from 1965. T h e T F P estimates are statistically indifferent from zero. Overall, these results suggest that the growth in total factor productivity may explain only a small proportion o f the econom ic growth in Ecuador at best. In particular, some sectors such as manufacturing seemed to have benefited from improvements in TFP. However, recognizing that the country has not been able to sustain prolonged periods o f high growth rates, it is also possible to conclude instead, that it is the lack o f factor productivity that may be the source o f the scant growth in Ecuador (Figure 6.11). A n extension o f the above m entioned estimates fo r the period after dollarization shows no significant change in the long-term trend (A rteta and Baus 2003). Although the stability afforded has increased the average contribution o f productivity to G D P grow th to over 40 per cent since T F P exhibits a slight negative trend (-0.001 per annum) when oil and other exogenous shocks are not controlled for. N ot statistically significant at 5 per cent level S ource : W hen oil and other exogenous shocks are controlled, T F P growth is positive (0.006 per annum), but still not significant at 5 per cent level Arte ta (2000). Figure 6.11 Ecuador, to ta l fa c to r p ro d u c tiv ity ( T F P ) growth, 1 9 6 6 -9 8 184 Political crises, social conflict and economic development d o lla riza tio n was adopted, in 2002 p rod u ctivity grow th fell back to historical levels. N o contingency planning A s dem onstrated above, the cou ntry is highly susceptible to shocks, particularly those related to oil markets. Nonetheless, the country has never instituted contingency plans or any sort o f stabilization fund. The same is true for the El N iñ o and L a N iñ a phenomena. These occur on average every 3.5 years generating an estimated $400 million in costs.29 However, the government never built an emergency fund or disaster insurance scheme. U n til 1998, and then only on the eve o f an imminent financial crisis, the country never set up a deposit guarantee system. This lack o f prudential planning is also expressed in the low domestic savings rates that average 18 per cent. Total investment as a share o f G D P averaged 19.2 per cent during 1965-2001. This share decreased in the 1990s to 18.5 per cent. The three-year m oving average IC O R (incremental capitaloutput ratio) over the last ten years has been very volatile. D uring 1990-94, it was 4.9; during 1995-99 it was -43.5; while during the entire decade it was 11.8. Thus the IC O R , with all its deficiencies as a precise indicator, suggests inefficient investment spending. Arguably, 18.5 per cent annual investment was either ‘excessive or inefficient’ considering average G D P per capita growth was negative during his period (-0.1 per cent). M ost likely what the econom y needs is not only higher investment but also better investment. A probable contributor to the lack o f productivity is low technological advancement. Ecuador only manages to attract annually an average o f 3.0 per cent o f G D P in foreign direct investment. M aking matters worse, almost all o f it corresponds to the oil industry. This trend certainly retards the possibility o f administrative and technological advancement transfer from developed nations. The unattractiveness o f investment in the country would need further analysis. H ow ever, business surveys repeatedly cite legal insecurity, macroeconomic instability, political turbulence, excessive tax changes and small economies o f scale as important deterrents o f investment. External vulnerability Th e large debt exposure has always made E cu ador vulnerable to the exogenous shocks mentioned above. O ver the last 30 years, the Ecuadorian terms o f trade have deteriorated, which was not compensated, as it needed to be, by productivity growth for the econom y to remain competitive. A ll these factors have led to almost permanent current account deficits, which in the ten years prior to the 1999 crisis sum to 47 per cent o f G D P (Figure 6.12). A large aggregate demand and im port compression in 1999-2000 Ecuador: political economy 185 led to large surpluses. However, the econom ic recovery process in 2001-03, appreciation o f the real exchange rate and construction o f the heavy crude oil pipeline (O C P ) inflated the current account deficit. These deficits have been 173 per cent financed by F D I. 8­ 6­ 4­ 2­ 0 % -2 ­ -4 ­ -6 ­ -8 ­ -10 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Source: Central Bank o f Ecuador. Figure 6.12 Ecuador, current account balance as p e r cent o f G D P Th e econom ic rebound from the depths o f the crisis com pounded by the appreciation o f the exchange rate fueled im port growth (Figure 6.13). However, the rate o f growth o f imports slowed significantly and by 2003 it was expected that it would approach its equilibrium level as a result o f four factors. First, the rate o f appreciation is subsiding reaching only about 3 per cent in 2003. Second, the repressed import demand during the crisis years has been satisfied. Third, the imports related to the construction o f the O C P have ended. Four, the growth rate o f worker remittances that has been financing a good deal o f consumer imports and private consumption has declined (Figure 6.14). Non-competitive domestic markets A much-unstudied problem in Ecuador is the degree o f market competition. However, superficial observation and a few industries that can be analysed suggest a high degree o f m onopolization, which affects firm conduct and market performance. W e present a few examples in Table 6.5. Political crises, social conflict and economic development 186 1201 1-750 ■Inverse o f real exchange rate (increases depict appreciations) - Imports -650 § 100 h 550 ^ I 450 80 * ë a -350 60250 40 150 Figure 6.13 R e a l exchange rate a n d im ports 1800­ 1 571 1600­ 1 415 1 432 1 317 1400 V* 1200- 1 084 vy I ^ 8 1000­ 794 800 644 600 485 382 400 273 201 200 0 F igure 6.14 ^ 1 93 94 ^ 95 ^ 96 ^ 97 ^ 98 ^ ^ 99 00 ^ 01 ^ ^ 02 03 W orker rem ittances Th e lack o f com petition surely hinders the merits and benefits o f co m p etition from flou rish ing. L o w grow th and high prices, lack o f dynamism, limited variety o f products and low quality products are all com m on across Ecuadorian industries. Additionally, government-granted m onopolies, protection schemes, price controls, subsidies and others aggravate sub-par econom ic performance. Ecuador: political economy Table 6.5 187 M a rk e t concentration Sector N o . firms Observation Electricity generation 9 Seven state-owned. These represent almost all power generation Telecommunications 3 Cellular providers Wholesale gasoline distribution Cement Autom obile builders 2 1 3 3 D ivided by three regional markets - state-owned N ational market State-owned Banks Beer 24 2 Dom estic airlines 5 Soda beverages 5 Supermarket chains 4 A ll under G M and G M -Isu zu partnerships Top five represent 75% o f assets One holds 89% o f sales One - A ir Force-owned represents 93% o f passenger travel Coca C ola and Pepsi represent 92% o f sales Tw o represent 86% o f urban sales Poverty and inequality M u ch o f E cu adorians’ disenchantm ent w ith dem ocracy com es from dissatisfactory econom ic results. The people expected democratic rule to help reduce the socioeconomic ills o f poverty and inequality. H ow ever as Figure 6.15 shows, poverty has barely declined. This stagnation is also evident in real per capita income and real wages. In constant prices and in current U S dollars, G D P per capita was lower in 2001 than in 1980. The minimum real wage in 2001 was 42 per cent lower than in 1980 and 10 per cent lower than in 1975 (see Table 6.6). These figures are consistent with the insignificant growth in productivity and powerful indicators justifying people’s perceptions. Table 6.7 presents data on the distribution o f poverty between rural and urban areas as well as across regions. Poverty in rural areas is 70 per cent higher than in urban areas. W hat is most striking from the table is the change between 1995 and 1998 in the different regions. W hile before most o f the rural p o or were located in the H ighland region - where the indigenous population is concentrated - since the crisis the Coastal region surpassed it in the share o f its population below the poverty line. However, the same change does not occur for indigence. U rban poverty also changed in similar fashion. Th e econom ic crises affected the coastal provinces disproportionately more. Political crises, social conflict and economic development 188 80 -i 69 70 - 65 63 60 - 56 50 % 40 30 20 10 0 1975 Figure 6.15 Table 6.6 1995 2003 (est) Ecuador, p o ve rty incidence Per capita incom e a n d real wages Per capita income 1975 sucres U S dollars 1970 1975 1980 1985 1990 1995 1998* 1999* 2001* 2002* 1998 10 503 15 598 19 009 18 911 18 815 20 046 18 700 17 012 17 678 18 643 272 624 1511 1371 1095 1678 1619 1109 1396 1642 Minim um monthly wage 1975 sucres U S dollars 1344 28 68 194 112 1711 2688 1952 1143 1772 1631 1358 1537 - 66 149 142 98 121 138 Sources: For 1970-95: Ruíz (1998). For 1998-01: The author’s estimates from data in ‘Información Estadística Mensual’ , Banco Central de Ecuador. These are based on the old National Accounts. For reference, under the new dollar based national accounts released in 2002, G D P per capita for 2002 was $1.92 compared to $1.772 for 1995. Ecuador: political economy Table 6 .7 189 Ecuador, p o ve rty incidence by region a n d area 1 9 9 5 -9 8 (consum ption m eth o d ) Poverty Area Rural Region Poverty Indigence Indigence 1995 1998 1995 1998 74.9 83.7 30.5 43.1 77.7 69.9 81.5 75.1 39.1 23.8 Total 75.8 42.5 82.0 54.4 33.9 49.7 38.7 46.1 9.2 15.3 37.5 42.2 45.8 38.9 8.0 12.6 10.9 Highlands (Q u ito) A m azon 29.9 47.2 29.5 45.3 7.8 14.4 5.3 9.8 Total Urban Coast Highlands A m azon 42.4 48.6 10.6 Coast 53.9 64.3 16.6 24.1 13.0 24.7 Coast (Guayaquil) Total Highlands A m azon Total 57.6 59.9 65.5 55.9 69.3 62.6 22.0 20.0 9.3 29.2 33.0 26.9 Source: Human D evelopm ent Report, Ecuador 2001, based on IN E C Survey on Living Conditions and Standards. Income distribution Incom e distribution presents similar flat trends to poverty. Estimates o f distribution o f income across households have barely changed in over 25 years. The Gini coefficient estimate in 1979 was 0.575 compared to 0.502 in 1995 and 0.555 in 2000.30 Households representing the highest 20 per cent o f the population earn over 60 per cent o f total income. Meanwhile the lowest 20 per cent earn 2.2 per cent o f total income. These facts constrain economic growth by limiting the size o f the domestic market for goods and services. Economies o f scale are often not achievable. The depth o f poverty and large inequality limit the access o f most o f the population to better education and health services provided by the private sector. This widens further the gap between rich and poor. O f course, not everything is bad. During the democratic period access to basic services and needs has improved significantly. Table 6.8 presents a sample o f the progress in areas such as life expectancy, infant mortality and others. These steps forward however seem to get lost amidst the rest o f steps back. Political crises, social conflict and economic development 190 Table 6.8 E cuador - indicators o f social developm ent Indicator Value L ife expectancy 1960 1994 53.1 years 69.3 2001 Infant m ortality rate 70.4 1960 2000 124 /1000 19 /1000 2001 Literacy rate 24/1000 1970 1999 72% 89.20% 2001 School registration rate at each grade - 91.00% % o f population 6-23 years old 1980 1999 Source: 6.4 69% 82.10% C O R D E S (1999). INTERACTION OF ECONOMICS AND POLITICS Th e Ecuadorian econom y suffers from various ills that contribute to its sub-par performance. It is susceptible to shocks that alter its growth path and suffers from lo w productivity, which retards growth. Incom e and opportunities are unequally distributed, which hinders good market functioning. M a n y key econom ic policies and institutions are deficient, outdated and replete with incompatible incentives. Meanwhile, the m ajor governance problems are political instability and lack o f consensus. A fractionalized party system and polarized political scene produce electoral volatility and cycling o f majorities that antagonizes political agents and generates policy instability. The ongoing disagreements prevent compromises, hinder negotiation processes and yield a barren ground for definitive change to occur. Twenty years o f reform efforts have not been sustained because o f policy discontinuity. For this, the country has paid a high price in the form o f low growth, instability and foregone time. Ecuador: political economy 191 What Explains the Economic and Political Performance? Sections 6.2 and 6.3 attest to various independent hypotheses o f the governance problems and the econom ic woes. However, the factors present in both are interest group influence and institutional weakness than embed principal-agent problems. These elements translate into lack o f transparency and concentration o f power that invite rent seeking and rent protection. These hinder efficient econom ic performance and feed conflictive political action. The end result is an inefficient government averse to change and prone to passing the cost on to the least influential interest group as well as regulation and policy setting susceptible to political and vested interests’ influences. W e analyse the effects o f weak institutions and interest groups in econom ic issues and political performance in turn. Economic Effects of Interest Group Influence and Institutional Weakness Interest group influence marks much rent seeking activity in Ecuador. Protection o f special privileges can be traced back fo r decades in terms o f land reform, labor reform, trade reform and others.3 W hile in the past 1 these were entrenched in the oligarchic political structure, since the return o f democracy interest group activity has become increasingly more evident in the legislative scene and in ministerial and supervisory posts. M uch o f the political action focuses on limiting econom ic competition. Groups that benefited from trade protection under the import substitution umbrella in the 1960s and 70s became open adversaries to opening o f the econom y in the 1980s. These same groups adam antly opposed the elimination o f the fixed exchange rate that prevailed in the 1970s. Some sectors o f inefficient domestic industries still lobby to maintain high tariffs. The automobile industry is a case in point. It takes about 30 days for local manufacturers to fit a bus chassis in an Ecuadorian auto body assembly plant, compared to about four days in industrialized nations. Yet, employees and firms are quick to defend ‘national industries’ when the 27 per cent tariff (plus other taxes and surcharges that add to over 50 per cent o f nominal protection) are called upon to be reduced. The protection and inefficiencies are expressed in the high prices o f the sheltered industries. F o r example, the average price o f an automobile in Ecuador is 50 per cent higher than in the U S market. Sim ilar cases are present in textiles, plastics, metallurgical, cook in g oils, and many other industries. Table 6.5 above sampled the degree o f oligopolistic structure in various industries. A s Stigler (1971) points out, higher industry concentration provides fo r higher interest group power. W hat we have observed in Ecuador over the past 20 years o f democratic 192 Political crises, social conflict and economic development rule is a wide range o f interests, from public sector unions to business trade associations that generate tax policy debates. Each seeks or protects its own interest, while public-interested econom ic reforms are usually given less importance. Opposition usually succeeds in blocking reforms, allowing only halfway changes, or repealing laws by manipulating legal formalities and the courts. A fte r a decade o f debates, the country is yet to change its obsolete social security system, power and telecommunications infrastructure, seaports and airports mostly due to reform efforts being boycotted by vested interests in public sector unions. The protection from com petition, private sector participation and prudential regulation in aggregate contribute to high production costs and low productivity. Interest groups’ interference also contributes to weak institutions. In some cases, they capture public bureaucracies or influence their design to serve their purpose. O f course, often this is the result o f an evolutionary process where beneficiaries o f a system create a vested interest. This is the case o f public sector unions, teachers’ associations and the like. The problem is compounded by the incentives inherent in bureaucratic administration (Niskanen 1974). Job perks and benefits are created and protected. Since the checks and balances o f the institutional framework are inadequate, and the political incentives are stacked against controlling government growth in public agencies, where the latter exploit the perks through very questionable - and even corrupt - collective bargaining agreements and budget processes. These benefits have reached even the extremes o f establishing heir rights to public posts, as is the case in the Social Security Institute. To compound the problem , when proposals are made to reform this fleecing o f the state, public sector employees strike or simply engage in rent-protection lobbying campaigns. But just as comm on as vested interests are outside groups that influence the operations o f an institution. One o f the most blatant recent examples o f this in Ecuador is the banking superintendency.32 W ith very few exemptions, superintendent appointees are usually related to top banks. Independent supervision is compromised. Another very common occurrence is influencing government to fill ministerial posts with personalities tied to interest groups. This is one o f the causes o f the volatility in policy, since once a minister’s policy position is exposed to the public, the struggle amongst interest groups to topple the minister is great. Weak institutions contribute to low policy credibility, leaving the economy vulnerable to shocks because contingent policies that require planning and extended time horizons fo r application are not sustained. For its entire history, the Central Bank o f Ecuador was widely respected for its technical staff. However, its dependence on the government limited its policy options. Ecuador: political economy 193 Vulnerable to political influence, it usually succumbed to pressures to monetize fiscal deficits or benefit politically powerful banks or economic sectors. Thus, its policy attempts to control inflation were always doomed. Lack o f credibility contributed to time-inconsistent policies and chronic high inflation. Political machines controlled by interest groups also profit from these weaknesses. Public sector bureaucracy is highly susceptible to political interference. G overnm ent agencies have becom e bloated w ith political appointees that lack jo b qualifications. For example, in the mid-1980s, central bank staff were augmented from about 2000 employees to 6000 to com ply with electoral promises o f jobs.33 A more extreme case is the Ecuadorian Social Security Institute (IE SS). Various administrations have successively increased the number o f posts to over 15 000, when it does not need m ore than about 3000 staff, according to experts. The political instability brought about by the flux o f ministers, lack o f legislative consensus and so on, spilled over into economic volatility (Figure 6.15). The high turnover o f key ministers (not to mention recent presidential in stability) leads to stop-go econ om ic policies, unfinished econ om ic programs and reform efforts that start but are not follow ed through. E con om ic policies have not had continuity from adm inistration to administration, and in many cases not even during the same administration. Hurtado A la rcon Notes: * ** These were adjusted to exclude the distortion from the disruption o f oil exports resulting from the 1987 earthquake. 2003 only. Figure 6.16 G D P grow th a n d m in isteria l instability 194 Political crises, social conflict and economic development A s a result, the country has not implemented a long-term program seeking m acroeconom ic stability, grow th and social justice. In fact, during this democratic period, the country negotiated ten letters o f intent and reached eight agreements with the International M onetary Fund, but Ecuador has only com pleted three o f them .34 In the cases when programs were not followed through the economy was managed erratically, without any agenda or direction. The welfare losses from interest group activities that do not contribute to economic growth but only to transfers from one sector to the other are very difficult to measure. However, if we assume that without all the instability policies that would have corrected the ills o f the economy, and G D P would have grown at its potential stable rate o f 4.35 per cent per annum, real G D P would be at least 1.6 times higher. Political Effects of Interest Group Influence and Institutional Weakness The governance problems o f fractionalized political parties, populism and regional conflicts are expressions o f interest group influence. D ifferen t - competing - groups certainly benefit from the status quo, even though it brings overall negative effects on the political system through weak institutions, political instability, lack o f consensus and the inability o f the system to resolve society’s problems. Political instability Interest group influence contributes to the high political instability. Although in general and w ith the exception o f the last six years the country has enjoyed presidential stability, ministerial, legal, and legislative volatility have been the norm. A s argued above, interest groups contribute to the fragm entation o f political parties. Th e institutional fram ework creates the incentives fo r a large number o f small parties. But special interests benefit from it. They do not need to jo in other, perhaps competing groups, to obtain representation in Congress. They can do this directly by form ing a party that would obtain m inority representation. Interest groups also contribute to populist tendencies. Dem agoguery and populism provide a façade fo r interest groups to hide behind. In essence, special interest free-ride on populist campaigns to get their candidates elected. Then, once in office, they are quick to reap the benefits o f complacent public officials. A n o th e r w ay o f lo o k in g at party fragm entation is as a diversified representation o f interest groups with political labels. This abstract view may be helpful in understanding legislative instability and lack o f consensus. Ecuador: political economy 195 The cycling o f majorities or m ajority coalitions, an important source o f the governability problems, and the consequence o f the fractionalization o f Ecuadorian political representation, constitute a m ajor barrier to carrying out reforms. The cycling o f majorities leads to legislation getting approved by one coalition, but soon after it getting m odified by another coalition. Sometimes this seesaw occurs through actions across the different branches o f government. A n exemplary case o f this was the value-added tax fiasco in 2001. The government proposed an increase in the tax rate. Congress did not approve it. The government, through the executive veto managed to enact it. The opposition from Congress appealed to their ideologically friendly and ‘dependent’ constitutional court, which annulled the increase in the tax. This process lasted about four months. Econom ic agents partially paralysed their activities and partially speculated on the outcome o f the tax increase. In the meantime, the I M F program was at stake and falling oil prices seemed to require other fiscal measures to compensate for the lost revenues. T h ere are tw o cases w here the lack o f consensus accum ulated insurmountable costs. One is the ten-year delay in building a second oil pipeline, which finally began operating in the fourth quarter o f 2003. The other case is the never-ending struggle over the focus o f m odernization reforms, especially those that call for privatization o f government-owned enterprises. M any years o f discussion have not been able to find a consensual strategy. A ccordin g to most public opinion polls about 55 per cent o f the population support the privatization and about 30 per cent oppose it. M ost o f the support is concentrated in the Coastal provinces and business sectors. U n d er particular conditions, reform s have been approved to allow privatization. H owever, opposing groups have managed to block privatization attempts by public protests and legal reforms. Other times, political uncertainty, electoral cycles and government turnover have scared o ff w ary investors. Regional differences in Ecuador also play into policym aking and reform philosophies. The more trade-oriented and business-minded Coastal region repeatedly favors modernization policies and smaller government. But at the same time, business sector rent-seeking and industry protection are influential. On the other hand, the population in the H igh land region has tended to be hesitant or incredulous o f modernization. Constituents have historically favored more state intervention in the economy, although the recent growth in the non-traditional export sector in this region has somewhat m odified the region’s attitudes. Military arbitration Political instability brought the need fo r m ilitary arbitration on several occasions during the democratic regime. Whilst it is true that the armed forces 196 Political crises, social conflict and economic development have contributed towards the stability o f the democratic order, especially in circumstances that in early years might have caused the collapse o f the democracy, it is also true that the armed forces have become an influential force that have sometimes acted beyond their constitutional mandate. On occasions, some army members have violated the constitutional order. In 1987, the air force commander led an insurrection against President Febres Cordero alleging that the president had trespassed on military norms. In 1995, the army chiefs pushed the administration to remove Vice President Alberto Dahik because the president was weak and could not subordinate the army to his authority. In 1997, the Joint Chiefs o f Staff umpired after President Bucaram was removed by a Congress resolution because there were doubts about its legal legitimacy. In 2000, a group o f middle-ranking army officers supported an indigenous insurrection and form ed a dictatorship because o f the social unease o f the country during the M ahuad administration. Soon after, they passed power to then Vice President N o b o a in a hurried session at the M inistry o f Defense.35 In addition, there have been public statements by army members and hidden pressures aiming to influence decisions that may affect their interests, or what the army believes to be the country’s interests. For example, the armed forces opposed the construction o f the new oil pipeline. Similarly, they control the C ivil Aviation Board that rules over airline licenses. Historically, they have protected the air force’s commercial airline, T A M E , from competition by limiting entry. A fter form er Colonel Lucio Gutiérrez was elected president for 2003-07, increased role o f the military became evident. H is background has led him to appoint numerous form er military officials to his ministerial cabinet and other key public offices. Gutiérrez has also announced that he w ill propose constitutional reforms that would allow military personnel to vote. Tim e will tell if this greater participation o f the m ilitary will become a threat to democracy or not. But certainly, recent events have changed the past two decades o f diminishing m ilitary influence in politics. Th e influence o f special interests is not lim ited to the executive and legislative branches. A s was argued above, the court system is dependent on the political front. D ifferent parties and influential groups frequently pressure judges and judicial decisions. B y interfering even in the courts, the end result is a very high degree o f ingovernance. Since the people don’t even have a last recourse o f reliable action to guarantee their rights, the effective principal-agent relationship lacks the ‘end-m onitor’ to rule over disputes. Thus, the system or institutional fram ework allows a huge loophole for democratic representatives (that is agents) to shirk without the people (that is principals) having a last option to demand true representation. Th e unchecked interference o f interest groups in the E cu adorian dem ocratic system through strong institutions and independent courts, Ecuador: political economy 197 leads to severe misrepresentation. F or the most part, voter-citizens are unprotected from even extreme and corrupt rent seeking and protection that are preventing econom ic and social developm ent. These elements provide an ideal political environment fo r a dem ocracy to minimize the interests o f voter-citizens. Im portantly, current generations w ould have the incentive to pass-on the bill to future - non-voting and not represented - generations. Thus Ecuador’s highly indebted econom y is the result o f the type o f incentive structure that Buchanan and W agner (1977) aptly call ‘democracy in deficit’ in reference to the tendency o f current generations to consume at the expense o f future generations. Feedback of Economic Conditions to Political System Th e prevailing susceptibility o f the political system to interest group influence and lagging institution building arises from a variety o f sources. Some may come from cultural origins inherited from colonial times, others from the socioeconom ic conditions. A s Crain and Tollison (1993) point out follow ing Olson (1965), unfortunately political science and economics have been unable to provide robust predictive theories o f the form ation o f interest groups. Suggestive hypotheses point to the prevailing incentives and institutional structures. Others, in particular Olson, emphasize pre-existing conditions that may render political activity m ore effective, for example organizations and groups that form for some other purpose that later find political action to be an effective byproduct to further their interests. This is the case o f trade associations, unions, social clubs, and so on. U nder this hypothesis, the conditions for interest group influence and concentration o f power in Ecuador are overwhelming. Aristocratic and oligarchic legacies, social class divisions, narrow (fo r example regional) trade associations are all elements that facilitate political action. A s a byproduct o f their principal motive o f association, links o f kin, landownership concentration, and special rights handed down from colonial times, evolved from business oligarchies into political oligarchies. Further strength o f interest group power is derived from asymmetry in firm sizes, products, and high industry concentration that dominates economic organization in Ecuador, allowing, according to Stigler (1971), more effective collective action. A n im portant factor that contributes to the political instability is the absence o f social consensus. Again, this is the result o f a tug o f interests. Political analysts have pointed out to exhaustion how the deficiencies in the democratic institutions and players cause political stalemates that block econom ic reform efforts. D em ocracy requires equal access and assumes basic freedoms. These however are truncated in Ecuador because o f unequal opportunities and endowments. The severely skewed distribution o f income, 198 Political crises, social conflict and economic development which is correlated w ith deficient access to go o d health and education, inhibits smooth democratic participation. Inform ation gaps between those who have it and those that don’t play into the lack o f consensus and the continuous acceptance o f populist policies and candidates. These factors are magnified as between urban/rural populations and am ong indigenous and non-indigenous ethnic groups. Poverty and less access to health, education and basic services are more pronounced in rural and indigenous populations. Reforms towards the Improvement of Governance The need to overcom e some o f the governance problems mentioned, as well as to set up sound functioning institutions, has been under discussion and consideration for many years in Ecuador. In the constitution approved in 1978, a disposition lim iting the parties’ fragm entation was included. According to the norm, if a party was to continue existing, it had to have national organization and receive at least 5 per cent o f the national votes in two consecutive multiperson elections. A specific Political Parties L a w was passed to regulate the birth, life and extinction o f political organizations. Th e purpose was to establish a group o f doctrinaire, dem ocratic and representative parties, and make them appropriate channels o f political expression. A dditionally, the law provided political organizations with public funding. Th e Elections L a w approved in the same year established electoral expenditure restrictions, in order to ensure equal access to media appearances by any candidate o r political party. Through this restriction, lawmakers intended to avoid the predominance o f m oney in campaigns, and avoid inappropriate advantages o f some candidates at the expense o f others. In the constitutional reform o f 1983, Congress granted the president’s capacity to send a project as econom ically urgent, in which case it had to be discussed and approved within 15 days. I f it was not debated and voted upon, the bill would automatically become law, but Congress retained the capacity to reform it or revoke it in the future. The reform also took away from Congress and gave to the executive the ability to set public sector wages.36 The reforms were useful for the 1984 and later administrations, since they were allowed to carry out programs and face econom ic crises, especially in cases when the government did not hold m ajority support in Congress. Since Ecuador returned to democracy in 1979, Congress became used to restaffing the Supreme Court o f Justice according to the interest o f political parties that held a m ajority in Congress. To avoid this practice that gave rise to corruption and politicized intervention in the judiciary, a constitutional reform in 1997 extended life tenure to Supreme Court judges, Ecuador: political economy 199 and established a transparent selection process based on merit. Vacancies were supposed to be filled by cooption. Also, the National Judiciary Council (Consejo Nacional de la Judicatura) was created, as an institution in charge o f governing and managing the judicial branch. The reforms mentioned have not resolved the weaknesses o f the justice system, but the changes have helped reduce problems. M ore time is needed in order to change lower courts in the same fashion as the Supreme Court. The Constitutional Assembly undertook the most ambitious efforts to resolve governance problems in 1998. It approved norms to strengthen presidential authority, lim it legislative intervention in econom ic issues, prom ote cabinet members’ stability, avoid political intervention in Central Bank policies, elim inate p o litica l parties w ithou t m inimum electoral support, eliminate m id-term congressional elections (usually lost by the political party in office), give the president capacity to increase public spending and taxes, forbid Congress to increase the fiscal budget, establish simultaneous decentralization o f incom e, expenditure and functions, establish independence and stability o f tribunals o f justice, and bar Congress from removing Supreme Court judges. Perhaps three crucial issues remained unresolved: (i) substitution o f the proportional electoral system by m ajority rule, which w ould encourage political party consolidation and prom ote m ajority form ation in Congress; (ii) transform ation o f the Constitutional Tribunal into an independent court o f constitutional justice, and (iii) elim ination o f political parties’ control over the Electoral Supreme Court. Such control has been a source o f electoral fraud and violations o f political-electoral laws. Despite these three shortcomings, the norms set in the new constitution were thought to be able to fix the m ajor governance problems o f the Ecuadorian democracy. However, fo r the most part, this has not been the case so far. The first president under the new constitution, Jamil Mahuad, lasted in office just one third o f his term. D u rin g his b rie f 16-month administration, he had three ministers o f economy, several oil ministers, even though Congress could not impeach ministers. A lth ou gh the new constitution granted extensive legal, budgetary and policy independence to the Central Bank, its board had three presidents during the M ahuad adm inistration. D espite en joying m ore constitutional pow er than his predecessors, President M ahuad led the country to an enormous economic and social crisis, almost provoking the collapse o f the democratic system.37 In a last and, many argue, desperate effort to re-establish economic stability, Mahuad abolished the national currency, and declared the U S dollar as the official Ecuadorian currency.38 In doing so, the president trampled on the Central B ank’s autonomy and advice. 200 Political crises, social conflict and economic development Th e reforms approved by the Constitutional Assem bly have not had the desired effects on other areas o f public life. The Supreme Electoral Tribunal has not obeyed the norm to eliminate political parties without 5 per cent o f popular support in the last two elections. A ll political parties with congressional representatives continue fragmented with personal or local interests, government intervention, and other conflict o f interests, regardless o f the norms seeking to avoid it. Despite a constitutional prohibition, a provincial autonomy project was almost approved (and the risk o f such approval has not disappeared). The autonomy system would have caused large revenue losses to the central government while keeping its spending obligations. Both Presidents M ahuad and N o b o a , and Congress violated the constitution, for example, when they abolished the sucre as the national currency. T h ey also infringed the constitution when they sent multipleissue urgent econom ic bills to Congress in violation o f A rticle 148 o f the constitution. Congress has proposed bills to increase public expenditures against constitutional norms that allow only the president to do so, and neither Mahuad, N o b o a or Gutiérrez have complained. Additionally, four years after the new constitution came into effect, Congress is yet to enact a number o f laws to adapt legal statutes to the new M agna Carta. 6.5 LIMITS OF LEGAL FORMALITIES3 AND FINAL 9 THOUGHTS Constitutional reforms aiming to resolve the main governance problems o f the Ecuadorian democracy have proven to be enough to provide the political system with the stability necessary to improve social and economic conditions. The last experience in 1998 - Ecuador has had one constitution every nine years on average - suggests that constitutional engineering is not enough to resolve the governance problems o f Ecuadorian democracy, or enough to build the necessary institutions for a well-functioning democracy. The correct functioning o f institutions also depends on the people in charge o f running and building them, who in turn depend on the citizens that form a political society. Hence, people’s everyday behavior, which is determined by cultural values o f society, is also important. In other words, the set o f values, feelings, attitudes and customs matter as well. Some cultural values o f several sectors o f Ecuadorian society do not seem to be compatible with good functioning democratic institutions. Ecuadorians tend to ignore norms, disobey rules and decisions. People often do not honor agreements; thus, suspicion and distrust instead o f confidence are frequently present in social and political relations. Citizens make claims to have their Ecuador: political economy 201 needs satisfied and their problems resolved through government action and public authorities instead o f through their own individual effort. P eop le and organizations do not h arm onize special w ith collective interests in their daily life. It is com m on fo r authorities to subordinate the public interest to individual and special interests. Lack o f tolerance, a tendency toward conflict, and the misplaced conviction that when one wins the other one loses, block the possibility o f rational discussion, interest matching, consensus building, and negotiation o f agreements. The notion o f possible win-win negotiations is not w idely held - perhaps precisely because o f a long history o f bad experiences resulting from non-democratic manipulation o f processes and institutions. D ecisionm akers are often m ore concerned about the beneficiary o f their decisions rather than caring about the merits, needs and rights o f those who demand the attention o f the authorities. People trust more in political influence and personal relations than in institutions and legal norms. Therefore, democracy is not seen as a political system demanding equal obligations and providing equal opportunities to people. Political relations shape a network o f commitments, privileges and sinecures. The network is preference-ranked above national interests, econom ic growth and social progress. Th e proclivity to transfer individual responsibilities to the state and its authorities creates the conditions fo r paternalism and populism. Th e absence o f the long-term view - a consequence o f high volatility - drives people to expect immediate results from policies that would otherwise require time, effort and perseverance to develop and reveal the benefits. A ll these are weaknesses that have retarded the form ation o f citizens com m itted to the cou ntry’s future, one in which they ought to participate with their generosity and effort.40 To improve governance in Ecuador, it w ill be just as necessary to build sound and strong institutions as to work toward building better citizenship. This is not an easy task. The 1998 Constitutional Assembly contributed in this direction by approving A rticle 97, in which rights and obligations o f Ecuadorians were laid down fo r the first time in the constitutional history o f Ecuador. Before, only rights were extensively stated but never obligations. But o f course, better citizenship requires much more than proclamations. It requires long education processes in schools, the media, religion, political parties, and organizations o f civil society. The profound governance problems in Ecuador require encompassing changes. Th e solutions are com plex because, as we have argued, the problems involve econom ic and political issues. Progress has been made in both areas. However, many o f the remaining problems correspond to the bidirectionality or synergy between deficiencies o f the political system that prevent econom ic progress and conversely. Concerted efforts w ill be Political crises, social conflict and economic development 202 required to resolve the econom ic inefficiencies and inequalities that distort the incentives to political agents. But at the same time, governance impasses need to be resolved to find consensual reform programs that can allow sustainable econom ic policies. NOTES * 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. The authors are grateful for the auspices o f C E P A L , the Ford Foundation and the Inter American Dialogue. We thank Andrés Solimano for his guidance and comments on earlier versions. Special thanks go to Paul Beckerman and Igo r Paunovic for helpful critiques and observations that improved the chapter. We also recognize insightful suggestions made by the participants at a C E P A L conference on the political economy o f Andean nations held in Santiago, Chile. Finally, we would like to thank Vicente Alb orn oz for his input into the final revision. We take full responsibility for any remaining errors or omissions. See C O R D E S , T endencias E conóm icas y F inancieras (1999), for an account o f the Ecuadorian 1999 financial crisis where camping contributions, a connected superintendent and the largest private bank all conspired to obtain special privileges. Huntington (1968). It is possible to trace this back to the period 1925-48 when the country had an average o f one president per year, some constitutional, some dictators and even ad-hoc presidents that resulted from chaotic political circumstances. Except in the case o f President Jaime Roldós, who died in a plane crash while in office and was replaced by his Vice President. Jaime R oldós and Osvaldo H urtado are considered a single administration. Roldós was in office for 21 months, and H urtado for 39 months. A t the time, the presidential term lasted five years. Burbano de Lara and Rowland (1998), pp. 99-103. Currently, the proposal to revoke this norm counts on the m ajority support o f Congress and political parties. The income tax was eliminated in 1998 and replaced by a 1 per cent tax on capital transactions, which was eliminated in 2000 after the income tax was restored in 1999. In late 1999, the V A T rate was raised from 10 to 12 per cent. A fte r a long debate in 2001, this tax was raised from 12 to 14 per cent in 2001. Two months later, the Constitutional Tribunal declared it unconstitutional, and was decreased back to 12 per cent. Alm ost all the parties that existed before that year have disappeared since they did not maintain the minimum vote requirements (Conservative, Liberal, Socialist, Extreme L e ft Front, Communist, and People’s Force Concentration). These vanished parties were important political participants in the early and mid-20th century, especially the Conservative and Liberal parties, which had been very influential since the foundation o f the Republic in 1830. M ejía (1998), p. 27. In the Coast region, liberalism, entrepreneurship and big business are common traits. In the Highlands, meanwhile, social and religious conservatism with hacienda-like paternalism are more common. Despite this contrast, both regions have an entrenched bias toward government assistance and rent seeking, but again with differences. In the Coast region the tendency is to seek mercantilist aid to businesses while preaching liberal economic policies and small government. In the Highlands, strong lobbying for rent protection in agriculture, industry and trade dominate along with more predispositions toward a welfare state. This practice is called ‘cambio de camiseta’ (shirt change) in reference to the change in alliance that the administration’s offerings cause. Ecuador: political economy 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 203 C O R D E S (1999), p. 167. For example, the once prominent businessman and owner o f Banco del Progreso, Fernando Aspiazu, is currently in jail at the time o f writing for not paying taxes, and not because o f his bank felonies, even though the financial fraud and scams were proven beyond doubt over two years ago. Bankers who have caused bankruptcy o f their institutions, and who have swindled the Central Bank and the clients, have obtained beneficial sentences and the right to be reimbursed part o f the performing loans portfolio, to the detriment o f the clients. P N U D (1998). M o n ito r, December 2001. Ecuador was a full member o f O P E C until 1993 when it abandoned the cartel. Arteta (2000). These figures come from the revised national accounts in U S dollars issued by the Central Bank o f Ecuador in 2002 and differ from earlier versions o f this material presented in Chile and N e w York. The rates o f growth are very similar to the old national accounts. The largest difference occurs in 1998. The old accounts reported G D P growth at 0.4 per cent while the new accounts report 2.1 per cent growth. In 1999 the output decline in the old accounts was 7.3 per cent, while in the new ones it was 6.3 per cent. By far the greatest difference between the new and old accounts lay in the levels o f G D P in current U S dollars. For example, the old accounts reported G D P falling from $19.7 billion in 1998 to $13.6 billion in 2000. The new national accounts report G D P at $23.4 billion and $15.9 billion for the same years, respectively. Fernández and Lara (1998). The author extended the exercise to 1998.04. In the first quarter o f 1999, which coincides with the beginning o f the crises a structural break occurs in the series. However, since the economy is still in the recovery phase, it is not possible to determine i f G D P w ill return to its long-term growth rate or i f the crises caused a structural trend break o f the series. Moreover, the meticulous econometric exercise required is beyond the scope o f the present chapter. Fernandez and Lara (1998) identify 11 shocks or structural breaks. We identify one more negative break in 1998.01, which we attribute to El N iñ o and another in 1999.01 that marks the unfolding o f the beginning o f the financial and economic crises. This is lower that the simple arithmetic average growth rate o f 4.9 per cent during this period. The difference is due to structural changes in the economy. Cagan (1956). A rte ta (2001) provides a succinct description o f the factors that contributed to dollarization. This is an implicit estimate obtained from the growth o f the public debt, which reflects the variation o f the consolidated public sector balance. There are no reliable figures for the N F P S until 1988. In the years 1988, 89, and 90 for when there are official statistics, the average deficit was 2.1 per cent o f GDP. But this figure excludes central bank losses from the sucretization o f private external debts in the early 1980s and later modifications. M ore importantly in these years, the government did not service its foreign debt completely. See C O R D E S 1999-2000. Also, a comprehensive account o f the institutional deficiencies is given in Comunidad Andina (2001). The independence granted in 1998, during the constitutional reform, was too little too late to prevent interference in the Central Bank board when the fiscal and financial crisis o f 1998-2000 unfolded. For this, we decompose the rate o f economic growth into its most basic economic factors: capital (k), labor (l) and technological change or productivity (a). y (t) = a (t)k (t)al(t)f. Taking time derivatives o f the logarithmic transformation o f the above neoclassical growth function and assuming constant returns to scale the capital and labor shares add to one (a + (1 - a) = 1), the expression relates the growth o f output ( Y ) to the growth o f the capital stock ( K ) , o f labor ( L ) and o f technology or productivity growth (A t), Y t = A t + a t K t + (1 -a t) L t 204 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. Political crises, social conflict and economic development The decom position o f this can be done either by applying growth accounting m ethodology (as suggested by Solow (1957) and followers) o f applying fixed factor shares or parametrically. Arteta (1999, 2000) estimates the contribution o f these factors to G D P using both. Arteta and Samaniego (2002). C O R D E S (1999) and P N U D (2001). Hurtado (1997). See supra note 14. There was so much redundancy that even the gardening department had multiple managerial levels. One was by the Hurtado government, another by the Febres Cordero administration and more recently by N ob oa. Although in this instance the constitution describes unambiguously the succession o f power, the intrigue was the point at which N o b o a assumed power. It should have been in Congress not in the M inistry o f Defense. Before the reform it was common for Congress to bind administrations by abruptly raising wages without financing. To pay for higher wage bills, the administration would have to propose or implement unpopular adjustment measures that would hurt the political party in office, and during the next election. This exacerbated political cycles, instability and economic policy. To be fair, M ahuad inherited an economy with severe underlying economic and financial problems. M an y o f these can be traced to irresponsible econom ic management by previous administrations and political volatility. Before he took office a large portion o f the banking system was already insolvent. El N iñ o was devastating the countrys agriculture and infrastructure. O il prices, at $10 a barrel, had dropped to their lowest levels in over 30 years. However, his administration made significant policy errors that made a foreseeable crisis much worse. This highly controversial policy was, in fact, unconstitutional. Article 264 o f the Political Constitution has not been repealed or modified. This article states that the Central Bank has the exclusive responsibility for monetary policy. M oreover, the article still states that the sucre is the official currency. ‘ L a emisión de moneda con poder liberatorio ilimitado será atribución exclusiva del Banco Central. L a unidad monetaria es el sucre, cuya relación de cambio con otras monedas será fijada por el Banco Central.’ On this issue we would like to refer to im portant publications such as D em ocracy in A m erica (de Toqueville 2000), E l Subdesarrollo está en la M en te (Harrison 1989), M a kin g D em ocracy W ork (Putnam 1994), L a Sociedad de la D esconfianza (Peyrefitte 1996) and Confianza (Fukuyama 1996). Hurtado (1994), pp. 107-21; Hurtado (2001), pp. 121-8; C O R D E S (1999). BIBLIOGRAPHY Araujo, M.C. (1998), ‘Gobernabilidad durante la crisis y políticas de ajuste’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 6, Quito: CORDES. Arcos, C. (1998), ‘Demandas y conflictos sociales en el sistema político ecuatoriano’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 10, Quito: CORDES. Arteta, G. (2000), ‘Los flujos de capital extranjero en el Ecuador: uso, destino y consecuencias’, Cuestiones Económicas, Quito: Banco Central del Ecuador. Arteta, G. (2000a), ‘Productivity growth and industrial structure in the Pacific region, Ecuador’, Pacific Economic Outlook Structure Project, Japan Committee for Pacific Economic Outlook, Osaka, Japan. Ecuador: political economy 205 Arteta, G. (2001), ‘Dollarization in Ecuador: experiences, challenges, and lessons’, American Insights, September (See also www.iamericas.org). Arteta, G. and C. Baus (2003), ‘¿En dolarización ha cambiado la competitividad?’, Carta Económica, 4, Quito. Arteta, G. and P. Samaniego (2002), ‘Patrimonio del estado y sustentabilidad fiscal en el Ecuador’, in Gustavo Garcia (ed.), Patrimonio del Estado, Caracas: IELSA. Banco Mundial (1998), ‘Más allá del consenso de Washington’, Washington, DC: World Bank. Buchanan, J and R. Wagner (1977), Democracy in Deficit: The Political Legacy o f . Lord Keynes, New York: Academy Press. 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CORDES (1999, 2000), Tendencias Económicas, Políticas y Financieras, Quito: CORDES. Comunidad Andina (2001), Los Seguros de Depósitos en los Países Andinos: Propuestas para un Régimen Común, Lima: Secretaría General Comunidad Andina. Crain, M. and R. Tollison (1994), ‘Toward a positive public choice’, in Mark Crain and Robert Tollison (eds), Predicting Politics: Essays in Empirical Public Choice, Ann Arbor, Michigan: University o f Michigan Press. de Toqueville, A. (2000), Democracy in America , New York: Bantam. Del Búfalo, E. and G. Ríos (2002), ‘Venezuela: from stability to turmoil’, mimeo, Santiago de Chile. Echeverría, J (1997), ‘La democracia bloqueada: teoría y crisis del sistema político . ecuatoriano’, Quito: Editorial Letras. Fernández, G. and C. Lara (1998), ‘Los shocks exógenos y el crecimiento económico en el Ecuador’, Documento Técnico no. 48, Dirección General de Estudios, Quito: Banco Central del Ecuador. Franco, R. (ed.) Sociología del Dessarrollo, Políticas Sociales y Democratia, Siglo X X I, México. Freinderberg, F. and M. Alcántara (2001), L os Dueños del Poder, Quito: FLACSO. Fukuyama, F. (1996), Confianza, Atlántida, Buenos Aires. Fundación Futuro Latinoamericano (1998), Consensos para una Propuesta de Gobernabilidad para el Ecuador , Grupo de Cousin I, II y III. 206 Political crises, social conflict and economic development Gallardo, J (2001), Reforma Fiscal: Garantía para las Nuevas Generaciones, Quito: . Ministerio de Economía y Finanzas, August. Harrison, L. (1989), E l Subdesarrollo está en la Mente, México City: Limusa. Huntington, S. (1968), Political Order in Changing Societies, New Haven, Connecticut, Yale University Press. Hurtado, O. (1994), ‘Cultura política’, in Léxico Político Ecuatoriano, Quito: ILDIS, pp. 107-21. Hurtado, O. (1996), ‘Gobernabilidad Democracia y Pobreza’, Proyecto Mitigación de la Pobreza y Desarrollo Social, Serie de documentos no. 7, Quito: PNUD. Hurtado, O. (1997), E l Poder Político del Ecuador , Quito: Editorial Planeta. Hurtado, O. (1999), Deberes y Responsabilidades Para Ser Buenos Ciudadanos, Quito: CORDES. Hurtado, O. (2001), ‘Cultura y desarrollo’, in Franco (2001). ILDIS (1990), ‘E l Tribunal de Garantías Constitucionales, Conflictos y Jurisprudencia Período 198011990’, Quito: ILDIS. Mancero, A. (1997), ‘Gobernabilidad del desarrollo a través de la democracia: enfoque del problema, documento provisional para discusión’, mimeo, Quito. Mancero, A. (1998), ‘Ingobernabilidad y transición de la democracia Ecuatoriana’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 9, Quito: CORDES. Market Consultores (2001), ‘Monitor de la opinión nacional’, Quito, December. Mejía, A. (1986), ¿Una Democracia Ingobernable? Arreglos Constitucionales, Partidos Políticos y Elecciones en Ecuador, 1979-1986, s.e. Mexico DF. Mejía A . (1998), ‘Partidos políticos: el eslabón perdido de la Representación’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 5, Quito: CORDES. Mejía, A. and N. Wray (1997), ‘Asamblea nacional para la reforma política, límites y posibilidades’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 1, Quito: CORDES. Niskanen, W. (1971), Bureaucracy and Representative Government, Chicago: AldineAtherton. Olson, M. (1965), The Logic o f Collective Action, Cambridge, Massachusetts: Harvard University Press. Organización Demócrata Cristiana de América (1996), Elecciones en América Latina 1995, Caracas: ODCA. Peyrefitte, A. (1996), L a Sociedad de la Desconfianza, Santiago de Chile: Editorial Andrés Bello. PN U D (1998), Gobernabilidad y Desarrollo Democrático en América Latina y E l Caribe, Quito. PN U D (2001), Human Development Report, Quito. Programa de Apoyo al Sistema de Gobernabilidad Democrática (1998), ‘La reforma electoral’ , Colección Reforma Política no. 4, Quito: Universidad Politécnica Salesiana. Programa de Apoyo al Sistema de Gobernabilidad Democrática (1997), ‘Los grandes temas de la reforma constitucional’, Colección Reforma Política no. 1, Quito: Universidad Politécnica Salesiana. Programa de Apoyo al Sistema de Gobernabilidad Democrática (1997), ‘Nueva justicia y revocatoria del mandato’, Colección Reforma Política no. 3, Quito: Universidad Politécnica Salesiana. Ecuador: political economy 207 Programa de Apoyo al Sistema de Gobernabilidad Democrática (1997), ‘Reforma política y asamblea nacional’ , Colección Reforma Política no. 2, Universidad Politécnica Salesiana, Quito. Putnam, R. (1994), M aking Democracy Work, Caracas: CEDAI. Ruiz, L. (1998), ‘Ecuador: tendencias de la distribución del ingreso; una visión panorámica’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 9, Quito: CORDES. Salgado, G. and others (1997), ‘Consulta popular: reflexiones y propuestas’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 2, Quito: CORdEs. Salgado, G. and others (1998), ‘Temas para la reforma constitucional ecuatoriana’, Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 4, Quito: CORDES. Salgado, G. and S. Santiago (1998), ‘Problemas fiscales y gobernabilidad’ , Proyecto CORDES - Gobernabilidad, Documento de Trabajo no. 8, Quito: CORdEs. Sánchez Parga, J (1995), ‘Conflicto y democracia en Ecuador’, Serie Diálogos, . Quito: CAAP. Sánchez Parga, J (1998), L a Pugna de Poderes: Análisis Crítico del Sistema Político . Ecuatoriano , Quito: Abya Yala. Sánchez Parga, J (1999), Cultura Política en la Sociedad Ecuatoriana, Quito: Abya . Yala. Solow, R. (1957) ‘Technical changes and the aggregate to production function’, Review o f Economics and Statistics, 39, August, 312-20. Stigler, G. (1971), ‘Theory o f economic regulation’, Bell Journal o f Economics and Management Science, 2(3). Stigler, G. (1974), ‘Free riders and collective action: an appendix to “ Theory of economic regulation” ’ , Bell Journal o f Economics and M anagement Science, 5, 359. Transparency International (2001), Report . Verdesoto, L. (1996), Temas para una sociedad en crisis ¿Es Posible gobernar desde los consensos?’, Quito: Fundación Esquel. 7. Governability and economic performance in 1990s Peru M iguel Jaram illo and Jaim e Saavedra* ‘E n el Perú lo único p erm a n e n te es lo p ro visio n a l’ ‘In Peru, only the provisional is p erm a n en t. ’ H éctor Verlade, architect and w riter in Lim a 7.1 INTRODUCTION Th e decade o f the 1990s brought a series o f changes to Peru that, it is often argued, altered the direction o f the country. Viewed from a broader historical perspective, however, the period is perhaps similar to other eras in Peru’s political past. A charismatic leader without a form al organizational structure comes to power with ideas o f reform and institutes an authoritarian government that ends in rampant corruption, economic crisis, and in political upheaval. President Leguía’s (1919-30) project, ‘la Patria N u eva’ , is perhaps the most recent example in Peruvian history, but there are others. A t least tw o im portant characteristics, however, set the 1990s apart from previous decades. In the first place, they were part o f a period o f democratic rule that had started in 1980 and was characterized by historically unprecedented levels o f political participation, at least in terms o f people’s access to government and exercise o f their right to vote. A s is shown in Table 7.1, in the last half-century, Peru has changed from being a country where only a small per cent o f the population was registered to vote into one where the m ajority o f the population can effectively choose its own authorities. Secondly, this democratic period occurs within an international context in rapid transit towards greater economic integration and, as recent history in Peru demonstrates, stricter standards for individual countries’ political behavior. Both o f these characteristics, greater political participation and economic integration, highlight the importance o f the connection between governability and econom ic performance. The first, in terms o f sustaining a demand for democratic procedures and institutions whose existence and performance 208 Peru: governability and economic performance 209 are clearly shaped, however, by phenomena such as terrorism, econom ic crises, and the fiascoes o f Peruvian political parties. The second, because it is the more open economies that are more dependent on international trade and finance markets and that are also then the most sensitive to shocks coming from financial and direct private investment reacting negatively to governability problems. Table 7.1 E lecto ra l particip a tio n 1939-2000 Year Register votes Valid votes Population Register votes/population 1939 597182 339 193 1963 1980 2 070 718 6485680 6 207 967* 9 906 296** 17031221*** 20.9 38.1 1995 11 974 396 1 814568 4123776 7 226 341 9.7 23 836 867 50.2 2000 14 567 467 11 085870 25 662 000 56.8 Notes: *1940, **1961, ***1981. Sources: Electoral data 1939-1980, Tuesta (1987): 295, 259, 233; 1995, 2000: O N P E . Population, N ational Census o f Population. Own elaboration. In this context, econom ic reforms cannot be profoundly sustained by governm ents w ith autocratic tendencies. Ultim ately, the character and institutional scope o f these econom ic reforms are to a large extent contrary to the needs and goals o f an authoritarian governm ent. Th e points o f conflict, moreover, are not simply limited to reforms that are specifically democratizing, like those that are aimed at reinforcing access to information or government accountability, but also present themselves even in reforms that, for example, are aimed at introducing better foresight in macroeconomic policies. The extent to which the government’s autocratic tendencies shape the political process responsible for the initiation o f reform determines both the strength o f the reforms and their sustainability. This new context o f dem ocracy also changed the roles o f the many m ediating actors in Peru ’s p o litica l and econ om ic system, including multilateral organizations (financial and political), investment banks, and risk-evaluation agencies. It is as a result o f this change in context that the more traditional roles o f the international agencies o f the U nited States, from the State Department, the C IA , and Congress, to the N G O s focused on human rights have all been redefined. Although some o f these agencies have a long and complex history in Latin Am erica, their roles have become 210 Political crises, social conflict and economic development much more important in the face o f the Cold W ar’s end and the new priority o f the U nited States’ executive branch to see democracy at the top o f its agenda fo r the region. The interrelation o f the interests and agendas o f these different actors w ill directly influence the results o f Peru’s internal political process. F o r example, in the case o f Peru it has been stressed how the result o f a battle waged by the C I A and the State D epartm ent have influenced political outcomes regarding certain controversial aspects and people in the Fujim ori regime.1 F rom a political econom y perspective, there are three clearly distinct periods in Peru’s recent history. In the first period (1990-92), the management o f the econom y was dominated by stabilization policies and a movement away from the vaguely heterodox visions o f Fu jim ori’s electoral campaign towards reform s much m ore in line w ith the dom inating W ashington Consensus - m onetary control, adjusting the price o f public services, commercial opening, and redirecting the econom y to be one in which the market is the principal allocator o f resources. The administration in this period, meanwhile, succeeded in maintaining alliances with other political forces in Congress that allowed them to push through their reforms without the specter o f m ajor obstacles. The econom ic results included a significant reduction in inflation, but this reduction came at the cost o f allow ing econom ic activity to remain stagnant. The second period (1993-95) is characterized by a m ore accelerated advance o f econom ic reforms already launched and the initiation o f new reforms which focused particularly on the process o f privatization, changes in the regulation o f the labor market, liberalization o f the financial market, the improvement o f the tax system, and, once the new resources began to enter the system, on social policy. In the political sphere, constitutional rule, along w ith the array o f other political forces, was overturned in Fu jim ori’s ‘ auto-golpe’ in A p ril o f 1992, an event which was supported by the armed forces and an important portion o f the population. W ith help from political manipulations o f the ju dicial branch, the new Congress, which was under the control o f the executive branch, gradually eliminated institutional checks and balances, slowly closing o ff channels o f horizontal accountability and offering the regime a free reign in the implementation o f its policies. The motivations behind the acceleration o f the liberal economic reforms and the change o f the state’s role are complex. Three factors seem to be key. First, the disastrous results o f the previous decade enormously discredited heterodox econom ic policies. Second, there was a new legitimacy in Latin Am erica to a combination o f reforms that tried to return the central role in the allocation o f resources to the market. Third, there was decisive pressure from the multilateral organizations that conditioned their financial assistance Peru: governability and economic performance 211 to the implementation o f reforms. In the case o f privatizations, these factors were joined by a precarious fiscal situation, which was in part caused by the large deficits that public companies had incurred in the previous decade. A n y alternative route to begin reforms that would make those state-owned businesses efficient could carry political costs that might be greater than the political cost o f privatizing them. The reforms were successful in terms o f econom ic performance. A t the beginning o f 1993, the econom y began to grow vigorously, the investment rate recovered, and inflation continued its descent into single digits. This helped promote Fujim ori’s re-election in 1995, which for many people was an essential requirement for the continuation and consolidation o f the new econom ic m odel as well as an opportunity to strengthen the institutional normalization o f a regime legitimated by a popular vote. The third period (1996-2000) would show how this perspective was wrong. N o t only was there no progress on the initiated reforms - in some cases there were even significant steps backwards, but the government also quickly revealed its absolute disinterest in managing itself within the confines o f a democratic regime.2 The long-awaited reform o f the state was never initiated, the privatizations were first decelerated and then suspended, the programs focused on incorporating greater participation o f people with little capital in these processes were eliminated in favor o f a more arbitrary allocation in public assets, while new businesses tied to the armed forces were created. The trade reforms were converted into just one episode insufficient to put the country at the level o f even its neighbors, the autonomy o f regulatory and supervisory organizations (such as S U N A T ) was cut short, and social spending began to respond increasingly to the political priorities o f the executive. In the political sphere, this course had its corollary in an everincreasing deference to the armed forces, control o f the other autonomous branches o f government, policies o f intimidation, persecution, and buying out o f political opponents and the press, and also in the manipulation o f mass media. The political strategy was directed towards just one goal: a permanent hold on power. Econom ic performance in this period was worse com pared to the earlier Fu jim ori period and also in comparison to the average performance in Latin A m erica at the time. Peru in the 1990s seems to be an excellent case for studying the relationship between governability and econom ic performance in the new international context, as much fo r its representative elements as fo r its extreme ones. This chapter w ill approach the complex relationship between the economic and the political through an analytical narrative that attempts to define and dissect the links between the two spheres. The sources fo r this study include existing literature, empirical evidence based on public perceptions o f institutions, and interviews with experts in the field.3 The text is organized 212 Political crises, social conflict and economic development as follows: the next section will explain the conceptual framework o f the chapter. In the third section we w ill discuss some structural characteristics that determine both the way the political process unfolds and the nature o f its relationship with econom ic performance. The fourth section addresses the political process o f the 1990s, and the fifth analyses the econom ic reforms and the political econom y o f those reforms. Th e sixth section briefly analyses the main macroeconomic variables at work. The seventh section returns to political variables and how they determine econom ic performance. Finally, the eighth section presents some reflections on the connections between governability and econom ic performance based on the Peruvian experience. 7.2 GOVERNABILITY AND ECONOMIC PERFORMANCE: A CONCEPTUAL FRAMEWORK Recently, there has been a tendency to re-evaluate the influence o f the political arena on econom ic processes, and especially the positive influence that the mechanisms o f dem ocratic institutions have on econ om ic performance. The dominant perspective in political science used to dictate that a political explanation o f economic processes either somehow identified the intervention o f ‘contingent factors’ and the direction o f that intervention or, alternatively, to pinpoint the superficial-structural signs o f the structural econom ic factors. Today, however, political forces have an independent explanatory weight. This change came in response, in part, to the testimony o f experience, which carries a lot o f weight in Latin A m erica and perhaps especially so in Peru. The strength o f this explanation is also owed to the development o f an institutionalist vision that successfully established the importance o f the political sphere in economic theory. In the institutionalist framework, which takes many o f its cues from Douglass N o rth ’s work, institutions provide a set o f rules that create and define opportunity for individuals and groups and also provide the mechanisms to make those rules effective (N orth 1990). This aspect is important because it determines the stability and predictability that econom ic actors need to confirm that their decisions will further their goals and that are necessary fo r sm ooth econom ic management. This perspective provides a meeting place between economics and politics by suggesting a better context and a more important role for the effect o f the political variables on the economy.4 The grow ing interest o f economists Peru: governability and economic performance 213 in political phenomena and their application o f analytical instruments o f rational choice to political situations has also contributed to this trend.5 F ro m the perspective o f develop m en t econom ics, the subject o f governability is related to the same concern expressed in calls fo r ‘ second generation reforms’ that tackle critical institutional aspects in the quest for sustained economic growth (Burki and Perry 1998). Different affinities can be seen in the various approaches to this subject. A good part o f the literature, particularly in Peru’s case, has had a tendency to restrict itself to identifying only the technical difficulties o f implementation. This literature generally refers to human resources that the state and ‘establishment’ reformers count upon, and to the competition necessary for the initiation and advancement o f all kinds o f reform, from reform o f institutional design to reform o f the structure and execution o f the legal system (U garte 2000). A n alternative approach focuses on the elements o f the ‘pending agenda’ o f reform as a confirmation o f what still needs to be done, without considering why those pending reforms do not get to the level o f reconstruction o f the state and without acknowledging the ways in which what is not done, as well as what is done, determines the performance o f an econom y (Abusada et al. 2000). The logic o f this interpretation is that greater economic success has not been achieved because structural reform has not been completed. In other cases, the focus is on the analytical side o f political economy, approaching the subject according to the logic o f the structural reforms and acknow ledging the inherent difficulties o f im plem enting them.6 In addition to the technical conditions, the analysis incorporates political elements such as the hindrance o f even the special interest groups that are within the coalition that supports the administration, like the actions o f those w ho stand possibly to gain or lose as a result o f the reforms, and like the administration’s style and political leadership. In this framework, political conditions play an explanatory role in econom ic performance. Nevertheless, the logic o f these elements can be different than the logic found in an econom ic analysis and takes more from the political science perspective, where it is not expected that political reform will necessarily com e from econom ic reform. From this perspective o f an analysis that incorporates the internal turmoil o f the reformist alliance, the pressures that come from interest groups, as well as social demands, it seems more ‘natural’ that reform o f the state has not yet occurred. Some analyses have started with the view that the reform could n o t occur and tried to w ork out why, approaching the question at the level o f either reform o f a specific policy or area, or reform o f the state in general. The analysis from the political science perspective has generally focused on the issue o f dem ocratization. It incorporates the idea o f a rational political agent and views institutions as presenting a range o f options that 214 Political crises, social conflict and economic development guide the behavior o f various social actors. The concept o f governability is central to analysing post-1980s Latin Am erica and has taken a central role in the crisis o f political parties and o f the party system itself.7 The decline o f the existing political parties’ ability to appeal to the public and to articulate people’s concerns are central factors in explaining the rise o f non-traditional leaders that were able to push through difficult structural adjustments and broad econom ic reform. The most obvious cases o f this phenom enon are A rgentin a w ith M enem , Brazil w ith C o llo r de M elo, and Peru with Fujim ori. But another important aspect o f this trend that becomes clear in these examples is the general weakness o f pre-existing political institutions. Included in those political institutions, and o f great particular importance, are the justice system and its effectiveness. Like the new results-driven style o f government exemplified by M enem and Fujimori, the serious crises o f the political party in Latin Am erica in the 1980s are ultimately associated with a very weak institutional system that did not have stable or solid mechanisms o f vertical accountability and that could manage the relationship between the governed and the governors - the relationship o f representation (O ’D on n ell 1994). These are the characteristics that O ’D onnell refers to as ‘ delegative dem ocracy’ , in which the electorate outside organic channels o f participation and support - gives a governor an open commission to govern. ‘ Governm ent-by-decree’ is indicative o f this type o f political regime.8 The notion o f horizontal accountability complements the concept o f vertical accountability incorporating the whole set o f state institutions (O ’Donnell 1997). This marks the confines o f the ‘ rule o f law’ , in between the socioeconomic and the political. Truly democratic rule o f law is a system o f interwoven legally defined accountabilities. The diagnosis is that rule o f law in Latin Am erica is largely ineffective, and caught up in obstacles such as: deficient or inadequate application o f the law, negligent gaps in the law, discriminatory and abusive behavior o f government bureaucracies towards citizens (especially towards the disadvantaged), unequal or non­ existent access to the judicial system and to due process, and illegality or irresponsibility in the handling o f public affairs by inform al mechanisms o f operation controlled by private regional, local, or (in the Peruvian case) national powers. This panoram a o f problems reveals the lack o f depth o f the state, especially in its legal system. O ’D onn ell suggests that this situation can be made worse in cases where the democratic transition has been accompanied by anti-state economic policies.9 A s we w ill discuss later on, in the case o f Peru, there was a reconstruction, rather than destruction, o f the state that had been financially devastated at the end o f the 1980s. This reconstruction, however, did not impede the informal power that grew with the Fujim ori regime and that came to control the other powers o f the Peru: governability and economic performance 215 state, eliminating any possibility o f horizontal accountability. R eform o f the state m oved in the opposite direction to the growth o f this inform al power, and as this power accumulated more control o f the government, the passage o f real reform became increasingly difficult. In Peru the relationship between politics and economics seems particularly strong. The analyses, however, often stress very different things. From a focus akin to that o f the current neostructuralist approach, the association between neoliberal policies, political authoritarianism, and social exclusion is automatic. The analyses vary from focusing on inadequate macroeconomic policies that ignore the structural inequality o f Peruvian society (Figueroa 1999) to policies that both favor a m odel o f primary exports and neglect problems o f poverty (G onzáles de Olarte 1998). One criticism directed to this line o f analysis emphasizes ‘its exaggerated norm ative tone and “ denunciation” , that make it difficult to understand the complex relationships between structural reforms and political processes’ (Tanaka 1999, p. 122). The suggestion presented here emphasizes the study o f concrete policies and their dynamics and finds the approach o f the new political economy to be very useful (fo r more in this vein, see Ortiz de Zevallos et al. 1999; Tanaka 2001). Solim ano has suggested a fram ework fo r the analysis o f the political economy o f the Andean countries that incorporates two blocks o f variables: a block o f variables that affect governability, on one hand, and another that affect economic performance, on the other, and explores the connections and interactions between both blocks o f variables that jointly produce economic and governability outcomes. This chapter adapts Solim ano’s framework to incorporate political science perspectives on the problems o f governability in the fragile and ‘incom plete’ Latin Am erican democracies. The follow ing two sections focus, respectively, on the structural variables that condition Peruvian politics, the governability o f the country, and the circumstances and actors whose interactions shaped the policies o f the 1990s. Then the chapter turns to the economic ‘block’ , emphasizing the characteristics o f the reforms that have been undertaken as well as the econom ic results o f those reforms and then coming back to the discussion o f interactions between the econom y and politics. In a broad sense, governability has been understood as the capacity o f the political authority to organize and direct public affairs in an effective way (Huntington 1968). Because legitimacy is not necessarily inherent to governments, the definition incorporates both legal and de facto regimes equally, while the role o f political institutions is not specified. Legitimacy, however, is an element that has been emphasized in more recent definitions. Although ‘the exercise o f power and authority constitutes the modulating fa cto r o f go vern a b ility’ (Brautigan 1994), in dem ocratic regimes it is 216 Political crises, social conflict and economic development also in volved in the acceptance o f a social contract that connects the government with the governed and that incorporates the rules both for the political system (representation, that is vertical accountability) and for the development o f the institutions (rule o f law, horizontal accountability). Kauffm an et al. (1999), for example, incorporate these elements into the definition o f governability and include the capacity to design and implement public policies in an effective way. A country is more governable when there are clear rules to the political game that are broadly accepted, when the laws are effectively carried out and are changed through transparent procedures, when mechanisms o f representation exist that effectively establish an organic relationship between the state and the citizen, and when the state has the capacity to enact strong and effective policies. Because it is difficult to establish totally objective indicators o f these dimensions, citizens’ perceptions o f them provide im portant indicators o f the level o f confidence in institutions and government - the essence o f governability. Indicators o f governability, such as approval ratings o f the president or o f econom ic policy or o f people’s perceptions o f institutions, are highly correlated w ith indicators o f econ om ic expectations and people’s perceptions o f the economic situation (see Figure 7.1). Clearly, the relationship between governability and economic performance runs in both N ote: ‘ Level A ’ represents a function o f levels o f income and assets o f the section with the highest socioeconomic status. Here we use it as a proxy for the expectations o f investors. F igure 7.1 A pproval ratings f o r the President, f o r the p o litic a l economy, a n d expecta tio n s fo r the econom ic situ a tio n (five-m o n th m oving averages) Peru: governability and economic performance 217 directions. Distinguishing the causality in the relationship is very difficult, both because the interaction bounces back and forth between the variables and because the period o f analysis is very limited. This study proposes a relationship that goes from governability to expectations o f econom ic perform ance and then comes back around with econom ic performance affecting governability. 7.3 STRUCTURAL FACTORS AND POLITICS IN PERU The most striking characteristic o f Peru’s national political history has been instability. During its first 20 years as an independent country, Peru had 30 governments and seven political constitutions. In the twentieth century, after two decades o f peaceful transitions o f power through regular elections (1895-1914), elected governments began to be pushed out by regimes that took power through coups d’etát at the rate o f approximately once every ten years.10 Political stability, in the sense o f predictability o f compliance w ith the stated rules o f the political system, rules that are essential to governance, has therefore not been a characteristic o f Peruvian political history. This instability comes in part as a result o f the initial conditions o f Peru’s political climate: an elite unconvinced o f the convenience o f political independence from Spain, o f a heavy colon ial inheritance o f institutions with absolute power, o f social fragmentation, and o f ethnic exclusion (B on illa 1972; D om ín gu ez 1980). It also comes in part from certain structural characteristics such as: the complexity o f its geography, the slow process o f national integration, and the still-serious problem o f severe inequality in the distribution o f wealth. The country o f Peru encompasses a particularly complicated territory o f land. Its landscape includes 84 out o f the 104 microclimates and 28 out o f the 32 climates that can be found on the planet, a variety o f conditions which qualifies it as one o f the most geographically diverse countries in the world. Getting a hold o f so heterogeneous a space, from barren coastal deserts to a dynamic Am azonian forest, with a high mountain range that crosses the country longitudinally, is an as-yet unfinished task fo r the Peruvian state, whose presence in much o f this territory is merely symbolic. The geographical distribution o f physical infrastructure and services is extremely unequal, as is the distribution o f incom e and per capita consum ption (Escobal and Torero 2000). The proportion o f public spending over which local and regional governments have real decisionmaking pow er barely reaches 5 per cent o f total public spending.1 Both econom ic activity and 1 political power are strongly concentrated in Lima, and, despite the presence o f regional political movements, the tendency has been towards ever-greater 218 Political crises, social conflict and economic development centralization. Th e enormous growth o f public spending that has been considered as part o f the definition o f a developed state since the 1960s has not helped to change this inclination towards greater centralization. One consequence o f the structural fa ctor in the political sphere has been the weakness o f regional movements that have been incapable o f articulating a viable decentralist political platform and have tended, instead, to concentrate their efforts on parochial claims.12 One recent national survey reveals that in spite o f a strong conviction that decentralization is important for regional econom ic development, Peruvians distrust their local leaders and local authorities.1 Th e role o f regional movements in the political 3 process, therefore, has typically been important mostly in election periods as a mechanism to guarantee a political clientele, but has generally become less important once those periods are over. Additionally, since regional political movements have been practically unable to mediate the relationship between governm ent and citizens, political leaders have opted to communicate directly with local populations. This strategy, as we w ill discuss later, was used with singular effectiveness by President Fujimori. The issue o f ethnicity, while it has never been at the center o f political debate, has always been present in a relatively explicit way. The sweeping advance o f u rbanization in the last half-century has accentuated the predominantly mestizo character o f the population, in spite o f the survival o f a strong indigenous tradition, particularly in the southern mountain range and o f the important presence o f a native population made up o f diverse ethnic groups in the forest. Table 7.2 reveals that according to the inform ation from the latest available census, only 20 per cent o f the population claim Quechua or other native languages as a first language. This percentage is smaller in L im a than in the rest o f the country, but is much higher in districts with more rural populations, like Cuzco. The percentage o f people whose first language is an indigenous language has dropped dramatically in recent decades. In the 1940 census, the number was as high as 51 per cent, and by 1961, it had already dropped to 36 per cent. This sizeable diminution is not only due to more racial integration, but also to changes in people’s self-perceptions about their own ethnic status. Ethnic factionalism in Peru has been largely mediated by the particularly heterogeneous composition o f the mestizo population, which incorporates very diverse and intermingled ethnic origins. This type o f dispersion has favored the developm ent o f a broad and unique nationalism that has operated as a shock absorber to defuse ethnic conflict.14 D espite these kinds o f mediating qualities that nationalism seems to offer, the categories that Collier (2001) proposes suggest that the apparent domination o f the mestizo population that characterizes Peru’s ethnic diversity masks a reality o f deeper ethnic divisions.1 5 Table 7.2 Population fiv e years old and older, organized by first language, 1993 Foreign Total1 Perú Lim a Cusco Resto del Pais N ote: Source: Spanish language Quechua Other native languages 19190623 5720256 878973 12591394 15410070 5119629 307641 383812 3166453 549145 559906 2057402 575719 286013 10548 279158 9982801 228810 8790 146212 1 Excludes the respondents that did not state what language or dialect they first learned to speak. IN E I - National Census o f 1993. Elaboration: G R A D E . Subtotal native languages 3 742 1 72 835157 57045 3 2336561 % of total 19.50 15 65 19 220 Political crises, social conflict and economic development The issue o f ethnicity, nevertheless, has not driven the organization or the workings o f Peru’s political climate. Supporting this idea is the fact that ethnicity has not had a large role in the political violence o f recent decades in Peru. It is also clear that the attempts to introduce the issue o f ethnic conflict in the last political campaign backfired. In this vein, it is important to note that the indigenous populations, generally dispersed in rural zones, do not have well-defined organizations that represent them, and have been unable to have a voice in national policy as a result. Historically indigenism o has never constituted an alternative policy and the indigenous populations have had a much more im portant influence culturally than they have politically. This does not mean that the subject o f ethnicity has stopped being im portant in the m ore recent political processes, or that a color-blind ‘national culture’ has been successfully constructed. Recent research instead suggests that the labor market rewards those o f lighter skin colors, and, in effect, that ethnic differences have an impact on the incomes o f ostensibly similar individuals, even within the heterogeneous mestizo group, in the same jo b market.1 In terms o f the role it has played in recent politics, in 6 one illustrative example, the electoral campaign o f 1990 was distinguished by the xenophobic reactions o f the people to the idea o f having an Asian president and by the then-candidate Fujim ori who astutely took advantage o f the issue and managed to position him self as the candidate o f ‘los chinitos y los cholitos’ in opposition to Vargas Llosa, the candidate o f ‘los blancos’ . Th e effect o f the ethnicity issue was also apparent in the recent political campaign, when current (at the time o f w riting) president Alejandro Toledo manipulated his ethnicity as a political asset and called to unify ‘todas las sangres’ behind his campaign. Ultimately, the issue o f ethnicity is an important factor in Peruvian politics, despite the fact that it is not one that drives political proposals or platforms, nor one that inspires violent conflicts. A n o th e r im portan t structural fa cto r that conditions the u nfolding o f policy in Peru is the inequality o f incom e and wealth. Even though recent studies show a reduction o f the dispersion o f incom e in the last two decades, through periods o f recession and growth, inequalities are enormous (Saavedra and D ia z 1999). Behind these inequalities there is the larger inequality in the distribution o f opportunities for social advancement. For example, large differences in the quality o f education between public and private; urban and rural; and also within public schools, have made the system ineffective in equalizing opportunities. This substantial inequality conditions politics, creating a political culture that cultivates populism. Strong redistributive pressures have shaped a new central role o f social policy in government spending. A n example o f this is the importance o f Peru: governability and economic performance 221 food programs during the 1990s. These pressures also affect the viability o f state reforms and the ways in which these reforms attempt to create more efficient public organizations that attract more qualified personnel, have more demanding processes o f selection and evaluation, and that offer more competitive salaries. Typically, this is opposed because o f its social implications: less qualified workers would have to vacate their positions for other, more qualified, workers that would probably get better salaries. Finally, it is important to discuss the influence o f the larger international context on the political developments o f the country. In this vein, two elements have made Peru a matter o f international interest and, in recent decades, particularly a place o f interest to the U nited States: the strong presence ( if not in numbers o f supporters, then in effectiveness o f their actions) o f the terrorist groups o f Partido Comunista Sendero Lum inoso (S L ) and the M o vim ien to R evolu cionario Tupac A m aru (M R T A ), and the presence o f narcotraffic. Even though their effects and scopes are different, in both terrorism and narcotrafficking, the central issue for the world becomes hemispheric security. In the case o f terrorist group advances, in a fin-de siècle version o f the dom ino theory, the principal fear o f the United States has been the possibility o f terrorism spilling into neighboring countries. Similarly, there is no doubt that drug trafficking has been the central force driving U S foreign policy towards the A ndean countries. The m ajor preoccupation o f these policies has been containment, or at least apparent containment, o f the flow o f cocaine into the U nited States. A large part o f the support that Fu jim ori garnered is explained by his successes in handling both terrorism and narcotrafficking. The rise to power o f Montesinos, the controversial adviser to Fujim ori, is also attributed to supposed advances in these two areas. 7.4 THE POLITICAL PROCESS OF THE 1990s Peru began the decade in the midst o f its greatest economic and political crisis o f the century. In the last three years before 1990, there was an accumulated fall o f about a quarter o f G D P, and inflation surpassed annual rates o f 7000 per cent. In political events, the steady advance o f terrorist groups paralleled the ever-increasing ill repute o f political parties. The elections o f 1990, then, became a confrontation o f two outsiders to national politics. O n one side was M a rio Vargas Llosa, whose intellectual reputation was internationally renowned, and whose youthful leftist militancy had gradually yielded to a liberal radicalism, managed to pull together a group o f parties that were center-right. On the other side was a university professor, who was an ex­ dean and an ex-President o f the National Assembly o f Deans, and who, with 222 Political crises, social conflict and economic development ambitions o f a seat in the Senate, led an independent political group that operated without any kind o f established party structure endorsing it. The campaign was clearly centered on the issue o f the economy, and was driven by the conflict between two opposing positions: one candidate was for a shock stabilizer and the other was against it but offered no alternative option that he would support instead.1 Beyond the campaign issues, it was 7 clear that there were two principal challenges facing the next president. In the econom ic sphere, the president w ou ld som ehow have to reduce hyperinflation and reactivate the economy, while in the political sphere, he would have to halt the thus-far unstoppable advance o f the terrorist groups S L and M R T A . It was understood that the governability o f the country in the near future depended upon success in both o f these two spheres. In a dizzying jump in popularity in the last two weeks o f the campaign that was driven by both the state’s mass media and by others close to the would-be governing Aprista Party, Fujim ori entered the second round and triumphed over his opponent by a wide margin. H e was then left with the task o f mapping the course o f econom ic policy. Initially associated with rather heterodox econom ic advisers, some o f w hom even helped shape his cabinet, it would take Fujim ori some time to choose a path o f fiscal and m onetary orth odoxy and liberalizing reforms. O nly w ith the 1991 appointment o f Carlos Boloña as M inister o f Econom y and Finance, did the direction o f m acroeconomic policy and the viability o f reforms that gave the market a larger role in the allocation o f resources become clear. A s will be seen, the reasons fo r this direction have little to do with Fu jim ori’s ideological position, whose political antecedents locate him m ore in the center left than these econom ic policies would imply. In such a complicated context, the alliances that Fujim ori created to give his regime stability had two important sources o f support: the first came from the Congress and the second came from the armed forces. On the congressional front, lacking his own bench-support, his alliance with the A pra gave Fujim ori enough backing to push through his first stabilizing measures that even earned an easy endorsement from his old election-time rivals. They observed the way that Fujim ori successfully implemented the substantive part o f his economic program, even as he neglected, they argued, a critical component o f social protection. In fact, as the liberal tendencies o f the economic program grew more pronounced, the support in the Congress began to come more from the Fredm o and less from the Apra. U p until 1992, the Congress was not a significant obstacle to the executive branch’s implementation o f its econom ic measures. The opposition o f the Congress to the measures that the executive wanted to put forward began to be concentrated on issues o f the anti-subversive struggle and o f human rights, and this opposition became a critical factor Peru: governability and economic performance 223 in the relationship between the administration and its other, eventually principal, source o f support - the armed forces. The investigations o f human rights abuses in the fight against subversives had, since the late 1980s, been a source o f tension w ith the armed forces and a determ ining fa ctor in its relationship with various administrations. The official position o f the m ilitary had been to consider the disappearances and deaths o f civilians related to the anti-subversive struggle, i f not as unfounded lies, as acts o f war that by definition should only be investigated internally and according to military law. Congress’s decision to reject norms oriented at giving the armed forces greater autonomy to fight against subversives in N ovem ber o f 1991 aggravated the conflict-ridden relationship between the legisilative power and the army, and served as an alibi for the coup that was already being planned. The relationship between Fujim ori and the armed forces was from the start mediated by Vladim iro Montesinos, w ho was an ex-collaborator o f the C IA , a lawyer fo r several o f the generals involved in cases o f drug trafficking and, beginning in 1989, adviser to the N a tion a l Intelligence Service. Objections over Fu jim ori’s foreign origins were quickly dismissed when he was forced to take up residence in a m ilitary compound between the first and second rounds as a result o f a supposed threat to his life that, it was later discovered, appears to have been a ruse created by M ontesinos to win the trust o f the then candidate. Tensions between the President and the military, however, were still present, in part because o f the presence o f Montesinos, who, despite his expulsion in the 1970s fo r selling military secrets to the U nited States, still wielded a powerful influence within the institution. In this context, the 1991 Law o f the M ilitary Situation gave the president power to choose the commander-in-chief from all high-ranking officials, elim inating norms and changing the rules to allow officials to retire irrespective o f their years o f service (O bando 1999). This broke the arm y’s institutional mechanisms o f succession, granted the president an enormous amount o f personal discretion over the military, and left highranking officials virtually at his mercy. In A p ril o f 1992, under the pretext o f a crisis o f governability allegedly sparked by the obstinacy o f the legislative power and the corruption o f both the legislative and judicial branches, both were taken apart and Congress was dissolved. These events occurred at the moment when public confidence in the Congress and political parties had fallen to their lowest historical levels.1 Given this context, the overwhelming support o f citizens for the 8 coup is not surprising - many o f them identified strongly with the President’s critiques o f ‘traditional politicians’ and o f Congress’s inefficiency. Public opinion perceived a conflict between governability and democracy: it saw dem ocracy as an obstacle to solving the serious econom ic and political 224 Political crises, social conflict and economic development problems o f the country (C otler 2000, p. 22). The international reaction, much stronger than the governm ent had been prepared for, reflected a very different point o f view than Peruvian public opinion and forced the government to hastily look for a way out o f isolation from the international community. This way out too k the form o f an election to choose a new Congress, whose first action was to write up a new constitution which would be passed by a very narrow margin in a national plebiscite a year later. The lack o f a Congress that could balance some o f the pow er o f the executive facilitated the implementation o f the first o f Fujim ori’s economic reforms. It is difficult to think that a set o f such broad reforms with such vast implications could have been implemented w ith the same speed in a political context that was m ore democratic. A n y econom ic program is easier to implement without institutional balances and fiscalization, but the lack o f these mechanisms also makes the sustainability o f any success much more uncertain. Perhaps the best case to illustrate this is the issue o f privatizations that is discussed later in the chapter. Before going further into this point, it is important to understand exactly what was included in the package o f reforms that was described by observers as both the deepest and the broadest set o f reforms implemented in Latin Am erica in such a short period o f time. 7.5 THE STRUCTURAL ADJUSTMENT: STABILIZATION AND ECONOMIC REFORM Peru’s stabilization program began in August o f 1990. The initial objectives o f the program were: the elimination o f hyperinflation, the reintegration o f Peru back into international finance systems, the re-establishment o f macroeconomic order, and the resolution o f the balance o f payments crisis. A lo n g with an orthodox program focused on reducing the macroeconomic imbalances, it was decided to also implement a set o f structural reforms inspired by the W ashington Consensus. Th e resounding failure o f A la n Garcia’s heterodox policies coincided with the hegemony in Latin America o f a set o f recommendations for reform that, as their central tenet, emphasized placing more trust in the market as the mechanism to allocate resources. The p o or performance o f state institutions during the previous decades was reinforced by the public sector’s terrible management o f resources at the end o f the 1980s to create a disastrous impression o f state control o f the allocation o f resources that made it easy to justify a drastic change o f the government’s position towards the market. Multilateral organizations exerted tremendous pressure in favor o f the reform movement and made Peru: governability and economic performance 225 the transfer o f new financial resources condition al upon the gradual implementation o f many o f these reforms. The ‘ structural reform ’ in Peru involved a much broader set o f reforms that were directed at, on one hand, restoring a basic macroeconomic balance (macroeconomic policy reform ), and, on the other, giving the market more room to allocate resources, rewriting the role o f the state in econom ic activities, and prom oting private initiatives. The set o f structural reforms included both the liberalization o f foreign trade and tax reform. To liberalize foreign trade, the government moved from a complex external tariff structure with high averages and broad dispersion to a much simpler arrangement with very few exceptions. In the case o f taxes, reform was focused on simplifying and modernizing the system and on improving the administration o f taxes. Other reforms were aimed at making markets more dynamic, beginning a process that made the labor market more flexible, deregulated the financial system, and opened up the capital account and the balance o f payments. Simultaneously, an aggressive process o f privatization o f public companies began. These reforms were principally focused on creating better conditions for private investment and on prom oting competitiveness. A s we will see, many o f these reforms, like the fiscal policy, were strongly influenced by political swings o f the government and, towards the end o f the decade, the background o f serious political instability and a prolonged recession left it very unclear what the direction o f the econom ic m odel was. Monetary and Exchange Policy W ith the beginning o f the stabilization program, monetary policy recovered its independence from the previous fiscal management and became a key part o f the struggle against inflation. This was achieved through the restriction o f primary financing to the public sector and bank prom otion. Unlike the experiences o f other Latin Am erican countries, in Peru the money supply was used as the nominal anchor o f the program as it simultaneously unified the exchange market and created a floating exchange rate. A s a fundamental part o f the economic program, the regime experimented with a series o f reforms o f the system o f exchange between M arch o f 1990 and August o f 1991. The first measures affecting exchange rate policy were directed at the implementation o f a system with flo ta ció n sucia, a floating exchange rate within certain controled parameters, (in this case, with the intervention o f the B C R P ) and a liberalization o f the exchange market that eliminated all the restrictions on the buying and selling o f foreign currency. Th e multiple exchange rates were elim inated and exchange rate policy was put in line with the goal o f keeping the growth o f the money supply consistent with inflation control. The policy o f flotation, combined with 226 Political crises, social conflict and economic development the important influx o f capital and the increase o f mining exports, created a reduction in the real exchange rate that would be maintained throughout the decade. In this context, part o f the discussion o f policy in the first half o f the decade was dominated by the debate over an assumed ‘slower exchange’ , while the attempts o f the B C R (Central Bank o f Reserves) to influence even at a nom inal level were not particularly effective. Ultim ately, with the exception o f a small academic circle, it seemed clear that the monetary authority did not have the instruments to influence the real exchange rate in a context o f strong dollarization. It is clear that the monetary goals on the part o f the Central Bank o f Reserves allowed inflation to reduce and opened the possibility o f a recovery o f total production levels. Nevertheless, it is im portant to note that the descent o f inflation towards single-digit levels occurred during a prolonged process that reflected the many initial difficulties o f implementing a coherent stabilization plan in the face o f the pragmatic skepticism o f the President.1 9 But, ultimately, it is the institutional reform o f monetary policy that has proven to be more important for the long term. This fact was taken into consideration and reflected in the 1993 constitution, which established the autonom y o f Peru’s Central Bank o f Reserves w ith the purpose o f preserving m onetary stability in the new Organic Law.20 The new Organic Law o f the BC RP, which is still in use, prohibits the financing o f the public sector, the providing o f guarantees, the giving o f sector credits, and the establishment o f systems o f multiple exchange rates. It is difficult to imagine that the present stability o f prices, even in the face o f the political turbulence o f the last three years, could have been achieved without this reform. Fiscal Policy and Tax Reform In the arena o f taxes, the Fujim ori administration had inherited a broken system, demoralized and prone to corruption, all o f which was reflected in a decline in tax collection. G iven the massive tax evasion, the tax burden barely reached 4 per cent o f G D P, and the collection was concentrated on just 700 companies.2 Th e governm ent’s strategy was directed both 1 at altering the tax structure - basing it instead on a smaller quantity o f permanent input, a much smaller number o f exonerations, a larger base o f contributors - and at modernizing the system o f tax collection - improving technologies for the control and collection o f taxes. On the institutional level, a process o f reform began in 1991 in the S U N A T aim ed at its m o d ern iza tion and at the strengthening and consolidation o f its management and decisionmaking autonomy. These changes, along with new tax legislation, resulted in a gradual increase in the tax burden and a tarnishing o f the image o f the institution. Beginning Peru: governability and economic performance 227 in the middle o f the decade the image and levels o f public acceptance o f the S U N A T (N ational Superintendency o f Tax Adm inistration) gradually eroded, mostly in response to the government’s increasing use o f intimidation as an instrument against political adversaries. U ltim ately, what was a successful administrative reform was transformed into a complex history o f capable p o litica l m anipulation. Th e S U N A T becam e part o f the distressing history o f the last years o f the Fujim ori government, in which the adm inistration’s inform al pow er governed many o f the supposedly autonomous institutions, including the Judicial Branch and the O ffice o f Public Prosecution o f the N ation. A lthough it managed to get fiscal accounts under control around 1993, the proximity o f elections would demonstrate the fragility o f the discipline the administration had achieved. Public spending rapidly expanded in 1994 and in the first trimester o f 1995 in the face o f an unusual complacency on the part o f the International M onetary Fund. There were pending reforms in this area that would have transformed the effort to restore fiscal discipline into a sustainable process o f healthy management o f public finances, but then a rash o f serious decisions were made ‘on the brink o f the abyss’ . The transition from managing a basic system dictated by the fall in resources to administrating a m ore complicated structure with grow ing resources, many o f them non-recurring, required a series o f institutional reforms, that in a pre-election context, the Fujim ori administration had no interest in beginning. Unfortunately, after the election the administration still showed no signs o f interest in beginning the difficult reform process. Paradoxically, a part o f this reform, the Law o f Fiscal Prudence, was passed just towards the end o f the second period o f Fu jim ori’s presidency, and it was he who violated that same law first. Another part o f institutional reform o f the fiscal sector, the part that was related to the budgetary process, was advanced very incrementally, in such a way that towards the end o f the decade it was still the President who decided the size o f the budget and the size o f the fiscal deficit.22 Financial and Capital Market Reform The financial reform had as principal objectives the elimination o f financial controls, the reduction o f transaction costs in financial operations, and, in the medium term, the development o f a capital market. A lo n g with the liberalization o f the interest rates and the elimination o f the use o f internal credit fo r the financing o f the public sector,23 the Fujim ori government rescinded the Law o f Nationalization o f Banks and Insurance that had been promulgated by the previous government. The entire banking and financial legal framework was also renewed with the purpose o f improving competition, 228 Political crises, social conflict and economic development solidarity, and confidence in the financial system, o f stimulating the level o f savings, and o f prom oting the expansion and diversification o f financial services.24 The Supervision o f Banks and Securities was strengthened and the role o f state institutions in the capital market was redefined, dissolving the bank o f prom otion, re-envisioning the functions o f the national bank and the Financial Corporation o f D evelopm ent (C O F ID E ). The pension system was also reformed, transform ing from a m odel w ith a com m on fund to one in which individual accounts are administered by specialized companies (administrators o f the pension fund), follow in g the Chilean model. Finally, a process o f restructuring the state financial systems was begun through mergers, liquidation, and privatization. On the other hand, the opening o f the capital market was initiated in the 1990s to stimulate both foreign investments in the country and the repossession o f Peruvian capital that had m igrated outside the country during previous governments. In this vein, the measures o f the 1990s included the total liberalization o f capital flows with other countries, the unregulated opening o f bank accounts in the country on the part o f national and foreign agents, as well as accounts held abroad by domestic agents, and the free possession o f accounts in foreign currency. T h e o p en in g o f the ca p ita l m arket and the co m m ercia l m arket simultaneously has been one o f the most criticized elements o f the program’s sequential reforms. Since the capital market adjusts m ore rapidly than markets for goods, the high interest rates that were prevalent at the start o f the program o f stabilization attracted capital in the context o f the low interest rates in international markets. This generated strong pressure on the exchange rate, lowering still more the price o f imported products, recently liberalized, and increasing the deficit o f the com m ercial balance. Nevertheless, the restrictions on the capital market were not consistent with the governm ent’s program o f privatization and attraction o f foreign investment. The financial reform, like the reform o f the capital market that was carried out in 1996, has been considered successful (M orris 2000), having achieved, for example, an increase in financial intermediation, a diminution o f interest rates, and a reinforcement o f the regulation and supervision framework. This context permitted the development o f new financial instruments that started to deepen - although only very slowly - the capital market. Nevertheless, large segments o f the population still exist that are not taken care o f by the financial system and that prefer other methods o f saving. In spite o f the reduction in interest rates, the cost o f capital has been persistently high, with unusually high and resistant spreads, producing little or no improvement in the efficiency o f the banks. Also, the development o f a mortgage market has been limited to houses o f very high value and so far financial instruments have not been developed that would permit the market to broaden to other Peru: governability and economic performance 229 sections o f the population. M eanwhile, the bank o f consumption faced serious problems because neither the banks nor consumers had developed a culture o f savings and debt that would allow them to manage their finances in the volatile Peruvian context. Commercial Reform The reform o f foreign trade was implemented with more than one objective (Velarde and Rodríguez 1992). On one hand, in the medium term, increasing competition in the sectors that produce tradable goods in the economy is desirable. On the other hand, in the short term, the program attempted to limit the increase o f inflation by reducing the inflation o f tradable goods. The process, although initiated later than in other countries in Latin America, was unusually aggressive. Th e principal measures were applied between 1990 and 1992, a period in which the dispersion o f nom inal tariffs was diminished and parallel tariff barriers were eliminated (Abusada, Illescas, and Taboada 2001). The average tariff (without considering exceptions) was reduced from 43 per cent to 29 per cent. In all sectors with the exception o f agriculture, the level o f effective protection was dramatically lowered, profoundly changing industries o f final consumption, which before had counted on levels o f protection that were higher than 100 per cent on many products, including dairy products, nutritional products, and clothing. T h e open ing o f com m erce continued in the fo llo w in g years, w ith additional reductions in tariff levels, the elimination o f all types o f parallel ta riff restrictions on the im portation o f goods, the simplification o f all customs procedures, and the elimination o f the state m onopolies o f the im portation o f food. It is w orth noting that the agriculture sector was treated differently than other sectors. In effect, an over-tariff was created fo r certain agricultural and derived products (dairy, cereals, and sugar) that although its stated objective was to stabilize internal prices o f certain agricultural products, clearly had an underlying protectionist slant that ultimately worked to benefit the retailers o f agricultural products much m ore than to benefit national agriculture (Escobal 1992). This special treatment o f agriculture is an example o f how on a few issues o f particular interest to President Fujimori, national policy moved away from the general trajectory o f the political econom y and o f the structural reforms. In the case o f agriculture, protectionist policies remained throughout most o f the decade. The rest o f the decade was marked by a heated debate over the expediency o f moving towards a flat tariff structure versus establishing a tariff structure that would have several tiers and would protect national industries.25 W ithin the private sector, there existed a strong opposition movement against the Political crises, social conflict and economic development 230 establishment o f a single ta riff that objected to the lack o f fairness in the government’s prom otion o f competition between Peru and its commercial partners both inside and outside the Andean region. For its part, the Ministry o f Econom y and Finances argued that past attempts at privileging sectors w ith no natural com parative advantages had ultimately only generated more corruption and losses in the fiscal income o f the country. Although the voice o f the M inistry o f Econom y and Finance (M E F ) on this issue was always very clear in favor o f a flatter tariff structure, the President’s weak conviction on the matter prevented this view from being reflected in policy. It was only in A p ril o f 1997 that a new reduction in tariffs, again with the exception o f farm ing goods, established that tariffs o f 25 per cent on certain items became 20 per cent and tariffs o f 15 per cent became 12 per cent. W ith these modifications, the average tariff decreased from 16 to 13 per cent. Despite the fact that initially the reduction in tariff protection was very rapid, towards the end o f the decade the average tariff in Peru was higher than other countries in the region, as can be seen in Figure 7.2. Measured in terms o f degrees o f openness,26 it is possible to appreciate the significance o f the observed increase in the im portance o f external commerce, that perm itted the index to m ove from 0.25 in 1991 to 0.33 in 1998 and to again achieve recently the level o f openness that it had two decades before 15 13.3 11.7 11.2 11 Argentina Chile 10 % 5 0 Source: Peru Colombia PrompPerú (1999). F igure 7.2 A verage ta riffs in 1998 (ad-valorem rates) Peru: governability and economic performance 231 (1982), similar to the one that C olom bia had at the time (Figure 7.3). It was also clear that while Peru demonstrated a slight tendency towards greater openness, Chile and C o lo m b ia were becom ing m ore open much m ore quickly. Peru’s path was much more similar to the pattern exhibited by the economies o f countries that, for their respective sizes, were considered to have closed economies, like Brazil. Source: L A D B , Integration and Regional Programs Department. Figure 7.3 E volution o f degrees o f openness (e x p o rts + im p o rts)/G D P 1980-98, se lec ted countries Changes in the Role of the State From the 1970s through to the beginning o f the 1990s, the Peruvian governm ent participated in the econom y through both entrepreneurial activity and intervention by fixing o f prices in different markets. The policies that were implemented as part o f the structural adjustment program, however, assumed that there would be a change in the role o f state intervention in the economy. In fact the restructuring o f the public sector, the elimination o f the state m onopolies in the commercialization o f some foods and fuel, the beginning o f an aggressive process o f privatization o f public companies, the diverse reforms that aimed at making the labor and financial markets and the capital account in the balance o f payments more flexible, and so on, all made it clear that the state was aiming to provide a system in which 232 Political crises, social conflict and economic development the market was the principal mechanism for the allocation o f resources. The state took itself out o f many aspects o f production activity, in many cases perform ing the role o f the regulator rather than the producer o f goods or the provider o f services. These new tendencies on the part o f the government were institutionalized as part o f the 1993 constitution that defined the state as a subsidiary to the private sector and as a prom oter o f private initiative. In this context, three parallel processes served to push the state into this new role: the process o f privatization o f public businesses, the development o f an institutional framework o f regulation, and the prom otion o f free competition. During the first half o f the 1990s, there was progress in all o f these areas, just as, during the second half o f the decade, there were also different degrees o f regression in all o f them. In the next subsection, we w ill concentrate on the issue o f privatization. The process of privatization Fiscal problems, the inefficiency o f public companies, the existence o f strongly interventionist policies, as well as undercapitalization and the lack o f new resources fo r investment, drove the Peruvian government to initiate a privatization program in 1991 (A lvarez 1992). The decision to begin this process was also facilitated by the influence o f the multilateral agencies and reinforced by the privatization trend that was also sweeping through other countries in the region. It was also true that the Fujim ori regime did not have the political party base that in other circumstances would have pressured him to keep some state enterprises as a mechanism to extract rent. Th e political base o f the regime lay mainly with the armed forces, and it was precisely in businesses related to this sector that not only were there no privatizations, but there was even an expansion in activity levels, particularly towards the end o f the decade. In the middle o f 1991, a normative fram ework began to take shape to stimulate and to regulate private investment in public companies. The Comm ission o f Prom otion o f Private Investment (C O P R I) was created and methods o f prom otion were established that included selling o f actions and assets, borrow ing o f services, concessions. The Peruvian strategy o f privatization demanded that investors not only pay fo r the transfer o f assets, but also fo r investment commitments: fo r example, in the case o f the telecommunications or electricity sectors, investors would have to pay for the expansion o f the services and in the case o f the mining industries, they would have to pay for further exploration.2 7 In that same vein, the ‘Law o f the Prom otion o f Foreign Investments’ was created that established equal treatment fo r both national and foreign capital, with which foreign investment could establish itself in all sectors o f Peru: governability and economic performance 233 the econom y and be used for whatever type o f enterprise the law allowed. During the first years o f the decade, a set o f norms were approved with the purpose o f generating a legal framework that was adequate and could guarantee private investment flows. A series o f institutions were also created as part o f the mission to make go o d on the commitments taken on by the businesses and, in the case o f natural monopolies, to prevent the abuse o f dominant market positions. In 1992, ten companies were privatized through C O P R I and the creation o f different special privatization committees (C E P R Is ), which translated into US$212 m illion in revenue for the state treasury with US$706 million in a projected investment. Nevertheless, it was not until 1994 that the sale o f the natural m onopolies in the telecommunications sector (C PT-Entel Peru)28 and the electricity sector (Edelsur and Edelnor) gave the privatization process real force. That year the amount collected by the sale o f actions and assets reached US$2579 million with a projected investment o f US$2050 million. During 1995 and 1996 the privatization process entered a stage o f acceleration and deepening and then began to slow down around 1997. In total, at the end o f 1999 all o f the privatizations had generated revenue o f US$8917 million and US$8800 million in commitments to invest. Some 40 per cent o f the total collection came in the telecommunications sector, follow ed by the electricity sector, which accounted fo r 21 per cent, the mining sector with 14 per cent, and the hydrocarbon sector with 11 per cent. In many different aspects, the privatization process in Peru was successful. The quality and coverage o f diverse services improved substantially, and by 2000 the amount o f commitments to invest had exceeded 11 000 million dollars, which was more than what the government had obtained for the sale o f its assets. Nevertheless, many errors in the implementation o f the privatization plan meant that gradually the privatizations lost political support. In the first place, during the developm ent o f this norm ative fram ew ork little attention was paid to the issue o f transparency o f information about the transactions taking place and o f the final destination o f the resources generated by the process. W ithout autonomous institutions to control the process and with norms that granted significant discretion to the executive authority, the government and its technocrats were relying on the entry o f new investment to silence critics. In this sense, the fact that there were no spaces available for people to discuss or debate the privatization process and that the mechanisms for using the resources obtained were never clarified, both worked to make the process socially illegitimate. Secondly, it was not taken into account that even when the privatization process had an overall positive social effect, there were still always winners and losers. Despite the improvements in efficiency in those same private 234 Political crises, social conflict and economic development sectors that in many cases generated important increases in the well being o f consumers (Torero and Pascó-Font 2000) the perception o f the social benefits o f the privatizations was very negative. In the case o f the privatizations in the telephone sector, fo r example, the principal improvements in well being happened initially, when access to telephone service was improved for segments o f the population that before had been marginalized; nevertheless, this change came at the cost o f increasing the price o f service to the middle classes, usually the most vocal segment o f the population, that had in previous decades had a poor, but highly subsidized, service. A lth o u g h the one evalu ation available to date o f the im pact o f privatizations shows that even in the worst cases, privatizations directly and indirectly created as many jobs as they destroyed, they also had important direct negative effects that were not managed adequately. N o systems o f social protection were implemented fo r the displaced workers from the privatized sectors and many o f those that lost their jobs could not find a way to regain salaried employment in the form al sector and had to either begin to w ork independently w ithout any social protection or to simply leave the labor market altogether. The fall in well being o f specific groups o f workers was painful and severe and their suffering was not alleviated in the short term. This makes it clear that if reforms take place without explicitly taking into account who wins with their implementation and, even more importantly, w ho loses, both the viability o f the reforms and the general well being o f the population w ill be put at risk. One idea that could have given a new perspective to the privatizations process was the program called Citizen Participation that attempted to expand the participation o f the small saver in the process. The program ’s purpose was to increase the small saver’s access to the benefits o f privatization through preferential buying o f com panies’ actions and stimulating the development o f a market for local capital. The first experiences under this new system (Banco Continetal y Cementos Pacasmayo) worked very well, with even more participation than had been expected. During the Peruvian release o f a package o f Telefónica assets in 1996, which coincided with an international launching o f the company’s assets, demand through the system was significantly higher than supply. Faced with the dilemma o f whether to sell the shares to these small shareholders or those that could take their demand to the N e w York stockmarket, the government chose the latter, generating a huge amount o f frustration among the form er29. Subsequent action sales were much lower-profile. Th e governm ent was not interested in politically selling the process. Citizen Participation was considered as an option for generating a political constituency in favor o f the process. The administration’s abandonment o f the program meant that it was leaving behind one o f the few programs Peru: governability and economic performance 235 that was aimed at communicating with and making participants o f more Peruvians and expanding the number o f people who would benefit from the privatizations. This reflected the scorn w ith which some advisers to the process treated the stated objective o f communicating clearly with the population.30 This mutual distrust between citizens and government meant that even when the processes were transparent in terms o f the access that was available to the bidders and the uniformity o f the rules that governed all potential investors, the population still did not feel adequately inform ed.3 1 The problem grew even worse when the opposition in Congress demanded an explanation fo r where the funds generated in the privatizations were going. In response to this congressional questioning, public opinion began to oppose the continuation o f the process. Th e dismantling o f Citizen Participation illustrated a change in the administration’s governing style towards policy that was increasingly created at the discretion o f the executive to further immediate political objectives. This new style explains the creation o f the N ational Public Savings Fund (F O N A H P U ) that was mandated to finance pay increases fo r pensioners in the public sector with shares from different public companies. Towards the end o f the 1990s, the state not only stopped privatizing but also even created a state-owned airline, and maintained interests in the real estate and hotel sectors. In all o f these cases, the interests were connected to the armed forces, the real political support behind the regime. Despite the governm ent’s apparently liberal rhetoric and its prom otion o f open competition, a variety o f businesses linked to the armed forces, like the army press corps, the Industrial Services o f the Navy, and the aforementioned airline, T A N S , were not forced to compete fairly with private companies. The political power o f the armed forces not only allowed them to keep these sources o f rent during the privatization process, it also meant that these businesses were maintained even in the face o f attempts at control on the part o f the civilian authorities, such as the Contraloría. Labor Reform For decades, Peruvian labor regulations, developed during a period o f im port substitution, consolidated in both a marked protectionism and a rigidity in the labor market. A t the beginning o f the 1990s the O IT (International Labor O ffice) characterized it as ‘probably the most rigid, protectionist, interventionist, and confused in Latin A m erica’ (O IT 1994). The labor legislation granted absolute labor stability after a very short period o f time (three m onths) by m aking the costs o f firing employees tremendously high. The extra benefits granted also substantially increased the non-salary-related costs to employers. This fram ework could be viable 236 Political crises, social conflict and economic development in an econom y with a heavily protected market at the cost o f a growth in informality, and this was, in effect, the experience o f Peru the 1980s. The opening o f the econom y created a new scenario in that form al businesses required more flexibility i f only to maintain themselves in the market. It was in this context that, beginning in 1990, the reform o f labor regulations was finally undertaken. The labor reform was implemented to reduce the costs o f contracting and dismissal, as well as making the determination o f salaries, hours, and types o f labor contracts more flexible and in the control o f the individual employer. The first measures adopted eliminated the bureaucratic restrictions on the use o f tem porary contracts and expanded the ways to contract employment for a fixed period o f time. To a large extent, these measures didn’t do more than legalize a series o f practices that had been becoming a habitual response to both the rigid laws and the authority’s incapacity to really investigate and control labor practices. One o f the intentions o f the legislative reforms was to eliminate absolute labor stability. According to the constitution o f 1979, labor stability was a right o f all citizens, meaning that the new reform could only be a partial elimination o f labor stability that protected against arbitrary dismissal and only affected those people hired after the reform ’s implementation. The workers contracted before N ovem ber o f 1991 could demand alternatively rehiring o r severance pay in cases o f unfair dismissal. A bsolu te labor stability was abolished in the constitution o f 1993, and was replaced with laws that protected against arbitrary dismissal o f all salaried workers. The costs o f dismissal were also reduced with the establishment o f mandatory severance pay fo r every year that the person worked, up to a maximum o f 12 years, and, in cases o f unfair dismissal, without obligation on the part o f the employer to rehire the worker. In the same way, proceedings to qualify for dismissals with ‘just cause’ were simplified and reduced. Table 7.3 summarizes the principal changes in labor laws. In 1992 the government permitted the creation o f more than one union per business, guild, and economic activity, eliminating the m onopoly o f the single unions and transferring the negotiation from the sectoral level to the level o f the firm. Intervention o f the state was limited and the process o f arbitration was substantially modified. It was established that workers on strike should receive their salaries until they returned to their jobs. I f the rate o f unionization had been falling since 1987, these changes reduced it even more. The growing use o f temporary contracts also served to dissuade people from union association. The percentage o f salaried workers in the private sector that worked in a company with a union went from 30 per cent in 1987 to 6 per cent in 1997. In the public sector, the unionization Peru: governability and economic performance Table 7.3 237 Changes in Peruvian labor legislation 1 9 9 1 -9 7 Law Principal content D.Leg. 650 (Ju ly 1991) Employers must deposit payment for Compensation for the Served Tim e (C T S ) of their employees in an account o f an authorized financial institution D.Leg. 728 (N ovem ber 1991) N e w flexible contracts for young people Makes work procedures (days and hours) more flexible Eliminates labor stability o f contracts after 1991 Makes the use o f temporary contracts easier and broadens their use Severance pay for dismissal: a monthly salary for every year worked, for a maximum o f 12 years Liberalizes use o f temporary and complementary services L a w 26136 (D ecem ber 1991) Overtime pay is increased by 25% to 50% o f the salary for a normal hour worked D .S.E . 08 -P C M /9 2 (M arch 1992) The employer’s contribution to the N ational Housing Fund is increased from 5% to 8% L a w 25593 (Ju ly 1992) The requirements for unionization are made more flexible, allowing more than one union to form in each company. A s part o f this, during strikes, the company may suspend salaries until labor activity is re-established L a w 25981 (January 1993) F O N A V I1 is eliminated as the responsibility o f the employer and the employee’s responsibility is increased by 9% L a w 25897 (Ju ly 1993) Creation o f a system o f private pensions L a w 26233 (N ovem ber 1993) F O N A V I input from employer moves to 6%, the input from the employee moves to 3% L a w 26513 (Ju ly 1995) Protection from arbitrary dismissal replaces absolute labor stability Terms o f temporary contracts are expanded The difference between the maximum working day for men and women is eliminated L a w 26504 (A u g u st 1995) F O N A V I contribution from the employer moves to 9%, input from the employee goes to 0% D.Leg. 854 (O ctober 1996) Overtime pay is reduced from 50% to 25% D.Leg. 871 (N ovem ber 1996) Severance pay for dismissal: a salary and a h alf per year worked, a maximum o f 12 years D. Leg. 853 a n d D. Leg. 855 (January 1997) F O N A V I contributions are reduced for the employer from 9% to 7% but this includes allowances for affected tax areas L a w 26851 (A u g u st 1997) F O N A V I contributions are reduced for the employer from 7% to 5% N ote: Source: 1 F O N A V I = National Housing Fund. Pascó Font and Saavedra (2001). 238 Political crises, social conflict and economic development rate fell from 75 per cent in 1990 to 13 per cent in 1997 (Saavedra and Torero 2002). In the second half o f the decade, the tendency towards greater flexibility was reversed when the cost o f dismissal was raised, increasing severance pay to salary and a half for each year worked. The non-salary labor costs increased during the decade. On one hand, the rate o f contribution to the F O N A V I (National Housing Fund), that in practice was actually a tax to fill out the form , was increased, and on the other hand, the maximum amount o f diverse contributions was increased, especially between 1990 and 1992. A s a result, the non-salary costs were substantially higher than they had been in the previous decade. In summary, while there was a loosening in labor laws in the sense that labor stability was eliminated, the incentives that were created for hiring temporary workers, the relatively high cost o f labor, and a business atmosphere that was much more competitive, all pushed an important part o f the labor opportunities to be given out through alternative contracts, and the percentage o f workers w ith form al em ploym ent and social benefits decreased. Social Policy The struggle against poverty was a central focus o f the government’s rhetoric during the 1990s. The government implemented a set o f programs aimed at increasing social spending and reducing both poverty and extreme poverty. M any diverse indicators show that there was a real transfer in resources to zones that were poorer and an expansion o f the coverage o f various social services. Various remote zones o f the country were given government attention fo r the first time and a range o f social programs were put into operation in those areas. Nevertheless, the increase in spending and levels o f access and quality o f social services was insufficient. Ultim ately, the increase o f social spending was not accompanied by the development o f efficient institutions and was instead increasingly tied to the administration’s political priorities. Social spending The stated objective o f Fu jim ori’s administration was to increase public spending in social sectors to total 40 per cent o f all public spending. Table 7.4 shows the evolution o f public social spending. I t ’s clear that social spending grew considerably between 1993 and 2000, as much in relation to G D P (from 3.2 to 8 per cent) as in relation to total public spending (from 18.4 to 45 per cent). Nevertheless, one must remember that the public social spending includes all o f the government spending in the social sector, a definition that incorporates the general spending o f the governm ent in Peru: governability and economic performance 239 education, health, and justice, and therefore includes social spending on the general population as well as benefits limited to the p o or populations. The spending related to the struggle against poverty also grew significantly between 1993 and 1998, from 1.2 per cent to 1.9 per cent in relation to G D P, and 7.1 per cent to 11.1 per cent in relation to total public spending.3 2 C E P A L (1999) has shown that Peru was the country in the region that most increased its public social spending per capita, in real terms, between 1990-91 and 1996-97. I f this increase was significant, it is largely because the levels o f public spending were extremely low at the beginning o f the 1990s. In spite o f this evolution, social spending as a percentage o f total public spending was, in 1997, only the average in Latin Am erica, behind Argentina, Uruguay, Brazil, and Chile, that all had more than 60 per cent o f their total public spending set aside for social spending. Around 1997, social spending as a percentage o f G D P in Peru was only 6.3 per cent, as compared to the average in Latin Am erica, which was 12.4 per cent. The struggle against poverty In 1990 a new institutional framework as part o f the struggle against poverty began to be created. In 1991, the N ation al Fund o f Compensation and Social D evelopm ent (F O N C O D E S ) was established as a decentralized organization, autonom ous from the president o f the republic, with the purpose o f focusing on the population in extreme poverty through the development o f programs o f social support, infrastructure, and productive development (see box: ‘the F O N C O D E S m odel’). In 1992, the N ational Food Assistance Program (P R O N A A ) was created to provide fo od rations in rural and marginalized urban zones. The N ational Institute o f Education and Health Infrastructure (IN F E S ) directed its principal investment in the construction and rehabilitation o f school buildings. The M inistry o f the Presidency (M IP R E ) was reactivated to combine almost all o f the new social programs o f the government.3 This ministry not only had responsibility for 3 the administration o f the m ajority o f the programs o f the struggle against poverty, but also took under its care the Transitional Committees o f Regional Adm inistration (C T A R ), which had been created as a tem porary system until regional authorities were elected. The 1993 constitution mandated that these elections be deferred until 1995,34 but they were postponed indefinitely. Throughout the decade this strategy allowed the president to have more control o f spending; given that the ministry came to control between 25 per cent and 30 per cent o f the total government budget, the administration had a large margin o f discretion over social spending. In 1996, the M in istry o f the P ro m o tio n o f W om en and H um an Development (P R O M U D E H ), was created with a more diffuse mandate and to assume the management o f some o f the M IP R E programs. Between 1997 Table 7.4 Evolution in social spending Category 1993 1994 1995 1996 1997 1998 1999 2000 34805 5970 1101 423 44801 8105 1999 590 53653 10044 55827 10044 3 575 546 3 575 846 59056 9969 3703 1089 57005 9727 4042 901 52028 9281 4080 1005 53880 9457 4307 1046 Total public spending Social spending Spending in poverty reduction programs 17.2 3.2 1.2 18.1 4.5 1.3 18.7 6.7 1.0 18.0 6.4 16.9 6.3 1.8 17.1 7.1 1.6 17.8 7.8 1.9 17.6 8.0 1.9 % Total spending Social spending Spending in poverty reduction programs 18.4 24.7 7.3 35.6 8.4 37.2 37.1 10.9 41.6 9.3 44.0 10.8 45.5 11.1 Level (millions o f current dollars) G DP1 Total public spending2 Social spending3’4 Spending in poverty reduction programs4 %GDP 240 7.1 1.5 7.9 Notes: 1 2 3 4 The data for 2000 are preliminary. Includes current spending and capital spending o f central government. The data for 2000 are preliminary. Includes spending in education, wealth and extreme poverty reduction programs. Executed data, except for 2000 that is estimated. Source: Central Reserve Bank o f Peru, IN E I, Instituto Cuánto. Peru: governability and economic performance 241 THE FONCODES MODEL FONCODES was created with the mission of improving the living conditions of the most poor, attending to the basic needs of the population with an emphasis on nutrition, health, education, sanitation, economic infrastructure, and the development of production. Its operating mechanism was the financing of demanddriven projects. In the first trimester of 1998, FONCODES had executed 28 289 projects, of which 70 per cent were in areas of social infrastructure (nutrition, health, education, and sanitation) and the rest were in the areas of economic infrastructure (agriculture, transportation, and energy). The FONCODES used criteria based on an index of problems in particular districts that includes indicators of undernourishment, education, housing, and basic services. According to a World Bank study, FONCODES, along with the PRONAA, had the best performance in its spending, measured by the correlation between the percentage of resources directed at helping the bottom 40 per cent of the population and the rate of coverage of this impoverished group. and 1999 there were various attempts to improve the coordination between social policy and the allocation o f resources to agencies and programs. Given the evidence that there were many duplicated functions and problems with allocation, as well as a lack o f both transparency and accountability in institutions, there were initiatives to improve interinstitutional and intersectoral coordination o f the programs.35 In 1999, the government even designed a first Contingency Plan o f Social Protection, a plan that had as its objective to protect the zones that were the most vulnerable to any possible recession or econom ic crisis. Nevertheless, the advance o f these initiatives was very slow due to the fact that they started to stop acting with the regime’s objectives o f controlling the growing movement o f the resources for the state’s social spending. One innovation that is important to emphasize is the active incorporation o f the population in different phases o f some specific social programs. The use o f participatory m ethodologies in this area tried to give those who had historically been marginalized a voice, to improve the quality o f the decisions, and to incorporate feedback from the beneficiaries of the program in a way that strengthens the democratization o f local-level decisionmaking and increases the transparency in the use o f resources. W ith different emphases and levels of success, the principal executors o f FONCODES, the 242 Political crises, social conflict and economic development Committees o f Local Health Administration (CLAS), the Local Teams of Priority Actions (ELAP) o f the Project for the Implementation of Economic and Social Investment (PROFINES), among others, were all examples of organizations that used these participatory methodologies. Recent research, nevertheless, has underlined the diverse ways that participatory mechanisms can be applied, given the level o f complexity o f the community, the type of local leadership, the role o f intermediaries, the institutional reinforcement that is involved, the public good aspects o f the given product, and the characteristics of the ‘external agents’. This analysis emphasizes the elements o f risk that can turn the process o f participation into a process that is both antidemocratic and inefficient. These social programs were not free of political manipulation on the part o f the Fujimori administration. A t the same time that the administration was spending more in general and in particular in the zones where the state had never before entered, it also used social policy as a way to legitimize the government, and in particular to legitimize Fujimori (Gonzáles de Olarte 2000). This explains in part the higher levels o f approval that he had towards the end o f the decade, in spite o f that fact that he had been in power for ten years and that the economy had been in recession since 1998. The mere fact o f providing daily meals to more than 10 million Peruvians acted as an immense source o f political power.36 Fujimori used that power whenever he could. Aside from the issue o f the absolute quantity that was spent, there is the question o f the efficiency o f the spending - after they had spent the money (more that $5000 million annually) it seemed reasonable to expect to see a sizeable decrease in levels o f poverty. In effect, the administrative mechanisms of many o f the social programs turned them into welfare programs. One o f the m ost important characteristics o f the social institutions that were put into place was the way that they strengthened the dependency o f the population on state-controlled resources, a dependency which was exacerbated by the growing use of state resources for the purpose o f proselytizing through social assistance programs. This dependency dynamic was reinforced by the dysfunctional public system that attempted to address the problem o f poverty, in which diverse institutions literally competed for a clientele by offering the same products or services. F O N C O D E S, in spite o f having been considered one o f the m ost successful social funds in Latin America during the 1990s, became, along with other programs, an effective instrument to proselyze, given the absence o f mechanisms o f accountability, in a context of the increasing politicization o f the budget decisions. Schady (2000) docum ented this phenom enon, finding a correlation between the progression o f spending and the proximity o f election periods, and between the selection o f provinces to receive funds and the magnitude o f expected political returns from each province. Peru: governability and economic performance 7.6 243 MACROECONOMIC PERFORMANCE The stabilization program had strong recessive effects on the econom y during the period o f 1990-92. A s can be seen in Figure 7.4, starting in 1993 there was a sustained growth in total production; G D P registered an average annual growth rate o f 6.4 per cent during the period o f 1993-97. Only in 1996 did growth slow as a consequence o f the important reductions in public spending that were necessary to reduce the fiscal inequalities that had been incurred in the months previous to the 1995 elections. N ote: Calculated from a base from 1994 during the period o f 1990-2000 and with a base from 1979 for the previous years Source: Central Reserve Bank o f Peru. Website available in February o f 2001. Figure 7.4 Growth rate o f G D P 1 9 8 5-2000 (per cent) At the start o f 1998, a series o f climatic financial and political shocks submerged the country in a prolonged period o f recession. For two years per capita production reduced, and in 2000, it grew less than 2 per cent. In terms o f domestic demand and level o f econom ic activity that was reflected in employment or revenue, there was stagnation for a long period o f time. The observed growth during part o f the decade could not be sustained in the face o f external shocks, o f inadequate m acroeconomic management 244 Political crises, social conflict and economic development o f these shocks, o f the postponem ent o f reforms - especially those that promoted private investment, and o f the serious political crisis. An important point in terms o f the impact o f the reforms is that the sector distribution o f production has not varied significantly since 1990 (see Table 7.5), despite the disagreements over the way that the chosen path o f the political econom y was deepening the economy. The manufacturing sector represented 15 per cent o f total production followed by commerce and agriculture (approximately 18 per cent) and then by mining (11 per cent). Although there appears to have been only a slight reduction in the importance o f manufacturing, this reduction is part o f a long-term pattern o f the manufacturing sector’s decreasing contributions to production and employment. Nevertheless, it is clear that within the manufacturing sector there was a restructuring o f production. Some capital goods production sectors were alm ost eliminated by the market while other consum ption goods production sectors, like plastics, household electrical appliances, and paper that had only survived with the help o f tariff production, practically disappeared. A s Saavedra (1997a) shows, the level o f em ploym ent in various manufacturing sectors was reduced at the start o f the decade. In the following years, however, employment recovered with production. In a broad sense, between 1990 and 2000 there is no evidence that the economic m odel changed the structure o f the econom y towards one that was less industrialized. The labor market’s performance was positive in terms o f the generation o f jobs until 1998, the year in which the employm ent rate reached 0.60 after having hit bottom at 0.52 in 1992. Nevertheless, there were not any substantial changes that were directed at resolving the structural problems o f the labor market, and the little growth in productivity kept real salaries from growing significantly and allowed the informal sector to occupy more than half o f the population. Along other lines, the correction of the distorted relative prices that existed at the end o f the 1980s, combined with orthodox fiscal and monetary policy, significantly reduced the inflation rate. After the years o f hyperinflation o f Alan García, inflation reached 132 per cent in 1991 and 56.7 per cent in 1992. In the following years there was a gradual reduction in inflation along with an increase in econom ic activity. In 1995, inflation reached 10 per cent and in 1997, the government managed to bring inflation down to single digits (see Figure 7.5). Cuba (2001) attributes the reduction in inflation during the 1990s to monetary policy and to the influx o f capital, which also brought the exchange rate down and made it stagnant until at least 1997. The country approached 2000 with inflation that was 3.9 per cent annually - the lowest rate in the last 40 years. Table 7.5 Composition o f GDP by sector 1990-99 (per cent) 1990 Farming2 Fishing M in ing and Flydrocarbon3 Manufacturing Construction 245 Commerce Other Services4 Total5 1991 1992 1993 1994 1995 1996 19971 19981 19991 20001 7.8 0.7 4.4 8 0.5 4.4 5.7 14.8 51.1 7.7 0.5 4.7 15.2 6.2 15 50.7 5 14.7 6.3 14.6 51.2 8.7 0.5 5.5 14.5 5.5 14.1 14.9 5.1 14.4 52.7 7.6 0.6 4.5 15.5 6 15.1 50.7 7.8 0.5 4.6 15.4 14.5 52.5 7.6 0.7 4.7 16 5.6 14.6 50.9 8.9 0.6 5.4 16.1 4 7.6 0.7 4.7 15.5 4.7 14.1 7.9 0.4 15.6 4.1 14.4 7.3 0.7 4.5 15.7 4.1 14.4 53.4 51.1 50.7 100 100 100 100 100 100 100 100 100 100 53 100 Notes: 1 2 3 4 5 Preliminary. Includes the fishing sector. Includes the non-metal mining sector. Includes direct taxes and importing rights. G D P calculated with a base from 1994. Source: Central Reserve Bank o f Peru. Website available in Feburary o f 2001. Political crises, social conflict and economic development 246 4 1 3.5 - Annual inflation 1990: 7.65% 3 2.5 2 Annual inflation 2000: 3.6% 1.5 1 0.5 0 ifl \D h 00 X 00 00 00 Q\ N ote: Sources : Q\ Q\ Q\ C\ X Q\ o Q\ C\ G\ N cn J\ G\ tf 05 G\ n c\ G\ ^0 t X J\ G\ o\ On HXL C\ % o O O N o Accumulated January-December 2000. Central Reserve Bank o f Peru (1998, 1999) and IN E I (2000). Figure 7.5 A nnual inflation 1985-2000 (lo g b ase) Once through the stabilization period, both the country’s savings rate and its investment rate began to slowly recuperate. A s can be seen in Table 7.6, internal savings grew steadily from the end of 1992 to 1997, with a slight dip in 1992. The com position o f these savings also changed significantly, with public sector going from the net spender it had been at the end o f the 1980s to having a savings rate o f 5.2 per cent o f G D P in 1997. On the other hand, external savings also grew until 1995 and during the last decade represented 5.4 percentage points o f GDP, decreasing only in recent years. Investment also showed a new vitality, growing to 16.5 per cent o f G DP in 1990 and then reaching up to a peak o f nearly 25 per cent in 1995. During the period between 1995 and 1997, private investment rose to the highest levels in the previous 15 years. The accelerated growth of investment during the first few years in the 1990s was much faster than the growth in internal savings, and the natural adjustment mechanism was an increase in the deficit o f the current account in the balance o f payments until 1998. After 1998, investment again demonstrated a tendency to decrease that both coincided with the econom ic cycle and was largely due to the political instability at the time. Part of the increase in the deficit on the current account is explained by the commercial balance. A s a consequence o f commercial opening and o f the reduction o f the real exchange rate, imports increased steadily throughout the period o f growth between 1993 and 1997. Despite the argument that the export sector would be one o f the hardest hit by the stabilization program, Table 7.6 M acroeconomic flo w s (as a percentage o f GDP, base 1994) Category 247 1990 S A V IN G S -IN V E S T M E N T Internal saving Public sector Private sector External savings Investment Public sector Private sector1 B A LA N C E OF PAYM ENTS Balance o f current account Commercial balance Services Income from production factors Current transferences Capital account Private sector Public sector Short-term capital Exceptional financing N e t reserve flows (B C R P ) ( - ) N e t mistakes and omissions N O N - F I N A N C I N G P U B L IC S E C T O R Savings in current account Capital revenue Capital spending Public investment Other capital spending Economic outcome Financing External financing Internal financing Privatization N ote: Source: Includes variation o f stock. Central Reserves Bank o f Peru. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 11.8 -5.5 17.3 4.7 16.5 3.2 13.3 12.9 0.8 12.1 4.4 17.3 3.5 13.8 11.5 0.7 10.8 5.8 17.3 4.1 13.2 12.7 2.2 10.5 6.6 19.3 4.7 14.6 16.5 3.0 13.5 5.7 22.2 4.8 17.4 17.1 2.3 14.8 7.7 24.8 4.7 20.1 16.7 3.9 12.8 6.1 22.8 4.3 18.5 18.8 5.2 13.6 5.2 24.0 4.4 19.6 17.2 4.0 13.2 6.4 23.6 4.5 19.1 17.8 1.8 16.0 3.7 21.5 4.8 16.7 17.1 0.8 16.3 3.0 20.1 4.0 16.1 -4.7 1.3 -1.2 -5.8 0.9 -2.4 0.2 -3.6 1.0 8.3 -0.6 -0.6 -4.4 -0.6 -1.2 -4.0 1.4 -0.2 0.4 -0.4 -0.2 4.1 -2.3 2.8 -5.8 -0.9 -1.6 ^1.5 1.3 2.4 0.6 -1.1 2.9 4.1 -2.0 1.3 -6.6 -1.7 -1.7 -4.7 1.5 5.3 3.5 -1.4 0.4 1.8 -1.9 1.4 -5.7 -2.2 -1.1 -4.0 1.7 8.6 8.5 -0.8 1.0 3.6 -6.6 0.9 -7.7 ^1.0 -1.4 -3.7 1.5 5.7 4.8 -0.3 1.2 2.8 -1.7 0.9 -6.1 -3.6 -1.2 -2.9 1.6 6.3 7.3 -0.8 -0.3 1.7 -3.5 1.7 -5.2 -2.9 -1.3 -2.5 1.6 9.7 4.2 1.0 4.5 -1.4 -2.9 -0.1 -6.4 -4.3 -1.2 -2.6 1.7 3.4 3.8 -0.1 -0.3 0.6 1.8 0.6 -3.7 -1.2 -1.4 -3.1 1.9 2.1 4.6 0.7 -3.2 0.1 1.5 0.0 -3.0 -0.6 -1.5 -2.9 1.9 2.1 2.2 0.5 -0.7 -0.1 0.4 0.7 -5.5 0.1 3.3 3.2 0.1 -8.7 8.7 6.3 2.4 0.0 0.8 0.3 3.8 3.5 0.4 -2.8 2.8 4.1 -1.4 0.0 0.7 0.3 4.9 4.1 0.8 -3.9 3.9 3.2 0.5 0.2 2.2 0.1 5.3 4.7 0.7 -3.1 3.1 3.0 -0.4 0.4 3.0 0.1 5.9 4.8 1.1 -2.8 2.8 2.4 -4.7 5.1 2.3 0.0 5.5 4.7 0.8 -3.1 3.1 2.5 -1.2 1.8 3.9 0.1 5.0 4.3 0.8 -1.0 1.0 0.8 -3.6 3.9 5.2 0.0 5.1 4.4 0.7 0.2 -0.2 -0.4 -0.7 0.9 4.0 0.1 4.9 4.5 0.4 -0.8 0.8 0.4 0.0 0.5 1.8 0.1 5.0 4.8 0.2 -3.1 3.1 -0.1 2.4 0.8 0.8 0.1 4.1 4.0 0.2 -3.2 3.2 1.2 1.2 0.8 248 Political crises, social conflict and economic development a fixed exchange rate, elevated tariffs, and high interest rates all meant that even exports, although still much lower than imports, still demonstrated a certain vitality. The increase in the deficit was also explained by more servicing o f external debt and interest and by the growing negative balance o f the non-financing service account. Even though the current account deficit could have been financed adequately before, its continual fluctuations for several years around 6 per cent o f G D P continued to worry the authorities until 1998. In the next two years, external crises and the phenom enon o f El N iño affected Peru’s external accounts, and yet the deficit on the current account managed to be reduced substantially to 3.7 per cent o f GDP, largely as a consequence o f the reduction o f imports in the 1998 recession.37 7.7 REGULATED DEMOCRACY OR DICTATORSHIP ON TENDERHOOKS? Two events that follow ed the closing o f Congress in 1992 dramatically affected the Fujimori regime’s political fortunes: the crucial blow to the subversive threat that was represented by the capture of the Senderista leader, Abimael Guzmán, and the beginning o f economic recovery. Even though the connection between these two events and the interruption o f constitutional rule is in no way clear, they were both used by the administration, its vocal officials and supporters to legitimate the regime. The 1995 elections could not have come at a better time for Fujimori. Aside from the expansion of fiscal spending, Fujimori used the armed forces in political propaganda, as well as the N ational Intelligence Service (SIN) to spy on his political rivals, both as tools to mastermind his first re-election. More important, however, was that the opposition that Fujimori faced was extremely weak. There is no doubt that this weakness contributed to the effectiveness of Fujimori’s anti­ political-party and generally anti-politics rhetoric. The principal opposition front, U nión por el Perú (UPP), was effectively a collection o f ‘traditional’ politicians, as Fujimori liked to call them, that crossed the spectrum from right to left. Unable to offer either new political figures or an alternative economic approach, the UPP had difficulty in creating a message that could reach and resound with the public. Many people’s expectations reflected a belief that the re-election would initiate a period o f consolidating the reforms that had been begun and of tackling the ‘pending agenda’ o f reform in a context o f econom ic growth and institutional ‘normalization’. N o t much time went by, however, before these expectations began to be disappointed. On the economic side of things, Peru: governability and economic performance 249 the price o f the excesses in public spending during the election campaign had to be paid, which meant an adjustment that drastically reduced the growth rate in the economy. Politically, the defeat o f the pro-government candidate in the Lima mayoral election less than a year after Fujimori’s triumph illustrated the difficulty o f successfully endorsing candidates. In this context, the preservation o f power was quickly confirm ed as Fujim ori’s b ottom line when Congress approved the Law o f Authentic Interpretation, which opened the doors to a third consecutive term .38 A television station’s divulging of information about the income o f Fujimori’s adviser, M ontesinos, and the subsequent persecution o f the owner and his family, as well as the participation o f high-up officials in the armed forces in drug trafficking, and the torture and assassination by agents o f the then obscure and now suspect SIN, all brought public approval o f the president down to its lowest level and resulted in the first public manifestations of rejection o f the arbitrariness and authoritarianism o f the government. In this context o f public disavowal o f the regime, the taking o f the Japanese embassy by the MRTA at the end of 1996, paradoxically, allowed the regime to sigh with relief. The erosion o f the second Fujimori administration was quick, as can be seen in Figure 7.6. In the face of dwindling public support, the government’s response was a com bination o f more authoritarianism, albeit limited by international conditions, and greater populism. Although 1997 marked an inflection point in the decade in the sense that it was a year o f the reinitiation o f econom ic vitality, even this change in econom ic events did not halt the fall in presidential approval ratings or recover the momentum o f reform of Fujimori’s early years. Two alternative explanations for this are: (a) the econom ic growth did not ‘trickle down’ to people o f lower socioeconom ic status, and (b) the political decisions o f the government were undermining its own capacity to govern. The policies during the rest o f his time in office and his public statements suggest that President Fujimori believed in the first of these hypotheses. Nevertheless, public perception did not seem to respond to Fujimori’s efforts and between the middle o f 1996 and the beginning of 1998, approval of the political leader o f the government, President Fujimori, had fallen close to 25 points, much more than that o f the econom ic policy (see Figure 7.1). Intuition suggests that there was a general dissatisfaction with the political situation that was dampening people’s enthusiasm over econom ic recovery. Indicators o f the public’s perceptions over what was one o f the pillars o f the reformist agenda, increasing the importance o f the market in the allocation o f resources, reflect a slight decrease in approval in the first few years o f the decade, that nevertheless in all cases stayed above 50 per cent and, for som e indicators, even hovered close to 80 per cent (see Figure Political crises, social conflict and economic development 250 0 \0 \0 \0 \0 \0 \0 \0 \0 \0 \(^ 0 \0 \0 \0 \0 \0 \0 \0 \Ó \Ó \Ó \Õ \Õ \ C) ! O tí y Q-,X t í o ^ ir í b ^ 3 o 9* u u 5 u c?^ ¿i a o a Dhd -a o . « 3 s tí O ^ ^ Ü^jU tí ií S ¿»; I Note: A - E indicate socioeconomic level according to the classification created by A p oyo Opinión y M ercado (1997), where A indicates the population with the most resources and E with the least resources. T represents the total. Figure 7.6 A pproval o f the P residen t’s m anagem ent o f the Republic by socioeconom ic segm ent (five-m onth m oving averages) 7.7). With respect to whether the state needed to reduce in size, however, the percentage o f people that agreed that it did, in fact, need to be smaller, declined significantly. A ttuned as he was to public opinion surveys, the President understood that the reform o f the state, associated in the public’s mind with a reduction in size, would have a high political cost. Even the M inister o f Econom y, w ho liked to call him self a liberal, declared in 1996 that the reform o f the state had to be postponed for reasons ‘o f the political m om ent’. Soon the President became an open critic o f the ‘neoliberal’ economic policies o f his own government, an attitude he exhibited at the major meeting o f Peruvian companies. The international crises that followed, combined with the President’s populist demands, complicated macroeconomic management, and rendered the government incapable o f successfully working against the recession that would stretch through the rest o f the decade. In the political sphere, the governm ent’s hardening reflected a new strategy that combined intimidation, blackmail, and cooption. According to the evidence revealed in the videos of meetings o f adviser-to-the-president M ontesinos with businessmen (particularly those from the communications Peru: governability and economic performance 251 The economy o f the market is the most convenient for the country u ^ « § o £ 80 rr\ J 60 40200 ♦ Agree ■ Disagree A Not sure The state should leave economic activity to the private sector 80 60 40 20 0 t r rr. j o ♦ Agree ■ Disagree A Not sure Private companies are the most convenient for the country ♦ Agree ■ Disagree A Not sure Private investment should be encouraged ♦ Agree ■ Disagree A Not sure 20 0 The state should be smaller 60 40 ♦ Agree ■ Disagree A Not sure 20 0 Source: A p o go Opinión y M ercado (M on thly Opinion Reports), several years. Figure 7.7 Public perception o f econom ic issues sector), the government seems to have used the recession to control employers and, especially at the end, used the police power o f SUN AT and the judicial branch to control civilians. M ost o f the important mass media were used to uphold the image of the President and to carry out smear campaigns against Political crises, social conflict and economic development 252 his political rivals. The audiovisual evidence that became available with the fall of the regime also showed how the government negotiated editorial lines and compromised individual journalists in these campaigns. Part o f this strategy was the financing o f the so-called ‘chicha’ newspapers, muckraking tabloids that were aimed at the poorest segments o f the population, and whose headlines were made or approved by the SIN. Another important com ponent o f the governm ent’s strategy was the use o f talk shows and systematic campaigns of misinformation or ‘psychosocial operations’. These essentially acted as mechanisms to demoralize and reduce the self-esteem o f the public, and to reinforce its perception o f dependency on its leader. These cam paigns seem to have been successful in terms o f their target populations, and beginning in 1998, while disapproval o f Fujimori began to consolidate and strengthen in the richer segments o f the population, it began to decline in the poorer segments, even in the face o f the damage that the econom ic recession was doing to their incomes. As can be seen in Figure 7.8, this marked a change in what had been an interclass support for the regime throughout m ost o f the decade, particularly at the start of the econom ic recovery. N ote: See note to Figure 7.6. Figure 7.8 D ifference in p residen tial approval between socioeconom ic levels In effect, in spite o f the evident achievements, like peace with Ecuador, Fujimori w ould not reach the same levels o f approval that he had had throughout m ost o f the decade. H is final comeback comes in the context Peru: governability and economic performance 253 o f an electoral campaign and is largely driven by popular sectors. This is partly explained by the ‘campaigns o f annihilation’ o f his political rivals, like the mayor o f Lima, Alberto Andrade, and the ex-President o f the Peruvian Institute o f Social Security, Luis Castañeda, in the mass media, that generated a sensation o f inevitability around Fujimori’s third term. In part this was also related to the display o f propaganda that included a distinct change o f color o f the movement that Fujimori led and the massive appearance o f the m otto of his group in public places, particularly in zones like the hills overlooking the city o f Lima, under the control o f the armed forces. The figure o f Alejandro Toledo, that now seems so important with only two months until the elections, would come to fill the void o f the leader o f the opposition in the new context o f the discovery o f the fabrication o f false signatures for Fujimori. This discovery tainted Fujimori, in spite o f the attempts to mediate its effect by the Jury o f National Elections and the Public Prosecutor’s Office that, to the surprise o f few, found only the accusers guilty.39 The time to implement a ‘campaign of annihilation’ proved to be too short on the one hand, and, on the other, the strategy seemed to be reaching a stage o f diminishing returns. A t the end o f the campaign, the people in the street and the pressure of international governments forced the head o f the National Office o f the Electoral Process to ignore the elementary arithmetic o f the questionable numbers that emerged, that indicated that Fujimori could still win in the first round, and declared that there would be a second round. 7.8 FINAL REFLECTIONS In the 1990s, Peru went from reform to counterreform in three stages. The first period (1990-92) is marked by the stabilization policies and the beginning o f reforms in line with the so-called W ashington Consensus, all under a democratic regime and without a parliamentary majority. The second period (1993-95) was characterized by an acceleration of the reforms and a strong econom ic recovery, under a political regime that gradually closed channels o f horizontal accountability by eliminating institutional checks on the power o f the executive. During the third period (1996-2000) the administration’s unconstitutional political objective to stay in power after 2000 was soon revealed, and the management o f the economy and public policy were soon subordinated to this political goal. In this context, the reforms were first frozen and then reversed, reinforcing the authoritarian and populist characteristics of the regime. Peru’s econom ic performance in this time was much worse than it had been in the middle o f the decade and than the average performance in the region. This history is consistent with 254 Political crises, social conflict and economic development the two characteristics that stand among the indicators o f the dimensions o f governability in Peru from 1997 to 1998, gathered from Kauffman, et al. (2002): the administration ranks low in terms o f giving people a voice, of accountability o f officials, o f political stability, and o f a government that abides by the law, but ranks high in terms o f governmental effectiveness and quality o f regulation (Kauffman, et al. 2002). Two central questions in analysis o f Peru’s economic policy throughout the decade are why the reforms were begun and then why they were postponed or reversed. In terms o f the first question, the spectacular failure o f Alan Garcia’s heterodox policies left the country in an econom ic and political chaos that forced the government to look for other econom ic and political alternatives. It was this context o f an enormous crisis among the political parties that permitted a virtual unknown to rise to the presidency, whose very obscurity and separation from the more established political machine granted him an unusual autonomy in the face o f traditional interest groups. The range o f options for Latin America at that time was dominated by the W ashington Consensus, which looked to recast the market in the role o f main allocator o f resources. A particularly attractive virtue o f a more active market for a pragmatic president like Fujimori was that it opened the possibility o f getting new financial resources in a context in which the public finances were virtually bankrupt and international reserves were negative. Multilateral organizations also put pressure on the government to open the market and allowed the administration to establish a minimal technocracy that the Ministry o f Econom y and Finance could use to push through reform. While this answers the question o f why reforms were started, the reasons that the reforms were stopped are equally important. One hypothesis is that the President agreed w ith many o f the critics o f the governm ent that argued that the econom ic model did not ‘trickle down’ to the poorer sectors o f society. The solution for that problem lay in less market control over resources and more government control. The President’s opinion on econom ic issues that were the m ost directly related to sectors that he had a personal affinity with or interest in, certainly support this hypothesis. Nevertheless, the growing impatience o f the President with the economic policies o f his government is largely explained by the deterioration o f the political situation, which at its core stemmed from Fujimori’s determination to remain in power after 2000. The reasons for the abrupt end to the reform process now seem very clear: Fujimori himself, as well as those followers that were m ost closely related to the armed forces (his main source o f political support), had much to hide. Because o f these illicit activities, beginning reforms that had democratizing content, or even reforms that would have put a limit on the arbitrariness o f the decisions o f the government, was not Peru: governability and economic performance 255 part o f his agenda. It was also true that a populist management o f public resources did seem to offer the possibility o f getting him in a better position for the 2000 election. Particularly important to Fu jim ori’s political agenda was maintaining an institutional setting in which he could continue to freely develop the in form al pow er that governed supposedly autonom ous organizations such as the judicial branch, the nation’s public prosecutor, the censored Constitutional Tribunal, and the S U N A T . These inform al powers were even reflected in the very actions o f the executive. These are abundant: from his use o f emergency decrees to hide illegal or awkward transactions, the use o f the presidential plane to transport cocaine, the lack o f public inform ation about the use o f resources from the privatizations in spite o f the continued demands from Congress, to the transfer o f regulatory agencies from the M E F to the M inistry o f the Presidency (P C M ) due to a friendship between both ministers and then the subsequent return o f the organisms to M E F when the minister o f P C M was set free (S em a n a E conóm ica, August 1998), and including the payment o f millions o f dollars to M ontesinos to leave the country in September 2001. The rule o f law demanded one m ajor area o f reform: accountability. This type o f reform meant horizontal accountability, as well as transparency o f the government accounts to Peruvian citizens, included vertical accountability, and directly collided with the inform al powers that constituted an im portant part o f the regime. There was no intention o f advancing a reform o f public service that would increase transparency in the use o f public resources, advance a process o f decentralization that would gradually grant more administrative and financial autonom y to regional authorities, or that w ould begin the much-demanded reform o f the judicial branch. A t the same time, the first-generation econom ic reforms began to lose support and were seen by the government as a political liability. The process o f privatization, for example, began to be perceived negatively in terms o f its impact on the overall well being o f Peruvians. A s has been shown, evidence existed that suggested that there was not a net loss in jobs, and there was rather an increase in the well being o f the very poor, even if it came at the cost o f the middle classes. The privatization was also used with the objective o f eliminating the fiscal deficit and with it, inflation. Nevertheless, the process o f privatization became so unpopular that the governm ent effectively froze it, making the administration’s lack o f conviction on the usefulness o f the reforms clear and prioritizing short-term political needs above the long-term econom ic health o f the country. The unpopularity o f the reforms can be explained by various reasons. Largely, it was due to the fact that the government did not implement systems o f social protection for workers that were displaced by the entry o f private companies. M any o f 256 Political crises, social conflict and economic development those that lost their jobs could not manage to adequately reinsert themselves into the job market and had to either conform to unstable independent work or simply leave the job market altogether. The fall in the well being o f specific groups o f workers was large and painful and was not alleviated in the short term. Also contributing to the reforms’ unpopularity was the fact that decisions about whether to privatize and about how to use the resources that came from the privatizations were not made in a public and transparent way. Even more importantly, there was never any policy o f explaining the nature o f the reforms to the public and convincing them of the advantages o f the process. Another example o f the erratic course o f the reforms is in foreign trade. A lthough the opening o f Peru happened very quickly, at the end o f the decade, the average tariff level o f many other countries in the region was much lower than Peru’s, and the tariffs in Peru stopped decreasing just as the government began to increasingly use quantitative restrictions. Similarly, the regulatory agencies for public services began to lose autonomy and the independence o f IN D EC O PI, the entity in charge o f consumer protection and open competition, also began to be questioned. Towards the end o f the decade, there was not a clear ideological orientation in the administration’s management o f the economy. Although the basic management o f fiscal and monetary policy continued to be orthodox in the government’s rhetoric, underlying was the change in the governm ent’s orientation towards a growing arbitrariness and ad-hoc management o f sectoral policies. After Fujimori’s fall, an important set o f reforms has been questioned by many public sectors. A s has been argued, in many cases the reforms were postponed, reversed, or simply badly implemented. But to this must be added the fact that whatever political measure was implemented during the 1990s runs the risk o f being questioned at its margin o f convenience, for the simple fact that it was implemented by the Fujimori government. This constant questioning and re-evaluation brings its own risk o f returning to the destructive pendulum swings in policy which go from one extreme to the other, with serious damage in the long term to the country’s political and econom ic well being. Some maintain that it was the very lack o f political opposition to the reforms that is explained in part by the lack o f alternative options and in part by the actions o f the government to take over whatever institution could oppose its initiatives, that ultimately served to erode the initial political support o f the reforms. A ccording to this logic, in a more democratic system, the reforms m ight have been im plem ented more gradually, but they would also have been implemented better and would have had greater sustainability. The Peruvian experience in the last 40 years, characterized by the pendulum movements o f its policy and economy, nevertheless denies Peru: governability and economic performance 257 this presumption. Indicators o f governability for 2001 reveal significant improvements in terms o f giving citizens a voice and accountability, but also show a backward slide in the effectiveness o f governm ent and the quality o f regulation. An im portant challenge facing a government as concerned as the current administration is with governability is how to assure the public and the world that institutional reform eliminates the possibility o f ‘violent lurches’ and generates a climate o f sound policy that, in turn, makes the government more effective. This requires not only much stronger institutions, a public service that attracts qualified professionals, transparency and solid systems o f horizontal accountability, but also the establishment o f mechanisms that allow the policies that are eventually implemented to be the result o f long-term political agreements. In this vein, the debate over the constitutional reform that began in the last few years will be an important indicator o f how much o f this challenge the Peruvian political class can successfully confront. NOTES * 1. 2. 3. 4. 5. 6. 7. 8. 9. The authors are grateful for the comments o f Andrés Solimano, Hubert Escaith, and Carol Wise. Also, they wish to thank Elsa Bardelez for excellent research assistance. This chapter was prepared for the project ‘Political Economy o f the Andean Countries’ , under the auspices o f the Ford Foundation. One reading o f the Peruvian political process that emphasizes the role o f this battle and presents it as a decisive factor can be found in Cotler (2000). President Fujimori did n ot lose the opportunity in international forums to present his peculiar, and to other Peruvians even embarrassing, concept o f democracy: a regime that offers economic development to its citizens. The evidence includes a time series o f indicators o f the perception o f public opinion on aspects o f governance, expectations, and economic performance. These indicators are regularly publicized in monthly reports written by A p oyo Opinión y Mercados S.A. and are frequently used in analysis o f the political situation. The time series has not been subjected to a systematic study. The type o f information is similar to that used by Kaufmann, Kraay, and Z oid o-Lob atón (1999) to construct indices, although in their case it is presented in conjunction with data from expert opinion. In the political science camp the ‘ autonomy o f the political’ has been long accepted, being, for many in the camp, a premise o f the discipline. For m ore on the effects o f this in contemporary political science, see M iller’s (1997) survey. For example, N aím (1995); for a macro-vision o f Peru along these lines see Kisic (1999). A t a more feasible level o f the public sector, there are also discussions o f the political dynamic in structural adjustment (Guerra-García 1999) and o f institutional reforms (O rtiz de Zevallos et al. 1999). The work o f Guillermo O ’Donnell and Adam Przeworksi has been perhaps the most inspirational in the field, functioning as important ‘nuclei’ in the academic work Latin America. For analyses o f Peru that incorporate some o f these elements see those o f Cotler (2000) and Grompone (2000). O ’Donnell (1997). 258 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Political crises, social conflict and economic development Estimation is based on the chronology by Tuesta (1987), pp. 22-4. During a large part o f the 1990s, while more than half o f the current public spending was channelled through the C T A R (Transitional Advisory Board o f Regional Administration), it had no decision making power over the spending. The spending that they could control at that level was financed only with their own meager resources. The provinces and district municipalities, on the other hand, received their own income and resources from the M unicipal Compensation Fund (F O N C O M U N ). The resources o f this fund are distributed from the M inistry o f the Presidency using a standard o f allocation based on the municipality’s population size and poverty level. One recent example is the M acro Región Sur movement, which was maintained by the political and economic elite from southern Peru, and, until the end o f the decade, was focused on obtaining preferential tributary treatment for the region. Similarly, regional movements o f the rain forest seem to have the defense o f the system that the law has established for them as their principal objective. Instituto de Estudios Permanoz (Institute o f Peruvian Studies, 2001). Nationalism is a complex subject that the more recent national historiographies have depicted as a process that, even from the most optimistic o f outlooks, was still largely incomplete until the end o f the nineteenth century. See the illustrative debate over the role o f the indigenous population in the war with Chile (Bonilla 1990; M allon 1990; Manrique 1990). For the rest, the development o f this national identity, o f Anderson’s (1983) ‘imagined community’ , has followed a singular process, that, unlike western Europe (Weber 1976), was for the most part independent o f the state’s limited capacity to drive the process. C ollier (2001) finds that ethnic politics can produce diverging results i f the ethnic diversity o f the group implies the domination o f one specific group or if it implies general divisions in the population. Ñ o p o, Saavedra, and Torero (2002) document the existence o f differences in income between ostensibly similar individuals o f different ethnicities. Ñ o p o, Saavedra, and Torero (2002) document the existence o f different income levels between ostensibly similar individuals that differ in their ethnicity. Mestizos that have lighter skin earn more than other mestizos, but less than individuals considered to be white. For more on the determinants o f the shock, see Guerra-García (1999). In March o f 1992, only 15 per cent o f the population approved o f Congress’s performance, the percentage that said they trusted Congress had fallen to 16 per cent, and the percentage that said they had confidence in political parties came to 12 per cent ‘A p oyo Opinión y M ercado 1992’ . In 1993, three years after the initial implementation o f a stabilization policy, the rate o f inflation was still at levels o f around 40 per cent annually. W hile there was certainly an important decrease, it is in sharp contrast to the rapid end o f hyperinflation in Bolivia in the 1980s. Unlike the monetary authorities o f other countries, the B C R P does not have any purpose related to the level o f economic activity o f the country. In the middle o f the 1980s, the tax burden had been more than 15 per cent o f G D P (Baca 2000). Interview with advisers o f the M inistry o f Economy and Finance. In practice, the high interest rates o f 1990 were maintained, that being so elevated actually allowed the interest rates to be determined by supply and demand. The capital requirements for a banking operation rose, a Center o f Risks was created, and, with the support o f the Central Bank o f Reserves and financial institutions, a Fund o f Securities and Deposits was created, which covered a maximum amount o f the individiuals’ deposits. This debate was revisited in 2000, by a manufacturing lobby that defended the convenience o f the several-tiered system. Defined as the proportion o f the sum o f imports and exports with respect to the internal gross product. Peru: governability and economic performance 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 259 A s Gonzáles de Olarte (2000) explains, the influence o f capital from the privatizations doesn’t only impact direct investment and additional commitments, but also, affects the creation o f a ‘ state o f confidence’ that attracts investment to distinct sectors o f the economy. The companies CPT-Entel Peru obtained a surprising value o f US$1391 million and a projected investment o f US$1565 million. The campaign o f diffusion had not made it clear that there was a serious possibility that not all o f the demand would be met, probably because such a strong response from the local market came as a surprise. Interview with a general manager that advised several privatization processes. In fact, with the exception o f a few specific processes, there were no further questions or requests for information on the part o f investors. This includes some o f the programs whose actions attempt to focus on the most poor, according to the classification system o f the IN E I. The M inistry o f Labor and Social Promotion developed a few programs linked to the labor market, the most important o f which is the Labor Youth Training Program. Its budget nevertheless was very small and it depended heavily on external resources. The M inistery o f Agriculture, on the other hand, administered programs o f supposedly productive prom otion with a largely rural clientele and that developed a strong slant towards welfare, particularly in the atmosphere o f the election. Political Constitution o f Peru, 8th Temporary Disposition. Numerous anecdotes exist about funds that were directed at schools before the actual school existed that could use them. In other cases, the speed o f the allocation o f funds meant that they constructed the same kind o f school in all o f the country, ignoring the particular differences o f geography and climate in each region. This number comes from Vásquez and Riesco (2000), p. 89. It is im portant to mention here that the official numbers o f the current account can hide various problems o f information that come from the revenue in foreign currencies from the illegal exporting o f narcotics and uncertainty over other accounts (like the net revenue o f tourism or problems in the registering o f transfers o f Peruvians’ payments abroad). The ‘account errors and omissions’ o f the balance o f payments registers a net positive revenue o f US$3794 million between 1991 and 1997 - the equivalent o f almost 50 per cent o f the commercial deficit accumulated during that same period and almost 20 per cent o f the deficit on the current account. 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Mirada al Perú de los Noventas, Lima, GRADE-CEPAL. 262 Political crises, social conflict and economic development PromPerú (1999), Perú país en marcha, Lima: Peru Roadshow. Przeworksi, A. and associates (1995), Sustainable Democracy, New York: Cambridge University Press. Saavedra, J (1997a), ‘Liberalización comercial e industria manufacturera en el Perú’, . Investigaciones Breves 2, Consorcio de Investigación Económica. Saavedra, J (1997b), ‘Quiénes ganan y quiénes pierden con una reforma estructural: . cambios en la dispersión de ingresos según educación, experiencia y género en el Perú urbano’, Notas para el Debate no. 14, Lima: Grupo de Análisis para el Desarrollo (G RAD E). Saavedra, J (1998), ‘Crisis real o crisis de expectativas? El empleo en el Perú antes . y después de las reformas estructurales’, Documento de Trabajo 26, Lima: Grupo de Análisis para el Desarrollo (G RAD E). 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Pascó-Font (2000), The Social Im pact o f Privatization and Regulation o f Utilities in Peru, mimeo, Lima: Grupo de Análisis para el Desarrollo (GRADE). Tuesta, F. (1987), Perú Político en Cifras, Elite Política y Elecciones, Lima: Fundación Friedrich Ebert, August. Ugarte, M. (2000), ‘La reforma de Estado: alcances y perspectivas’ , in Abusada et al. (2000). Vásquez, E. and G. Riesco (2000), ‘Los programas sociales que “ alimentan” a medio Perú’, in F. Portocarrero (ed), Politicas sociales en el Perú: muevos aportes, Lima: Red para el desarrollo de las Ciencias Sociales en el Perú. Velarde, J and M. Rodríguez (1992), E l Programa Económico de Agosto de . 1990: Evaluación del Primer Año, Lima: Universidad del Pacífico, Centro de Investigación. Weber, E. (1976), Peasants into Frenchmen: The Modernization o f Rural France, 1870-1914, Stanford, California: Stanford University Press. 8. Venezuela: from stability to turmoil Enzo Del Bufalo* 8.1 THE END OF AN ERA A failed military coup lead by Hugo Chávez on 4 February 1992 marked the beginning of a new period of political instability and institutional changes in a country that was until then a model o f governance in Latin America. The coup attempt had been preceded by three days o f street looting in February 1989. It happened two weeks after the new administration o f Carlos Andrés Pérez announced a stabilization and liberalization package supported by a standby agreement with the International M onetary Fund (IM F). This popular upheaval cannot be considered a reaction to the usual negative effects o f orthodox stabilization programs, since there was not enough time for these effects to work out. It was rather due to the psychological effects of the announcement itself that caused a sudden disappointment o f people’s high expectations o f a quick return to the better days previous to the 1983 devaluation. A return that people felt had been too many times postponed just because o f the inefficiency and corruption o f governments. The addition o f a new disappointment to the accumulated burden o f a long series o f frustrations unleashed the social reaction that signaled the end o f an era o f stability. The new government had been elected because it had promised a return to the b oom days o f the 1970s, when the first administration led by Carlos Andrés Pérez enjoyed the huge oil revenue. The stabilization program meant exactly the opposite o f what the people were expecting from the new government. But more than that, the government’s stabilization program meant the end o f the social pact that made possible the stable democracy, enjoyed by Venezuela for several decades in a region dominated by military dictatorships and authoritarian regimes. Since 1958, the county had been able to build solid democratic institutions. After an initial period o f proliferation o f parties and conspiracy threats from right-wing groups and a more impelling menace by left-wing guerrilla movements, the Venezuelan political system evolved rapidly into a twoparty system with a fairly regular alternation in power. The two major parties commanded around 90 per cent o f the electoral votes and the rest 263 264 Political crises, social conflict and economic development went to left-wing parties and other minor political organizations. One of these parties, A cción Dem ocrática, had a social-democratic orientation, while the other, COPEI, had a Christian-democratic ideology; both parties were members o f their respective international movements. Initially, only Acción Dem ocrática had a wide popular basis, gained during the 1940s, when it helped to overthrow the last government elected on a restricted electoral basis, and opened up the way for the rising new middle classes to seize power. A fter the interlude o f the Pérez Jiménez dictatorship during the 1950s, Acción Dem ocrática’s candidates won the first two free elections and lost a third one to Rafael Caldera o f COPEI. By that time, this party had undergone a big transformation from a small urban middleclass party to a mass party that had successfully competed with A cción Dem ocrática for the vote o f workers, peasants, and the urban poor as well as the middle classes. Besides the state institutions, the country also developed a fairly well organized civil society with business chambers gathered in a loose federation called F E D E C A M A R A S and widely spread trade unions united in the Confederación de Trabajadores de Venezuela (CTV), with strong links to both major parties. Professional associations were also very active and in the late 1970s, neighbors’ associations and N G O s for the defense o f specific interest started to appear as a clear sign o f a dynamic civil society. This political system and social organization were made possible by a sustained econom ic growth with low inflation during a period o f several decades that started before the establishment o f the democratic system. The non-oil G D P grew at an average annual rate o f 8.5 per cent during the 1950s, 6.5 per cent in the 1960s and 6.8 per cent in 1970s; while the inflation average rate was 1.3 per cent during the period 1950-60, 6.6 per cent during the 1970s (Hausman 1990). The average wages increased at 2.4 per cent for the whole period 1950-70 (Baptista 1997), while the rate o f unemployment was kept around 6 per cent during the same period. The national currency was convertible at a fixed rate at 3.33 bolívares per dollar until 1961, and then, after a brief period o f exchange control, the free convertibility was again re­ established at a fixed and freely convertible rate o f 4.30 per dollar until 1983. Trade balances were persistently positive except for very brief periods and fiscal deficits and public debt were very small and manageable. In such an economic environment income distribution improved considerably. The Gini coefficient steadily decreased from 0.69 in 1944 to 0.40 in 1981 (Baptista 1991). The health programs, the enhancement of educational facilities and a considerable flow o f European immigrants initiated in the late 1940s greatly increased the human capital. It was this institutional framework that was compromised in 1992, mainly because the econom ic conditions that made it possible were fading away. Venezuela: from stability to turmoil 265 But before entering into the analysis o f the crisis o f governance o f the 90s, we should get a better insight into how the Venezuelan democracy really worked by taking into account three major factors: a) the social com position o f the country; b) the nature o f the econom ic model based on the oil rent perceived by the state; c) the international context o f the 1960s. Human Geography Four main regions are distinguishable in the Venezuelan geography that have had some incidence in the formation o f regional differences that are relatively minor compared with other Latin American countries. Although they have played some role in Venezuela’s historical conflicts, they never consolidated in lasting political differences that could have threatened the unity o f the country, even during the nineteenth century when Venezuela was just a loose confederation o f regional political caudillos. The coastal region is where the capital city and the more im portant industrial and commercial complexes are located, mainly along the axis between the ports o f La Guaira and o f Puerto Cabello. To the east lie the traditional cocoa plantation lands o f Barlovento with an important population of African descent. During the eighteenth century, cocoa was the main export crop that made the fortunes of the more important families of nearby Caracas and therefore played a determining role in the final political configuration of the colony that later gave birth to the Republic of Venezuela. Further to the east lies a less developed area with important oil fields and great tourism potential that has played an important role in Venezuelan history since the arrival o f the first Spaniards in the early sixteenth century. To the west the poor and undeveloped Falcon State separates the central axis from the oil-rich M aracaibo area. The population character o f the coastal region is akin to the rest o f the Spanish Caribbean. The Andean region stretches from the west part o f the coastal region to the southwest up to the C olom bian border. It has a very traditional agrarian society that earns its livelihood from high mountain crops raised on small plots o f land and it is structured around the family unit and the small town. Culturally, the people o f this region have some similarities with their Colombian neighbors and it is the only part o f the country that can be considered properly as part o f the more extended Andean region o f South America. Historically, the region has had a strong influence on Venezuelan politics and before the oil era was responsible for one o f the main export items: coffee. 266 Political crises, social conflict and economic development The plains region lies to the east o f the Andean region and south o f the coastal region along the plains north of the Orinoco River up to the Atlantic Ocean. It has very few urban centers and its western population gravitated around the Andean region, while those living in the central plains are more integrated into the cities o f the central coastal region and the rest are linked to cities o f the eastern coastal region. The traditional social structure of this region used to be very loose, conditioned by a presence o f the so-called extended family and a production organization that rested upon the large cattle ranch (hato) and the small plot o f land (conuco) cultivated by poor peasants. This has been a traditional cattle country, home o f the llaneros, a mixed-blood race o f horsemen that played an important role in the war for independence and during the subsequent civil wars. Their seminomadic lifestyle made then naturally inclined toward a free and egalitarian type of society that tends to reject hierarchical institutional relations in favor of more horizontal personal relations. The forest region lies on the right bank o f the Orinoco river and is made up o f two main territories. The first is the south that goes deep into the Am azon basin and is mainly populated by indigenous people belonging to the traditional Am azon cultures. It has very few small towns scattered along the river. It is a frontier territory and has traditionally little bearing on Venezuela’s social and political events. But it has a great economic potential as one o f the greatest reserves o f the planet’s biosphere. The second territory is the Guayana region that runs east o f the south region to the Atlantic Ocean and for its main part is also scarcely populated with the exception o f the area around Ciudad Bolívar. Settled since early colonial times at the narrowest stretch o f the Orinoco River, this city had played an important role in Venezuela’s history. More recently, since the 1950s, heavy industries had been developed at Ciudad Guayana on the conjunction o f the Caroní River with the Orinoco. It is a very rich mineral territory and is becoming increasingly connected with the northern Brazilian state o f Roraima. Ethnic diversity The Venezuelan ethnic com position inherited from colonial tim es was a typical m estizo society with considerable clusters o f black population partially mixed with the other races and a white minority at the top o f the social ladder. A strong European immigration especially after World War II partially changed such a com position, but Venezuela remained a multiracial society where ethnic conflicts are practically non-existent. Social conflicts take place in a relatively hom ogeneous national environment that did not particularly emphasize ethnic differences, but rather took the form o f disputes among different interest groups. Naturally the different ethnic groups are not equally distributed along the different layers o f society and Venezuela: from stability to turmoil 267 subtle forms o f discrimination are still present, but in general Venezuela is a fairly hom ogeneous national state. In other parts o f Latin A m erica, ethnic diversity im plies m ainly a differentiation along cultural lines in order to exclude certain groups from political power and to link them to the modern labor market in a peculiarly exogenous manner clearly singled out by Arthur Lewis in the 1950s (Lewis 1953). Since ethnic groups are very seldom o f pure blood or have an untainted traditional culture, the concept refers more to a particular type o f power relation than to some sort o f anthropological entity. What really defines the alleged ethnic character is the type o f exclusion that characterizes its relationship with the rest o f society. Ethnic exclusion is typical o f countries where a national state has not being able to create a homogeneous society, by which we mean a society where each person is a sovereign individual formally equal to any other. In such a society racial and cultural differences are no more than personal peculiarities that are part o f their own individuality and do not constitute patterns o f collective identification. This is the reason why there are no ethnic conflicts in Switzerland. Venezuela is probably one o f the countries in Latin America that has the m ost advanced social democracy and this has been a major factor in the country’s long governance stability within a political democratic setup. Such a social democracy has been the result o f a long historical process that started in the second half o f the nineteenth century with the so-called Guerra Federal, a civil war that almost entirely destroyed the old colonial social organization and set in m otion a dynamic process, and, as a result o f which, social democracy advanced much more rapidly than political democracy. Venezuelan history was then marked by a violent succession of caudillos that were an offspring of regional segments acquiring more power from the traditional elite based in Caracas. Thus these dictators were more the expression o f the dissolution o f the colonial segmentations and despotic personal relations than the political arms o f a social elite trying to cling to the old colonial order. This was an asymmetrical process with respect to what was going on in neighboring countries where a Montesquieusque type o f political institution were being consolidated for a very small minority, while the rest o f the population remained trapped in the ancient colonial segmentations. The Oil Rental Model During the late 1920s Venezuela becam e one o f the w orld’s largest oil producers and by the end o f the follow ing decade was the first world exporter. M ultinational corporations ran the oil industry until 1975 when it was nationalized. But they could only do so by obtaining concessions to 268 Political crises, social conflict and economic development exploit the oilfields, while the state retained the ownership o f the subsoil and therefore the right to claim the rent originating from such exploitation. This arrangement set in m otion a complex interaction process between oil production, state institutional consolidation and social development that made possible an increasing governance o f the country that eventually allowed for a stable democratic regime. This peculiar multidimensional arragement o f econom ic, political and social relations is called: the oil rental model. The expansion o f oil production increased fiscal revenue, that enabled a considerable enhancem ent o f governm ent spending that was used to modernize the country. In the 1920s Venezuela was a small and very backward country o f less than 3 million inhabitants with a rural population reaching 80 per cent o f the total, almost the same rate o f illiteracy and a third o f the people afflicted by endemic diseases. Four decades later in the early 1960s, the country had 10 million inhabitants with 80 per cent o f its population living in cities and having the highest per capita income and one o f the best social indicators o f Latin America. Such an amazing transformation was possible thanks to the oil revenue accruing to the state and being recycled to private citizens through government spending, subsidies and other less legitimate forms. The latter became a particularly effective mechanism of trickling down o f the state wealth to a growing middle class, an improving working class and a fading-away peasantry. Since there was no meaningful private exploitation by nationals and the multinational corporations operated in the country under the enclave system, legitimate government policies and corruption were the only ways to inject the oil rent into a very poor and undeveloped society. In its early stages up to the completion o f the first phase o f industrialization in the late 1970s, this mechanism fostered the creation o f private entrepreneurial capacity that was previously non-existent. It also helped to improve the human capital o f the middle and working classes that dramatically changed the com position of Venezuelan society. Those who were in control o f the state institutions were able to direct the distribution process in their favor. This incited the new rising middle classes to seize power in 1945, through a military coup that ended the oligarchic regime o f the posgom ecista^ra, by establishing universal voting rights and a program o f modernization based on industrialization and land reform, universal education and health improvements. Since then, the two main objectives o f Venezuelan politics had been: 1) to get an ever-increasing share o f the oil revenue accruing to state; and 2) to try to secure the control of the state through a wining political alliance, organized in political parties that could seize power through elections. Venezuela: from stability to turmoil 269 The first one was a consensus objective, since it was considered as the natural way to finance a modernization program shared by almost all sectors o f the political spectrum. This sort o f national project, synthesized in the motto: Sem brar elp e tro lio (sow the oil), was the basis for the high degree o f governance that the country enjoyed for five decades. This is true in spite o f the two coups d’état that took place: one in 1948 that established military rule and one in 1958 that ended it. The military dictatorship that ruled during this period shared the same modernization program and did not disrupt the process that was creating those new social practices that, in the end, made possible the establishment o f democratic institutions. It was only a transitory episode caused by some errors com m itted by the parties led by an inexperienced new political class that were magnified by an international context determined by the Cold War, as we shall show presently. The important fact was that the goal o f using an increasing share o f the oil rent to finance the development o f the country was the basis for the underlying political consensus that, in different occasions during 50 years, helped to renew the social pact among all segments o f Venezuelan society. From the political and juridical point o f view, the institutional changes brought about by switching back and forth from a democratic regime to a military dictatorship were certainly important; but from the point o f view o f governance, they were minor modifications in the way the social consensus was realized. The second objective was responsible for a process o f natural selection o f political parties that helped to build the two-party system. The change from the oligarchic regime to democracy meant the enhancement o f the electoral basis to cover all sectors o f society and therefore the need of broad alliances among different sectors o f society in order to have a chance to win power. The parties that were more capable o f building an alliance among middle classes, workers and peasants had better chances to win elections. Initially two parties, A cción D em ocrática (A D ) and U nion Republican Democrática (U R D ) with social democrat and populist ideologies competed successfully for mainstream votes, followed by the Communist Party (PCV) and other parties like COPEI that did not have widespread support. A better leadership gave A D an advantage over U R D and the first democratic Government (1945-48) was an A D government and this fact established it as the majority party that could guarantee sure access to the control o f the oil rent. It seemed that A D was on the verge o f becoming another PRI and established a regime similar to the Mexican one. But the 1948 coup got in the way and A D was the main target o f the following military government repression and was declared illegal. U R D was then left as the main legal party, and in fact won the election in 1952, held under the supervision of the military regime, that refused to yield to the government. 270 Political crises, social conflict and economic development By 1958, when democracy was restored, A D had grown stronger after years o f underground activities and was perceived as a party with a real chance to win even by those less interested in improvement o f society than in their own personal gains. This perception did in fact help the party to win the election and its victory made it the sure way to maintain access to the oil rent. The tendency towards a sort o f Mexicanization o f Venezuelan politics was again set in m otion. But this time it was aborted by the split o f the left wing o f the party that wanted to push towards a Cuban type o f social transformation. The prompt reply o f Betancourt outlawing the dissidents made them go underground and start a guerrilla movement, followed shortly by the Communist Party. This caused a crisis of governance for a newly elected government that was already under siege by the far right that was trying to restore the military dictatorship. The crisis was solved by a governance agreement with the other two major parties left: U R D and COPEI; this agreement was called P acto de P unto Fijo and lasted for the following 37 years. The other two parties were too small to have a real option to win elections and A D won the second election in 1963. Being in control o f the state, A D was able to implement strong populist policies and to foster patronage as a way to create allegiance to the democratic system and, at the same time, adhesion to the will o f the party machinery. The rule o f the game was as follows: A strong party was needed to win the election and to gain access to the oil rent distribution process. A t the same time, the control o f the oil rent distribution process gave the party in power the necessary financial means to command the allegiance it needed to win the next election. All sectors that wanted to have a fair share o f the state revenue distribution should establish some sort o f connection with the party in power. In the Venezuelan case, the economy o f the vote really meant a vote econom y where a winning vote was the best way of tapping the oil revenue. But in the early stages o f this democratic game, the fact that A D was only a relative majority party posed some problems. A considerable sector o f the middle classes, that were not connected to the party machinery, would have been left outside the distribution process with a high risk o f breaking the social pact underpinning the democratic process and in fact the very basic consensus on the modernization process. The Pacto de Punto Fijo was the solution. Officially, the Pacto referred only to institutional post sharing such as the presidency o f the H ouse o f Representatives that should be given always to a member o f one o f the opposition parties, a fair distribution in the appointment o f justices to the Supreme Court and other judicial posts and so on. In exchange, the opposition parties were to give legislative support for passing crucial laws and should rally behind the government on special issues deem ed o f national interest such as the defense o f Venezuela: from stability to turmoil 271 democratic institutions and so on. Unofficially, the Pacto set up an informal consultation mechanism among the parties’ leaders to decide on the most relevant issues that were afterward ratified formally in the Congress. These informal decision mechanisms were extended to negotiate procurement issues as part o f the political bargaining process. State-financed projects were allocated among contractors with connections with parties which were members o f the Pacto on a prorata basis. Exemptions, subsidies, permits, grants, financial support by state-owned investment agencies under the framework o f import substitution policies were also negotiated in these informal meetings in favor o f parties’ sympathizers. This patronage system together with populist policies that trickled down a part o f the oil rent to workers, peasants and even the urban marginal population, helped the democratic system by maintaining the necessary m acroeconom ic equilibria that made possible econom ic growth and a rapidly stabilizing political system. But these very same conditions helped to consolidate the privileged position o f A D as the government party that could becom e the permanent winner o f the elections and the danger of a M exicanization o f Venezuelan politics and institutions was increased by the Pacto. In order to avoid this outcom e, a conscious decision was made by the A D leadership to create an opposition party that could be an alternative to AD. A fter two victories in a row by A D , its leader, R óm ulo Betancourt, intentionally split the party just before the third election, in order to get rid o f the left wing, deemed too radical, whose candidate was about to win the nomination o f the party. This division allowed the candidate o f COPEI to win the election by a small margin. COPEI then became a government party in control of the oil revenue distribution process and could consolidate itself as an equal option to access to the state-controlled oil revenue. In this way the Pacto underwent a refinement, since now all the discontent, normally generated by the exercise o f power, could be capitalized on by the opposition party that was a winning option. A new mechanism of pendulous shifting allegiances was set in place that could efficiently help to defuse social pressure and further stabilize the system. Only a tiny minority could not be integrated into this system and expressed itself through other parties of little political significance. The system, supported by relatively abundant oil revenue, worked very well. In a few years, the drive not to waste one’s own vote induced almost 90 per cent o f the electorate to vote for one o f the two major parties, while leftist guerrilla movements lost momentum and gradually returned to legal political life. By the end o f the 1960s and early 1970s, the governance system loomed very stable, fueled by a distribution o f the state oil rent that financed the social pact by reaching all sectors o f Venezuelan society although in an 272 Political crises, social conflict and economic development uneven way. The oil rent was by far the m ost important exogenous variable that sustained a very high degree o f governance. A t this stage, patronage, illegal commissions paid to government officials, embezzlements, collusion between private businessmen and government officials, intentional deficits run by state enterprises, subsidies and other manifestation o f corruption o f this sort, were not a hindrance to governance but rather were essential to it. A proper understanding o f the interrelation between the oil rent distribution and the development o f democratic institutions is needed to understand Venezuela’s governance success until the end o f the 1980s and her governance difficulties in the 1990s as well. International Context In order to understand why the democracy was finally established precisely in 1958, we should look at the international situation. As mentioned earlier, the developm ent o f middle classes induced by the new oil wealth was already well advanced in the 1940s, when the old p osgom ecista regime was toppled and replaced with the first government elected through universal voting rights. This government did not last more than three years because of its inefficient administrative performance and because it had certain political inclinations that were deemed incompatible with the security o f the Free World. In those days, military dictatorship was a preferred option to any democratic elected government that might have or be believed to have some communist leaning. In such a Cold War climate it was easy for the former military allies o f A D to topple Róm ulo G allegos’ inefficient government and try to pursue the same m odernization program under an authoritarian government with impeccable anticommunist credentials. Venezuela’s democratic development was stifled by an international adverse atmosphere that helped the spread o f military dictatorships all over Latin America and the Third World as an effective measure to fight Soviet expansion. Custom arily after prolonged econom ic prosperity, an authoritarian government will sooner or later start having a decreasing marginal political utility. This is so mainly because, as their living standard goes up, middle classes will put a greater value on their personal freedom and the satisfaction o f such needs as political participation, free expression, development of new patterns o f behavior, and so on. In such a case the benefits of the governance provided by an authoritarian regime do not compensate any longer the rising social costs caused by the lack o f freedom. This was precisely what happened in Venezuela, where people finally forgot the reasons for having allowed the military to take power and Marco Pérez Jiménez was ousted in January 1958. Venezuela: from stability to turmoil 273 The overthrow o f Pérez Jiménez was followed shortly by Batista’s in Cuba. These events were harbingers o f new times for the whole region. The evolution toward communism o f the Cuban Revolution and the strong challenge represented by the left-wing guerrilla movements to the democratic regime in Venezuela and elsewhere prompted a new response from the United States. In order to thwart the spread o f Cuban-type revolutions in the region, a new set o f policies were implemented to foster economically successful democratic regimes in the region that should offer a better option than the Cuban way to development. In this context, it became o f vital importance to ensure the development o f democracy in Venezuela whose relatively good economic performance offered the potential for making the country a model of development and democracy for the entire region. Thus during the 1960s, Venezuela enjoyed a favorably active international environment that helped the country to consolidate her democratic institutions that successfully survived during the 1970s when practically the whole region plunged into a long period o f ruthless military regimes. For more than two decades, Venezuela remained insulated from the general crisis of the region with no significant contentious issues with its neighbors, from which it received huge numbers o f immigrants and entertained a lot o f formal agreements o f econom ic cooperation with very few practical effects. The country engaged in an active policy o f promoting democracy in the region that gave it some leadership in international fora such as the North-South conference in Paris in 1976, but also caused it great diplomatic tensions with the military rulers o f the region. This situation lasted until the 1980s, when the domestic crisis, on one hand, and the return o f Latin American countries to democracy, on the other, brought some changes in the international position of the country. As the domestic conflict in Colombia grew in intensity, it became a serious threat to the security o f Venezuela’s border areas, jeopardizing production and igniting old territorial disputes that caused some diplomatic friction between the two countries, sometimes demagogically manipulated by both governments with no real significant effects. D uring the 1990s, the Colom bian guerrilla activities penetrated even deeper into Venezuelan territory with further damaging effects on the economy o f those areas. But on the other hand, after the commercial reform of those years, the trade between both countries has increased considerably and each country has become the other’s second major partner. With the rest o f the South American countries, Venezuela has maintained cordial but very loose ties. Its participation in the Andean Pact has had no relevant consequences beyond the above-mentioned increase in trade with Colom bia in the 1990s. For a long time the relations with bordering Brazil have been ones o f reciprocal indifference as should be the case with two countries separated by the same rain forest. N onetheless in recent 274 Political crises, social conflict and economic development years there has been a promising intensification o f econom ic relations and some integration at the only active border point between the two countries. Venezuelan foreign policy has been more active in Central America and the Caribbean countries, motivated mainly by political reasons with no meaningful consequences for the econom ic development o f the country. This must n ot be taken to m ean that Venezuela has been a sort o f isolationist country. On the contrary, it is a very outward society. But being an oil-exporting country, its ties with the U nited States and with OPEC have been by far the m ost im portant foreign factors in determining its governance and econom ic performance. Outside them, it may be said that the international context has played no important role in the evolution of Venezuela’s governance with the possible exception o f the early years of the establishment o f the democratic regime. The situation started to deteriorate at the end o f the 1980s when the econom ic and political model based on the oil rent distribution became dysfunctional due to two main causes: (1) The oil rent was no longer sufficient to finance an adequate income distribution to a society that had grown bigger and more sophisticated. In other words the econom ic costs o f the system began to increase at a faster speed than the oil revenue. (2) The accumulation o f collateral negative effects o f the model started to take their toll making the model increasingly dysfunctional and a hindrance to further development. 8.2 THE CRISES OF GOVERNANCE If governance means the ability to carry on policies with a certain degree o f efficiency (as shown by social and econom ic indicators) with none or a low level o f social conflict; we can say that the second oil crisis o f 1979-81 signaled a turning point in Venezuela’s quality of governance. Until then the latter was probably one o f the best in the region with very high participation and political stability with low violence, and good government efficiency. Regulations were important within the import substitution framework, but not particularly heavy, although corruption was increasing and supervision began to relax. The second oil boom ended in early 1983 with the first devaluation of the bolívar in 20 years, a consequence o f the mismanagement initiated with the Carlos Andrés Pérez (CAP) government (1974-79) that reached an unusual peak during the follow ing adm inistration o f Luis Herrera Campins (LHC). See Table 8.1 for a list o f presidents since 1958. During these two administrations, Venezuela contracted a huge foreign debt, while imports skyrocketed and productivity lagged and investment Venezuela: from stability to turmoil 275 came to a halt. Under CAP, the debt was contracted mainly to finance huge industrial projects at an accelerated pace to boost a more advanced phase of the industrial substitution process. But during the following administration o f LHC, m ost o f the new debt was used to finance current expenditure and to cover public enterprises’ deficits. A considerable part o f the debt was contracted in order to solve short-run cash problems by many public institutions outside any control o f the central government. During this administration government efficiency in providing public services declined sharply and the striking lack o f coherent macroeconomic policies accelerated the trend to serious imbalances in this area. Table 8.1 P residen ts o f Venezuela since 1958 President Róm ulo Betancourt Raúl Leoni Rafael Caldera Carlos Andrés Pérez Luís Herrera Campins Jaime Lusinchi Carlos Andrés Pérez Octavio Lepage Ramón J. Velásquez Rafael Caldera H ugo Chávez Frías Years 1958-1963 1963-1968 1968-1973 1973-1978 1978-1983 1983-1989 1989-1993 1993 1993-1994 1994-1999 1999-(2006) The LHC government established a new level o f inefficiency, corruption, m ism anagem ent and p olitical patronage that swerved away from the county’s historical pattern; and a new trend o f increasing degradation o f the social order and disruption o f state institutions set in. It was the administration that had received the greatest oil revenue and became the worst government that Venezuela had had in the twentieth century, only to be surpassed by that o f Chávez on both counts: the greater oil revenue and the worst management performance. But the Chávez phenom enon cannot be properly understood without a clear evaluation o f this disruptive trend set in place by the LHC government. The refusal to renegotiate the foreign debt in 1981, well before the beginning o f the crisis; the insane policy to foster capital exports to drain domestic liquidity and the absolute disregard for any type o f bureaucratic efficiency, are just a few o f the features o f this administration. The decline o f oil prices in 1982 and the international debt crisis o f that same year abruptly cut the easy access to foreign financing at 276 Political crises, social conflict and economic development the same time that the oil revenue shrank. After having depleted the stateowned oil holding (PDVSA) o f its foreign reserves, the government was forced, in February 1983, to devalue the bolívar by almost 50 per cent after 20 years o f a fixed and free convertible foreign exchange. Neither can the deterioration of governance during the LHC administration be imputed to mismanagement and unsound policies alone, nor was the election o f LHC due to a stroke o f bad luck. After all, the people that ran that government belonged to the same political culture as the others before them and were elected under the same system. A better team would not have made much difference in sorting out the new trend that had deeper causes than just bad policy orientation. Any society and econom y need good governance and a steady productivity increase in order to function well and although both aspects are interrelated they also have some specific determinants o f their own. It is significant that the foreign reserve shortage came about at the end o f a period in which the country received a huge amount o f oil revenue and it was precisely in this period that the economy suffered a very prolonged recession. During the period spanning between the first and the second oil crisis (1973-82) the Venezuelan m odel was considerably altered by the inflows o f huge financial resources that could not be absorbed by the expansion of domestic production capacity. This windfall revenue deflected the country’s econom y from a steady development pattern that it had been following since the 1930s. In the midst o f a financial bonanza, private investment was reduced drastically and productivity started to lag, as reflected by the decline in G D P growth and the appearance o f inflation as can be seen in Figure 8.1. In spite o f the efforts made by the CAP government to expand the productive capacity of the Venezuelan economy, the huge financial resources did not find an efficient absorption in the non-oil real economy because of market restrictions, lack o f entrepreneurial capacity, and inadequate social behavior. Such resources were either recycled to the foreign markets in the way o f capital exports or were used to boost consumption. The efforts to com plete the industrialization o f the country were abandoned by L H C ’s government altogether. When the second oil boom dried up, the country was left with a bloated non-oil economy and a society with a series o f enhanced revenue claims that had no relation whatsoever to the productivity performance o f the economy. The very fundamental conditions o f the Venezuelan social pact were strained in an effort to ward off the menace of social conflicts, induced by the increasing disappointment o f such claims. The government stretched the fiscal and monetary policies over and above the constraints im posed by the new debt service and the diminished oil revenues. Macroeconomic mismanagement became politically correct, a tool to sustain Venezuela’s governance model that had made it an Venezuela: from stability to turmoil 277 «rifuniríioOovoOOhhhhhooooooxxoN^^ONONOO On O n O n On O n O N ( 7 \ ( 7 \ O N ( 7 \ O n O n O N ( 7 \ ( 7 \ O N ( 7 \ ( 7 \ C \ C \ C \ O n On O n On O O Source: BCV Figure 8.1 Inflation an d growth in Venezuela island o f stability and prosperity. From this moment on Venezuela was on the road to becoming just another Latin American country. From this point on, the econom y becam e m ore sensitive than ever before to a political cycle that had been in place since the beginning of the dem ocratic period. In fact, it had becom e custom ary for any new government to try to implement a restrictive policy during the first two years o f its term and then revert to expansionary policies in the last three years as a means to help the winning o f the next election by its candidate. But after 1982, the expansionary phase became more difficult to finance and the LHC administration had to resort to imposition o f price controls, multiple foreign exchange rates and import prohibitions. This was thought to be the only way to handle the increasing fiscal and balance problems and avoid, at the same time, any econom ic measure that would imperil the social pact. N on e o f the necessary adjustments were undertaken. Tax reform was strenuously opposed by the middle classes. Businessmen and lower classes fought the elimination or reduction o f subsidies. Inefficient industrialists abhorred reduction o f protection. The financial sector resisted independent supervision. Public employees strove to keep their real salaries up, while postponing any organizational and institutional reform that might have affected their jobs. In this new environment, sound econom ic decisions were taken only when it became inevitable. Fiscal adjustments were usually done through the very unhealthy method o f cutting a fixed percentage across all budget items in order to avoid pressure from powerful stakeholders. This practice 278 Political crises, social conflict and economic development caused great damage to public management, disrupting projects in process, blocking ongoing operations o f many institutions and introducing new elements o f dysfunctional performance by encouraging a perverse natural selection in the quality o f public officials. The cuts in expenditure were never accompanied by job reductions; on the contrary, positions in public administration were increased to compensate rising unemployment in the private sector, which meant a deterioration in salaries and other benefits o f public employees. The public administration suffered heavy loses o f human capital, as a career in the public service became unattractive. The state institutions that had functioned quite well since the Gómez times and had maintained a fairly good degree o f efficiency during the first 20 years o f the democratic period began to deteriorate rapidly. Corruption that in the early stages was kept within boundaries spread out as institutions deteriorated, and became all-out graft with no relation to the needs o f the maintenance o f the social pact. During this period, the two-party system reached its full development commanding almost 90 per cent o f the preference o f an electorate that participated in the electoral process almost at the same rate. But after 1983, the dissatisfaction o f the middle classes began to increase at the same pace as the decline o f their real income. The old enthusiasm for the vote and party politics declined with the increasing inability o f the state to satisfy the claims o f different stakeholders. The traditional practice o f state contract allocation by the shadow committee o f senior members o f the two parties benefited a lesser number o f sympathizers, fostering an increasing sensation o f unfairness among the unsatisfied claimants. Am ong the wider population, the use o f political connections to make personal econom ic gains was no longer seen as an acceptable way to personal success and began to be stigmatized. Finally, the shocking abuses in the allocation of preferential foreign currency during the Lusinchi administration were quite helpful in inducing more and more people to relate their present deteriorating personal econom ic situation to government mismanagement and political corruption. The corrupto became the new villain o f the Venezuelan drama and, from the end o f the 1980s on, he was considered by public opinion the only cause o f all the evils that the people had to endure. Personal unethical behavior o f government officials and politicians became also a proxy for the more difficult to understand real causes o f the decreasing returns o f the model based on oil rent. The com m on naïve interpretation associates corruption with bribes, embezzlement, theft and misuse of public funds and other personal mischief; a conception often shared by multilateral institutions and other experts in these matters with a Protestant ethical heritage. But in the more rigorous sense o f classical political theory, corruption means above all a stage of Venezuela: from stability to turmoil 279 degradation of the proper organization o f a body politic. In the AristotelianPolibian tradition a tyranny is the corrupted stage o f monarchy, oligarchy is the result o f a corrupted aristocratic regime and so on. And it is this concept o f corruption that must be emphasized in the case o f Venezuela, because the crisis that started in the early 1980s is above all the expression o f the corruption o f the oil rent model o f governance. It is because this m odel was corrupted that the econom ic and social indicators started to deteriorate and, as a consequence o f this, the governance indicators as well, not the other way around. The corruption o f the system was due to the overgrowth o f the social and economic structure far beyond any feasible way of continuing financing it with a steady flow o f oil revenue. The oil revenue enabled Venezuela to develop a non-oil econom y that depended for its imports upon the foreign currency generated mainly by the oil industry, and to build a large public services sector. The oil revenue was sufficient to finance its foreign exchange requirement properly while this non-oil economy remained relatively small. But the huge inflow o f resources during the oil crises o f the 1970s and early 1980s overextended the Venezuelan economy and the society reached a new dimension and complexity that were far beyond the natural limits o f the model. By the early 1980s, it became clear that the non-oil sector o f the economy had to become self-sustainable and this means primarily two things: (1) It had to generate m ost o f the foreign currency it needed for its continuing development. (2) It had to finance its social externalities necessary for its growth by paying taxes to the state. In other words, the flow o f resources from the state to civil society had to be reversed and a more natural flow should be established, like in any normal economy and society. In order to do that, a truly productive non-oil economy should be developed and m ost o f the social claimants to the oil revenue should be transformed into active agents in the non-oil economy. In other words, they should be transformed from non-productive claimants o f the national rent into suppliers o f some factor o f production that could be efficiently used in the non-oil economy. This implies drastic changes in the social pattern o f behaviors such as: (1) converting crony capitalists into real entrepreneurs by creating competitive conditions; (2) turning unqualified workers into skilled workers through intensive human capital investment; 280 Political crises, social conflict and economic development (3) integrating the marginalized population into the modern econom y by providing its members with some capacity that make them the suppliers o f some factor o f production recognized as such by the market; (4) reshaping state institutions in order to make them instances o f social coordination able to replace the system o f informal personal alliances that frequently constitute the true ruling mechanism. These changes require much more than consistent and efficient policy proposals, even if they go beyond macroeconomic policy, structural and institutional reforms. All these proposals address technical aspects that must be complemented with the formation o f adequate political subjects that can bring about such changes. The latter dimension is usually obviated by modern analysis. It tends easily to forget that policy proposals are always the expression o f a political will and not merely an exercise in technocratic ingenuity. Governance problems stem from two different, although related, sources: (a) the disruption o f organizations and the perversion o f institutions in such a way that the political and social system becomes dysfunctional and is no longer able to achieve its legitimate objectives as intended by the subjects that give cohesion to the body politic; (b) the inability o f the political subjects to carry out the necessary reforms for the renewal o f the social pact on a consensual basis. We can distinguish two phases of the Venezuelan crises, each characterized by the pre-eminence of one o f these two aspects. During the first years, there was a progressive degradation o f social organizations and state institutions with a complete lack o f political will for any kind o f reforms. The ruling parties and major social stakeholders stuck to the traditional patterns of behavior implementing and supporting econom ic policies that aggravated the situation. Such was the main feature o f the LHC and Lusinchi adminis­ trations. A t the end o f the 1980s, a new consciousness of the need for drastic changes in the econom ic model began to win over an increasing number of people. But, at the same time, there was a strong resistance to political and social reforms that were necessarily implied in the econom ic changes. The failure o f the second CAP administration was due to the fact that it was not supported by any meaningful political subject. The reform proposal was improvised under the duress o f a critical situation o f the balance of payments and amounted to nothing more than the usual IM F recipe. Some o f these measures were certainly needed to correct the abuses o f years of mismanagement; others were aimed at the replacement o f some o f the institutions and usual practices o f the import substitution model with no Venezuela: from stability to turmoil 281 clear vision o f what w ould follow. That was left to the market to decide. Far beyond the obvious technical shortcomings o f this type o f proposals that emphasize the market without understanding how a modern money production market econom y really works, the proposals were a first step in the right direction to change the oil rent model. But their main shortcoming was that they were not the expression o f a political w ill o f some social subject capable o f carrying out the reforms by generating the necessary consensus and alliances. N o matter how good a proposal may seem from a technical point o f view, if it is not the genuine expression o f meaningful social players’ political will, it w ill always be a b a d policy. Technocrats with too narrow a training keep forgetting that p o lic y is not only wisdom and prudence in the management o f affairs or a definite course or method o f action selected from among alternatives and in the light o f given conditions to guide and determine present and futures decisions. In a more original meaning p o lic y is P olitia, politeia: the art o f assuring social coherence through the management o f power relations that make up the thread o f the body politic. Therefore, policy is in itself governance. It is not that a g o o d policy needs go o d governance to be implemented; on the contrary, a good policy is only such if it makes possible go o d governance. There is no such thing as a go o d policy that cannot be implemented because o f lack o f governance. The lack o f governance is rather due to the lack o f policies that can effectively build the coherence o f the body politic through the management o f the material interest o f different social subjects. This was the lesson that C A P, and his team, had to learn in his second administration. A lesson, by the way, that is now being taught to a broader audience by the A rg en tin e case. Instead o f in itiatin g a new era o f transformation o f the Venezuelan econom ic model that would support a steady path o f growth and development, the package o f reforms brought about the final collapse o f the old system. Being based, as we said, on a p o or comprehension o f how the modern market econom y works, the only partially correct reforms, sponsored by the IM F , were insufficient to address the problems o f developm ent. Nonetheless, they were very effective in signaling the end o f the traditional parties’ role as viable instruments for the distribution the oil revenue among the different national stakeholders. P a rty defection s w ere then accelerated and those fo rm er p o w erfu l organizations that com m anded citizens’ participation were reduced to shabby electoral machineries, disavowed by the general public as mere clubs o f corrupted politicians. The 4th o f February coup attempt revealed the new situation quite clearly. That day, people supported dem ocracy against any outdated return to military government, but rejected the old system o f governance o f which 282 Political crises, social conflict and economic development C A P’s reforms were seen to be the latest expression. In fact, contrary to what is com m only believed, such reforms were not perceived to be part o f a m odernization program. This is certainly the way the W ashington Consensus viewed the reforms, but to most Venezuelans it was just another effort to further concentrate the oil rent distribution in favor o f privileged minorities and against the impoverished majority o f the population. The institutional crises that followed the two coup attempts o f 1992 ended up with the ousting o f CAP from power through a legal procedure. He was accused o f embezzlement and his trial became much more than one person’s trial. It became the trial o f the corrupted oil rent model that he personified so well. People identify, in a somewhat simple manner, the corruption o f the regime, based on the oil rent distribution, with the unethical behavior o f politicians. By doing so, they lump together graft with ineptitude and inefficiency. This lack o f awareness that ineptitude and inefficiency could be just as bad as graft is still a major problem in determining the electoral choice and was a major factor in Chávez’ election. The aversion to the corrupt politician fueled the search for honest persons, even if they were inept and unable to perform properly. With these shortcomings, it became clear to everybody that radical changes were needed. Rafael Caldera, an almost retired old politician, was one o f the very few that captured the new m ood o f the people, that had finally accepted the need for drastic reforms, but were hostile to a modernization program that spelled more concentration o f wealth. Caldera’s first administration was the last government to run fairly equilibrated macroeconomic policies and to keep the econom y on a path o f growth with no fiscal deficit and no foreign debt. Being one o f the founders o f the democracy, having cut his ties to the COPEI party, his diagnosis o f Venezuela’s troubles made him, so it seemed at that time, a viable figure that could lead the democratic transition to a new econom ic and social order. A mixed alliance o f heterogeneous political movements, some of them representing modernizing forces and others being just old interest groups, united by their common contempt for the traditional parties, won the elections. Caldera became the first democratic president to be elected without the support o f one o f the two major traditional parties; a clear signal that something was changing. The bipartisan system had ended but was not yet dead. A fter a few months o f tension and internal strife, the modernizing current within the government was expelled and Caldera made a political deal with the A D party boss in order to ensure majority support in the Congress. Meanwhile the serious mismanagement o f the inherited financial crisis forced him to enter into an ill-fated policy o f foreign exchange control that stalled all possibilities to bring about any kind of reforms. After almost two years of an Venezuela: from stability to turmoil 283 agonizing econom ic situation that began with a big devaluation and ended with another even bigger, Caldera went to the IMF, where he had pledged never to go. He then went back to basically the same CAP policies, but with more moderation and a certain social concern, shared by the multilateral organizations that by that time, so it seemed, were beginning to learn their lesson too. The fundamental econom ic and social changes were postponed sine die and the government tried to administer the old model the best it could, until the next elections. At the end o f the Caldera administration, Venezuela, instead o f being the tropical version o f a Montesquieusque society, had become just another Latin American country. In a region known for its institutional fragility, Venezuela’s political stability since 1958 had been noticed by the literature on the subject (Roberts, 2001). N ow the collapse o f the traditional parties has becom e a sort o f a puzzle for this institutionalist literature. In fact, Venezuelan parties had stable electoral bases, deep roots in civil society, legitimate political functions and strong internal organization. In other words they comply with those features that, according to this theoretical approach, should assure them a perm anent stability (M ainwaring and Scully 1995). In all these studies, the connection between the institutionalist fundam ental features and the oil rent distribution process is always missing. Nonetheless, this connection is the true nature o f the Venezuelan anomaly: an underdeveloped oil producer democracy. As the political and institutional crises unraveled, the econom ic system steadily increased its already high inefficiency and vulnerability to fluctuations o f oil prices. The state institutions began to fall apart to the point o f total inefficiency. Social behavior changed drastically and governance was completely disrupted. By 1997-98, the situation in Venezuela was no different to that o f the rest of the region, at least according to the perception o f the people, as shown by indicators o f cross-section measurements made at that time, to be analysed in the next section. 8.3 AGGREGATED GOVERNANCE INDICATORS K aufm ann, Kraay and Z oido-L obaton (1999) had developed certain governance indices to measure the relative performance o f each country in six main aspects that define governance: graft, rule o f law, regulatory burden, government effectiveness, political instability and violence, and voice and participation. Some o f the results cast doubts on the soundness of the criteria selected. Nevertheless, we think they give an idea o f the degree of deterioration of Venezuela’s governance during the crucial period o f the election o f H ugo Chávez. Political crises, social conflict and economic development 284 It is unfortunate that we do not have values of these indicators for the early 1980s that would allow us to compare how people perceived the country at that time when expectations were very optimistic. It is not unwarranted to say that probably, most o f the indicators would have placed the country in the upper quintiles and very far from the rest o f the region. But in Figure 8.2, that shows the 1997-98 results, it appears that except for voice and participation, where Venezuela scores among the upper 50 per cent o f the whole sample, in all the other indicators it shows a very poor performance. Particularly disturbing are the results in government effectiveness and graft, where the country is placed among the worst quarter. But after what we have said about the nature o f the Venezuela oil rent model, it should not come as a surprise. What once was a fairly good mechanism of distributing the state oil revenue among a backward population had degenerated into wholehearted graft. The effectiveness o f the government was so dependent upon the abundance o f oil financial resources that it almost disappeared completely when these started to drain. Control of corruption 1 Rule of law I Regulatory framework I Government effectiveness I Political stability/lack -------------------of violence --------------- --------- 1 1 Voice and accountability , 0 ~ 25 50 75 100 Percentage of countries with lower score N ote: G rey bars represent mean estimate for the percentile rank on each o f the governance indicators. The thin vertical lines represent standard errors around these estimates. Sources: Kauffman, Kraay and Z oid o-Lob iton (1999). Figure 8.2 A ggregate governance indicators f o r Venezuela Voice and Participation This index comprises a series o f variables that measure different aspects o f the political process such as civil liberties and political rights (Figure 8.3). They purport to determine: the degree o f citizens’ participation in the selection o f government, the independence o f mass media, government threatening pressures on private citizens, police ability to make unlawful Venezuela: from stability to turmoil 285 arrests o f citizens, freedom o f expression, and o f association. They also take into account the possibility for citizens to stand freely for public office and to win elections in a fair and transparent manner. Somewhat surprisingly Venezuela scores worse than Bolivia and Ecuador and better than Colombia and Peru among the Andean group and within the whole region her performance is inferior to that o f Argentina, Chile, Brazil and Costa Rica, but superior to M exico’s. High Sources: Kaufmann, Kraay and Zoido-Lobaton (1999). Figure 8.3 Voice an d participation These results are difficult to explain. They certainly indicate a strong deterioration o f the citizens’ participation especially after the failure o f the CAP administration and the subsequent events. But they probably reflect much more an increasingly pessimistic m ood o f the general population than a factual curtailment in traditional liberties. In fact, with the loosening o f the power o f traditional parties, som e liberties such as freedom of association and possibility for citizens to freely stand for public office and to win elections in a fair and transparent manner may have actually increased. The lagged effects o f an unfinished decentralization process have enhanced others, such as citizens’ participation in the selection of government. Locally elected officials such as provincial governors and local mayors have been a counterbalancing power to the deterioration o f the central government especially after 1992 and in some cases have been perceived as fundamental features o f a new governance model. The independence o f the press has clearly increased with the weakening o f the central governm ent. D uring every dem ocratic adm inistration 286 Political crises, social conflict and economic development there have always been a few major incidents o f government harassment o f the press. But those that occurred in the 1990s were fewer and minor compared with previous periods. Furthermore the independence of the press increased during the Caldera administration period. And by the time these measurements were taken, it was about to become the major political factor in the incoming elections. The press was on its way to become the principal opposition factor to Chávez’ regime, as we shall see later on. Government threatening pressures on private citizens and police ability to make unlawful arrests o f citizens must certainly have increased due to the degradation of institutions, especially o f the judiciary. The latter has always been the dark side o f Venezuelan democracy that even in the 1960s and 1970s performed no better than during military dictatorships. In spite of these considerations, this indicator is a clear signal o f the low point reached by the Venezuelan governance model in 1998. Political Instability and Violence This indicator gathers together a group o f variables that measures the probability o f a dem ocratically elected government being destabilized or ousted by unconstitutional procedures or violent means (Figure 8.4). Venezuela appears behind Bolivia, Argentina, Chile and Costa Rica but does better than the rest o f the Andean group countries, Mexico and Brazil. N ow these results were simply laughable before 1992, but in 1998 were puzzling. On the political instability side, the events after Chávez’ coup demonstrate the solid foundations o f Venezuelan democracy. The fact that Carlos Andrés Pérez was ousted through a legal procedure proved to be a step forward in the consolidation o f democracy. Another equally important case o f a further consolidation o f a democratic culture was the fact that Chávez was elected president with broad popular support and with the votes o f many people that opposed his coup attempt. Although political instability unquestionably increased during the 1990s, democracy has certainly deepened in Venezuela, up to the point that we can say that democratic institutions started to permeate deeply into the social fabric in this period. In the previous decades, the country enjoyed great political stability with a very shallow democracy; in the 1990s the situation was reversed. Probably this indicator continues a confusion between p o litica l instability and im perilm en t o f dem ocracy. It is true that often both situations go together, but this is not necessarily always the case. Political instability could endanger democracy only when it is the consequence o f an acute social conflict that cannot be alleviated by econom ic means and within truly egalitarian institutions; only then does political repression become the means to re-establish social cohesion. Normally, well-established and Venezuela: from stability to turmoil 287 authentic democratic institutions can survive a period o f strong political instability on condition that they are in fact true democratic institutions that allow the contending political subjects to properly convey their political will. When this is not so, then successful coups d’état or endemic guerilla movements are set in place. In Venezuela since 1958, both phenomena have been fleeting events and this is its outstanding feature, almost unique in the region with the only exception being Costa Rica. Coups d’état and guerrilla movements are two forms o f political violence that stem from the same source o f social inequality mediated by restrictive institutions that do not allow for proper participation in the political power of social subjects. Where coups d’état are recurrent and guerrilla movements are o f long standing, democracy is just a juridical fiction or a minority’s privilege. In m ost part o f Latin America this has been the case for too long. High Sources: Kaufmann, Kraay and Zoido-Lobaton (1999). Figure 8.4 P olitical in stability an d violence In Venezuela in 1998, there was not even the most remote possibility o f a coup d’état or the outbreak o f political violence of the sort described above. The political instability was mainly due to the uncertainty stemming from the fact that the two traditional parties were no longer viable options, and, as the elections approached, there was no clear definition o f new political forces with clear government programs, all the attention being concentrated in two figures created by the mass media that were as politically shallow as their images on the screen. Behind them, there lay a frantic regrouping of political forces that cut across all social strata with no clear political will 288 Political crises, social conflict and economic development but to bring about radical changes, those radical changes that Caldera had failed to accomplish. Their main contention with each other was a point o f style: the bleak political proposal o f the b ea u ty queen against the harsh rhetoric of the w arrior . Like in many developed societies, a strange paradox appeared here: the deepening o f democratic institutions in the social fabric seemed to go pari passu with a widespread infantilization o f personal and collective behavior. Therefore, it was all too natural that expectations were determined by the apprehension over an uncertain future. But we should notice that the whole situation developed with no violence. A drastic sentiment o f deep frustration and anger against a deeply corrupt system was conveyed through democratic channels in a highly civic manner. We found no other instance in Latin America of such a deep change in the political forces developed within the democratic institutions. Therefore, the electoral process o f 1998, like the institutional ousting o f Carlos Andrés Pérez in 1993, are benchmarks o f the deepening o f the democratic culture in Venezuela, in spite o f the fact that their immediate outcom es may be disagreeable and unquestionably increase political instability in the short run. Government Effectiveness This is an indicator that measures the people’s perception o f the quality of public services, the professional qualifications and performance o f public officials, the independence o f bureaucracy from political pressures and the ability of government to carry out credible policies. In this category, Venezuela scores as one o f the worst in the world and rightly so (Figure 8.5). There are historical reasons for this result such as the fact that nineteenthcentury civil wars never allowed for the consolidation o f a stable bureaucracy; that the national state institutions began to function properly only in the 1920s, when Góm ez unified the national administration by getting rid of local caudillos. More recently, the rise to power o f the middle classes in 1945, although it enhanced political participation, affected the quality of the bureaucracy. U ntil then, official posts were the privilege o f a rich minority that went into public services for reasons o f prestige and political interest rather than to improve their personal econom ic and social status, as was the case with the newcomers. In fact, this possibility became one o f the main features o f the oil rent distribution process. A certain bureaucratic inefficiency was a need and, at the same time, a consequence o f such a distribution. Its negative effects o f poor public management were usually com pensated by bigger expenditures made possible by abundance o f financial resources. The oil rent model did not foster efficiency in the public sector, on the contrary it made it worse even by Latin American standards. Venezuela: from stability to turmoil 289 High Sources: Kaufmann, Kraay and Zoido-Lobaton (1999). Figure 8.5 Governm ent effectiveness In other countries o f the region, the lack o f fiscal resources im posed a minimum o f efficient management that was dispensable in Venezuela. Having said that, we must recognize that, within the narrow Venezuelan boundaries in this matter, the effectiveness o f government was kept at acceptable levels until the end o f the 1970s. It was only with the Luis Herrera Campins government that the trend o f deterioration set in and afterward was accelerated by the deepening o f the crises until the entire public administration collapsed in the early 1990s. This widespread inefficiency o f the public administration is an important element in understanding the victory o f Chávez in the 1998 election. For one thing, this state o f collapse o f public institutions with very few islands o f efficiency, especially in the local administrations, helped to exasperate the reaction against a corrupt system and increased the willingness to see radical changes. For another, people got so used to such a state o f ubiquitous inefficiency and ineptitude, where anybody could perform any task with more or less the same results, that personal qualifications became totally irrelevant in most cases. This is the m ost striking characteristic o f the Venezuelan anomaly and only in such an environment is it possible for a man like Chávez to become a serious candidate and even win the election for president. What is relevant here is not that Chávez had no previous political training or experience in state affairs, since such a person reaching public office is neither an undesirable nor an uncom m on fact in a democracy; but the fact that Chávez has a sort o f cultural handicap that barred him from even the most 290 Political crises, social conflict and economic development elementary understanding o f the institutions and functioning o f a modern state. We call this cultural handicap nom adism which we shall analyse later on. In a less degraded political condition, he would have been sifted at the early stages o f his career by the system’s natural mechanism of selection, as appeared to be the case at even as late a date as 1996. Only in a society that has reached the conviction that anybody could do anything with more or less the same results, is it possible to have a man like Chávez as President. This speaks highly o f Venezuelan social openness and egalitarianism, but very poorly o f its appreciation o f effectiveness at all levels. This is probably the darkest consequence o f the oil rent model and the biggest challenge for the country’s future. Regulatory Burden The indicator in Figure 8.6 measures the impact o f regulatory policies that may interfere with the market mechanism or do not provide sufficient institutional support for its normal functioning. Price controls, excessive legal requirements, cumbersome permit procedures may considerably affect investment plans and place an unnecessary burden on the everyday business operations that foster bribery and other corrupt practices. On the other hand, lack o f adequate supervision and proper regulation o f the financial system may increase the financial fragility and the risk o f crises. Here Venezuela’s performance is inferior to the rest o f the Andean group countries and to other countries o f the region such as Brazil, Mexico, Argentina, Costa Rica and Chile. But these results should not be surprising after what we have just said on the collapse o f the public administration. It is worth noticing that one o f the very few positive effects o f the reforms initiated in 1989 was the general reduction o f the regulatory burden caused by price control, import and export permits and the like. On the other hand, the cumbersome bureaucratic procedures worsened even more with the progress o f institutional collapse. One o f the biggest flaws o f that reform program was that it left out the financial system. Moreover, the Carlos Andrés Pérez government increased cronyism in this sector and did nothing to improve its supervision. During this period, insider trading and other unlawful and risky practices increased and traditional poor banking management became even poorer, while almost every major business group tried to establish its own bank. This, together with the high interest rates that became even higher during the institutional crises was conducive to the financial crises that began in December o f 1993 until July 1994. It was only then that efforts were made to set in place an adequate system o f supervision. Venezuela: from stability to turmoil 291 High Sources: Kaufmann, Kraay and Z oid o-Lob iton (1999). Figure 8.6 R egu latory burden Rule of Law The purpose of this indicator is to measure the degree of people’s confidence in the existing rules and laws. The estimation is made by surveying a sample of opinions on the effectiveness o f existing institutions in enforcing the law and in solving conflicts and disputes. In particular, it is the judicial system that com es under scrutiny and other law enforcement agencies as well. All the Andean countries are below the average o f the whole sample and Venezuela is better placed than Ecuador and Colombia (Figure 8.7). The weakness o f the judicial system is a com m on feature o f all Third World and non-democratic countries, and even highly developed societies show serious shortcom ing in the quality o f justice they deliver. But generally speaking, citizens o f developed countries feel confidence in their justice system and law enforcement agencies. The justice system is the Achilles’ heel o f modern democracy because it implies a level o f citizens’ consciousness and political freedom yet to be achieved anywhere. In the case o f developing countries, this set o f institutions is the m ost difficult to coat with the formalities o f a nominal democracy. It is here where the most serious limitations to the existence of a truly democratic society are blatantly revealed. Venezuela is no exception to this. But the oil rent model gave an additional reason for failure in this area. The ruling agreement between the two major parties provided for a sharing in the nomination o f judges on political sympathy lines. Therefore even in the best phase o f the model, the Political crises, social conflict and economic development 292 High Sources: Kaufmann, Kraay and Z oid o-Lob iton (1999). Figure 8 .7 R u le o f law judicial system was highly inefficient and arbitrary. Much more efficient, but equally arbitrary has been the police’s performance, while the Venezuelan prison system remains absolutely unacceptable: a true scandal for a civilized society. It is here and not in the other more ideologized issues, comprised in these indicators, that the otherwise almost ‘perfect’ democracy model reveals its true barbarian nature and its deep underdevelopment. 8.4 A BRIEF REVIEW OF THE VENEZUELAN ECONOMY A s was already m entioned, it is not possible to analyse the Venezuelan econom y without understanding the deep impact that oil has had in the main areas o f the economy. For example, in 1990-99, a period in which average real oil prices reached $16.9 per barrel for the Venezuelan mix, oil contributed about 25 per cent of total GDP, and accounted for more than 70 per cent o f total exports, while government oil revenues represented 59 per cent o f total fiscal revenues. The unpredictability and volatility o f oil prices make the tasks o f policymakers in Venezuela very difficult, and traditionally the econom y has been ill-equipped to deal with oil shocks. Table 8.2 shows the impact o f oil in the external, fiscal and real sectors during the periods 1970-79, 1980-89 and 1990-99. It is interesting to notice that although oil continues to be very important in all areas o f the economy, its share Venezuela: from stability to turmoil 293 in the fiscal and the external sectors has declined since the 1970s. This is confirmed by the deterioration o f oil exports per capita which reached a historical maximum o f $2795 per person in 1974 and declined to $635 per inhabitant in 1999. Table 8.2 O il im pact on the Venezuelan econom y Indicator (average) Oil Oil Oil Oil Oil fiscal revenues/GDP fiscal revenues/Total revenues exports/Total exports exports/GDP GDP/Total G D P 1970-79 1980-89 1990-99 15.1 70.1 87.4 23.0 31.3 13.2 60.7 82.2 21.2 20.0 11.4 59.0 71.1 20.5 24.5 Therefore, in periods o f oil booms, the economy grows faster, the fiscal accounts usually reach surpluses or manageable deficits, and the external position is strong. On the other hand, when oil prices are low, the economy is usually stagnant, the current account is in deficit and the fiscal accounts become a serious problem for the government. In 1998, a M acroeconomic Stabilization Fund (FIEM) was established to smooth out the fiscal effects of oil shocks. Unfortunately, the new authorities almost immediately modified this mechanism to accommodate the government’s fiscal and investment needs, making it less useful as a stabilization tool. A s it can be seen in Table 8.3, the problems for the Venezuelan economy started in the 1980s. From the 1950s and until the 1970s the country enjoyed high G D P growth rates with low inflation, and in general current account and fiscal surpluses. However, during the 1980s G D P growth began to slow down and became very volatile, inflation surpassed double digits and the fiscal situation began to deteriorate rapidly. Also, unemployment and exchange rates showed higher volatility than in previous periods. The main explanation for the change from econom ic stability to econom ic volatility were the huge positive oil shocks that hit the economy in the 1970s. During the 1980s the oil shocks were m ostly negative which caused a marked deterioration in the m acroeconom ic conditions and ended with the first failed attempt at stabilization in 1989. As was mentioned earlier, neither the institutions nor the society were ready or equipped to deal with the volatility caused by the succesive oil shocks o f the 1970s and 1980s. Of course, the econom ic policies that worked so well during stable times were unable to cope with a new reality o f instability and volatility. 294 Political crises, social conflict and economic development Table 8.3 S u m m a ry o f m acroeconom ic indicators In d ic a to r (average) Real G D P growth (%) Consumer prices (% o f period) Current account balance (% o f G DP) Central government fiscal balance (% o f G DP) Venezuelan real oil price mix ($ per barrel) Sources: 1951-60 1961-70 1971-80 1981-90 1991-2000 7.9 6.0 4.2 0.7 2.1 1.9 1.0 8.5 25.0 44.8 -0 .7 2.6 2.0 1.9 2.9 n.a. 0.2 1.2 -1.3 -1 .7 13.3 9.4 28.1 32.3 16.8 International M onetary Fund (IM F ) and Central Bank o f Venezuela (B C V ). D uring the 1991-95 period, several shocks continued to affect the econom y and the policy responses to those shocks only exacerbated the period’s volatility. Declining oil prices, political instability and a massive banking crisis in 1994 were some o f the features that characterized the first part o f the decade. In 1996, the government started a stabilization and reforms program called Agenda Venezuela which was supported by the IM F and which enjoyed some short-lived successes. But in 1997 following the political cycle, the government decided to implement expansionary fiscal and income policies and later on eased monetary policy. This did not help to reduce inflation, but econom ic activity expanded as a consequence of the increase in public expenditure. A negative oil shock, caused by a sharp drop in prices at the end o f 1997 and the beginning o f 1998, produced a change in expectations for the worse, and the pressure on the bolívar mounted. The years 1998 and 1999 were very disappointing in terms o f econom ic growth due to low oil prices. The negative conditions in oil markets also caused important fiscal deficits for the central government. The external position worsened in 1998 when the average oil export price was $10.6 per barrel, and improved in 1999 when oil prices started to rise and reached an average o f $16.1. However, oil prices skyrocketed in 2000, reaching $25.9 per barrel for the Venezuelan oil mix and the econom y started to grow, although moderately given the magnitude o f the positive oil shock. As was expected, the external accounts turned around and a considerable current account surplus was attained together with an important accumulation o f international reserves. In 2001, oil prices started to decline, negatively affecting growth and fiscal and the external accounts as well. It is interesting to note that, during most o f the decade, inflation was high due to a loose Venezuela: from stability to turmoil 295 monetary policy and backward-looking indexation. However, starting in 1999, and thanks to a very strong external position, the government began to use the exchange rate as a nominal anchor, reducing inflation to less than 20 per cent in 1999 and 2000. The Real Sector of the Economy As we should expect o f an econom y based on oil rent, we find a close correlation between oil prices and G D P growth (Figure 8.8), especially oil GDP, which represents around 25 per cent o f total GDP. But in recent years the nature o f this correlation has changed radically. The evidence shows that oil prices and G D P growth have a weaker correlation now than in the past, suggesting that positive oil shocks do not contribute to G D P expansion as they used to do. This clearly shows the exhaustion of the oil rent model. That is not to say that oil prices have no effect on the economy. We can clearly see that the drastic drop in prices in 1998 accelerated the downturn, as the subsequent rise helped the country to come out o f the deep recession. But this was due primarily to the magnitude o f the price variation. fu t V3 m Year Source: 0 BCV. Figure 8.8 O il p ric es an d G D P growth This reduction o f the impact o f oil revenue on growth began, as we have already said, at the end o f the 1970s when private investment practically stopped and total factor productivity, G D P per worker and capital per 296 Political crises, social conflict and economic development worker have been declining steadily since then (Baptista 1997). The consequence o f this has been a tendency to stagnation o f the tradable sector o f the economy, with a short-lived period o f recovery depending on the government’s econom ic policy. G D P growth has been declining decade after decade. In the period 1951­ 60 G D P grew at an average o f 7.9 per cent annually, while in the period 1961-70 grew at 6.0 per cent. In spite o f two huge positive oils shocks during the 1970s, average G D P growth reduced to 4.2 per cent in the period 1971-80, in part due to the incapacity o f the economy to absorb the huge am ount o f resources, and the beginning o f great volatility in the main macroeconomic variables. More recently, the economy has grown even less, reaching an average o f 0.7 per cent in the period 1981-90, although there was a timid recovery in the period 1991-2000 when the econom y grew on average at 2.1 per cent annually. D ue to the strong correlation between output and employment in the case o f Venezuela, unemployment has been low in periods o f G D P expansion and has increased during recessions. Lately, unemploymnet rates have been higher than the historic mean, which could suggest increasing rigidities in the labor market or som e kind o f hysteresis behavior. Because Venezuela is a small open economy, we also observe that the behavior o f real variables corresponds with what many m odels o f an open econom y w ould predict. For example, there is not a strong correlation between aggregate demand and output, but there is a strong correlation between aggregate demand and non-tradable output. Output o f tradable goods is closely correlated with imports. In 1997, the econom y grew 6.4 per cent fueled mostly by investment and production expansion in the oil sector that grew 9.4 per cent in a positive oil market environment. The non-oil G D P also expanded 5.3 per cent coming out o f a recession in 1996 and the beginning o f 1997. The forces behind the good performance o f the non-oil econom y were the dynamism o f the non-tradable sector especially construction and trade. A combination of an increase in real wages, an increase in credit to the private sector, an expansionary fiscal policy and low interest rates spurred the expansion in the non-oil economy. The situation was reversed in 1998 and 1999 when G D P growth fell to 0.2 per cent and -6,1 per cent respectively, owing to the deterioration in oil prices and the uncertainty caused by the election that, as we shall see later, this time implied the collapse o f the old political system. In 1999, the lack o f private sector confidence in the new administration of President Chávez, the rise o f real interest rates during most of 1998, and cuts in oil production caused G D P to decrease 6.1 per cent and unemployment to increase to 15 per cent. During 2000, the Venezuelan econom y grew m odestly at 3.2 per cent, driven mostly by an increase in public expenditure made possible by the Venezuela: from stability to turmoil 297 hike in oil prices. It is important to note that unlike other positive oil shocks, this time private expectations did not show a boost as they usually did in previous boom s, insulating the private sector from the oil bonanza. This explains why the economy did not grow faster. The extremely poor reaction from the private sector was due to two main factors. First o f all, we have already mentioned the reduction o f the efficiency o f the oil revenue impact on the economy. This is mainly due to the fact that fiscal expansion has an extremely low public investment com ponent and additionally this time did not spur private sector investment either. M ost o f the fiscal expansion fueled the use o f available production capacity and imports. Secondly, this time there was another factor the tended to thwart even this minor response from the private sector: Chávez’ mass media performance, o f which we shall speak later. Oil prices started to decline in 2001, and OPEC decided to implement several production cuts. This situation worsened after the incident of September 11 in N ew York. A s a result, econom ic activity decelerated to a growth rate o f only 2.7 per cent. Again, the poor result in terms of econom ic performance was explained mainly by the loss o f dynamism o f the oil sector which decreased 0.9 per cent. On the other hand, the non-oil econom y grew 3.8 per cent, driven by construction activities associated with increasing public expenditures, the communication sector and manufacturing. Unem ploym ent has declined slightly, yet remains at very high levels compared with the recent historical average. There is some evidence that the high unemployment experienced in the last five years is related to the failure o f hundreds o f small and medium businesses caused primarily by the overvaluation o f the exchange rate and high interest rates. As a result, the proportion of the labor force employed in the informal sector has risen dramatically, reaching more than 50 per cent o f the labor force. The Exchange Rate, Inflation and Monetary Policy Traditionally more than 90 per cent o f foreign exchange comes from the oil and other state-owned enterprises, that are obliged to sell their foreign exchange receipts from their operations abroad to the Central Bank. Therefore, Venezuela seemed to be a natural case for fixed parity. At least this has been the prevalent view on the subject and it was quite consistent with the oil rent model. Since oil exports are not sensitive to the exchange rate, a fixed parity covering a moderate real appreciation o f the real rate was thought to be beneficial for the import of capital goods and an efficient way to protect personal real income. Both targets were consistent with the goals o f the import substitution that needed cheap capital goods and a relative high demand for consumer goods. In fact, Venezuela had long periods of Political crises, social conflict and economic development 298 fixed exchange rates until 1983, when the country started to experiment with multiple exchange rates, floating, crawling pegs and bands. U ntil oil revenue was stable, the domestic demand for foreign goods was small in relation to this revenue and the dom estic production was little diversified; this seemed to be a sound policy. But in the 1980s when the oil market became highly unstable, the domestic demand for foreign goods outgrew the oil revenue inflows and domestic production could not diversify its supply o f export goods, which made the fixed parity policy increasingly costly. On the other hand, the experiment with a freely floating rate in the early 1990s proved to be even more costly. It forced an unusually high rate o f interest that had a very negative effect on the real econom y and was a major factor in the outbreak o f the financial crisis in 1993, while the benefits o f the export o f non-traditional goods did not com pensate for this shortcoming. So after the ill-fated foreign exchange control established in July 1994 to cope with the financial crises, in 1996 there was put in place a system o f bands around a central parity that is adjusted daily. Starting in 2002, the rate o f annual devaluation was set to 10 per cent and the width o f the band to 7.5 per cent on each side o f the central parity. Since this system was im plem ented, the Central Bank policy has been to keep a sm ooth path for the exchange rate and a depreciation rate below the one originally announced. As a result, there has been an important appreciation o f the real exchange rate in the last five years. This can be seen in Figure 8.9. Source: Clement and Puente (2001). F igure 8.9 R e a l effective exchange rate Venezuela: from stability to turmoil 299 The use o f the exchange rate as a nominal anchor has helped to reduce inflation, but at the cost o f losing competitiveness in the tradable sector of the economy, especially in the manufacturing sector. The consumer price index (CPI) annual change dropped to 12.3 per cent in 2001, an improvement compared to the average annual level o f more than 44 per cent that existed in the period 1991-2000. Inflation was more volatile in those years following the devaluation o f the bolívar, for example in 1996 it reached 103.2 per cent. Even though in years o f fiscal expansion there have been domestic demand pressures on prices, the appreciation o f the exchange rate has been more than enough to compensate for them. D ue to the way the Central Bank has administered the band system and the limited scope for monetary policy, interest rates are relatively independent of Central Bank policies and monetary variables have been, for the m ost part, endogenous. In general previous to 1992, real interest rates were low and even negative when the external position was strong and there were not excessive pressures on the bolívar. But whenever oil prices declined and the fiscal and external positions deteriorated, as happened in 1993-94 and more recently in the last part o f 2001, real interest rates tended to increase at very high levels, negatively affecting private econom ic activity. For example in 2000, a year o f high oil prices and a comfortable external position, the average real deposit rate was -1 .8 per cent while in 2001 it was 3.2 per cent. Regarding money, as measured by M2, it is interesting to note the sharp reduction in 2001. In Table 8.4, which shows the main monetary indicators in the five years 1997-2001, we can observe that M 2 decreased 5 per cent in 2001. The main explanation for this outcome has been the massive capital outflows that occurred in 2001 as a result o f lack o f confidence in the government policies undermined mainly by President Chávez’ inflammatory political rhetoric. A t the end o f 2001, as the oil price decreased and foreign reserves deteriorated, increasingly higher expectations o f a sharp depreciation of the bolívar started to develop, adding even more pressure to capital outflows. In addition, the Central Bank kept a very tight monetary policy during 2001 through open market operations, which reduced money in circulation and pushed interest rates upward. In this scenario, the banking system may face problems if high real interest rates and im portant capital outflows persist as they did under a similar situation in 1993. N onetheless, the financial system has grown stronger after the banking crisis in 1994. It has gone through a process o f capitalization, mergers and acquisitions, with a better supervision that has improved the health o f the system. However, demonetization o f the economy due to increasing fears o f devaluation and/ or capital controls and prospects o f low growth in the near future may pose serious risks to the system. A t this time, the banking system is adequately capitalized, but non-performing loans have started to rise and may signal a Political crises, social conflict and economic development 300 gradual deterioration o f the banking system. Indeed, the capital adequacy ratio increased from 12.5 per cent in 2000 to 13.6 while non-performing loans as a percentage o f the total loan portfolio went from 16.8 per cent in 2000 to 19.8 per cent in 2001. Table 8.4 Sum m ary o f m on etary an d banking indicators Indicator 1997 1998 1999 2000 2001a M 2/G D P (%) M 2 (annual variation %) Average nominal deposit rate (%) Average nominal lending rate (%) D om estic credit (annual variation %) Capital adequacy ratio (%) Non-performing loans (% o f total loans) 20.1 62.5 13.1 24.4 23.3 12.4 9.0 19.4 20.4 18.6 19.8 35.7 19.7 47.8 32.5 26.1 12.1 14.2 13.2 14.9 20.4 N ote: 21.1 18.5 27.8 -5.1 14.9 14.2 24.5 24.6 15.8 7.2 12.5 13.6 16.8 19.8 (a) Preliminary. Sources: International M onetary Fund (IM F ) and Central Bank o f Venezuela (B C V ). The External Sector Venezuela’s dependence on oil exports has made it possible for the country to enjoy a positive balance on current account for long periods o f time, contrary to what is the usual feature for an underdeveloped economy. This fact was certainly a major factor contributing to a stable free exchange rate. But starting with the first oil boom the sensitivity o f the current account balance to oil price fluctuations increased substantially. The main reason for this was that the sudden hike in oil prices boosted imports at an accelerated rate that reduced the surplus drastically even before prices began to decline. Both boom s, o f the 1970s and early 1980s, ended in a huge deficit when prices declined moderately. After the second boom , the devaluation o f 1983, the implementation o f multiple exchange rates and import regulations helped to eliminate the deficit. But even with these drastic measures the government was unable to maintain a current account surplus for more than three years. After that, the new Lusinchi administration’s expansionary policy, according to the rule o f the political cycle, caused a strong deficit during 1986-88, in spite o f all the restrictions and regulations, that drained all the foreign reserves at the end o f 1988. The subsequent liberalization revealed an econom y with an underdeveloped non-oil export base due to low diversification. Venezuela: from stability to turmoil 301 This basically means that in times o f oil bonanza, there is a substantial increase in oil exports and, as a result, a surplus on the current account. In times o f negative oil shocks, the opposite happens. Figure 8.10 shows the evolution o f the current account balance as a percentage o f G D P for the period 1951-91. 1.80 0.600.30 Source: o o o BCV. Figure 8.10 Current account balance Venezuela’s external vulnerability is also reflected in its dependence on the U S market. Exports to the U S in the recent past represent more than 50 per cent o f total exports and Colom bia is a distant second with around 6 per cent o f total exports. M ost o f the exports to the U S are oil-related which make Venezuela highly sensitive to American econom ic cycles. As for the other aspects o f the balance o f payments, it is important to notice the the capital account reflects the degree o f confidence in Venezuela that goes far beyond mere distrust o f short-run government policies. It is a known fact that capital outflows are a long established trend o f the Venezuelan economy, but in recent years this trend has been aggravated by the uncertainty generated by the political instability. Fortunately Venezuela’s external debt is relatively low as compared with international standards, reaching 28 per cent o f G D P in 2000. It is a debt that can be managed from the point o f view o f foreign exchange availability. Its negative effects are much more serious as far as the budget is concerned. The negative effects of the political instability and governance deficiencies during the five years to 2001 were partially neutralized by the oil revenue 302 Political crises, social conflict and economic development as reflected in balance o f payments results. Table 8.5 shows that in 1996, a very large increase in oil exports, caused by high oil prices and production expansions coupled with sluggish imports due to weak domestic demand, resulted in a current account surplus o f 13.5 per cent o f G D P compared with a deficit o f 3.5 per cent o f G D P in 1995. Meanwhile, the capital account deficit declined owing to higher flows o f F D I (related to privatizations and private oil sector investments). The government continued to repay external debt in net terms, and short-term capital outflows were reduced as a result o f increasing confidence and high real interest rates. The situation turned around in 1998 when the surplus on the current account shifted to a deficit o f 3.4 per cent, but in 1999 the recovery o f oil prices and the sharp decline in imports resulted in a current account surplus o f 3.5 per cent. Despite huge capital outflows in 1999, due to political uncertainty, net international reserves increased by $800 million, reaching $14.4 billion at year’s end. In 2000, oil prices continued to rise and the external position o f Venezuela strengthened. Despite a huge current account surplus, net international reserves did not accumulate further due to heavy capital outflows. This was mainly due to the high country risk as measured by Brady Bonds spreads. Venezuela was second only to Ecuador that defaulted on its external debt. However, an important amount o f foreign assets were accumulated in the M a croecon om ic Stabilization Fund ( F I E M ) which together with the net external reserves reached more than $20 billion. D uring 2001, the current account surplus was markedly reduced due to a drop o f oil exports o f around 22 per cent and an increase o f imports o f more than 17 per cent. A s we can see in Table 8.5, oil exports fell to $21 710 million in 2001 from $27 885. This was the result o f the price o f the Venezuelan oil mix reduction that reached an average o f $25.9 per barrel in 2000 and 20.3 in 2001. On the other hand, the combination o f an appreciated real exchange rate and the moderated growth o f the economy caused imports to increase by almost $2 billion. A s in 2000, during several times in 2001 there were important speculative attacks against the bolívar that resulted in an important decline o f net international reserves, which fell to $11.8 billion in 2001 from $15.8 billion in 2000. Prelim inary data from the Central Bank indicate that capital outflows reached around $9.7 billion. The massive capital outflows were the result o f uncertainty with respect to the econom ic strategy o f the government, especially on the fiscal front. It is worth noting that in 2001 foreign direct investment ( F D I ) flows fell to $2.6 billion from $4.4 billion in 2000. M ost o f the F D I flows that entered the country in these two years were associated with investments in the telecommunications and oil sectors. The important reduction in F D I flows is related to political noise and the uncertainty regarding recently approved laws. Venezuela: from stability to turmoil Table 8.5 S u m m a ry balance o f p a y m e n ts (U S $ m illion) Category Merchandise exports Merchandise imports Trade balance Balance on services, income and transfers Current account balance Equity investment, net Direct investment Portfolio flows Lon g and short-term 1997 Reserves excluding gold ( - = increase) 1998 1999 2000 2001 23 703.0 17 576.0 20 819.0 33 035.0 27 056.0 -13 678.0 -15 105.0 -13 213.0 -15 491.0 -17 282.0 2 471.0 10 025.0 7 606.0 17 544.0 9 774.0 -6 558.0 3 467.0 5 542.0 5 036.0 506.0 capital, net -4 957.0 Capital account balance 585.0 Errors and omissions, net -1 462.0 Sources: 303 -2 590.0 -5 724.0 -3 917.0 -4 433.0 -3 253.0 3 689.0 13 111.0 4 128.0 5 551.0 1 939.0 4 262.0 -5 379.0 4 395.0 2 924.0 2 669.0 4 357.0 1459.0 -2 418.0 2 595.0 329.0 -3 825.0 -6 512.0 -4 729.0 1726.0 -2 384.0 -2 790.0 -1 442.0 -990.0 -4 503.0 -4 871.0 -1 947.0 -4 882.0 1289.0 2 969.0 -315.0 -5 818.0 2 434.0 IM F , B C V and IIF. The Fiscal Accounts A s in the case o f the external sector and given that the state is the owner and administrator o f the oil rent, the fiscal result is basically determined by the oil market performance. This means that in times o f high oil prices there w ill be observed, in general, a fiscal surplus, while when prices are low a deficit probably emerges. One o f the characteristics o f the oil rent model is that most o f the distribution o f revenues is done through the budget. Before the oil shocks o f the 1970s, it was a fairly simple process to distribute oil revenues among different groups. However, as the oil rent faded and society became increasingly complex, the distribution process started to break down either fo r lack o f resources or for failure to reach important parts o f the population. Also, ‘white elephant investment projects’ and the use o f public institutions as a means o f generating employment drained an important amount o f resources and made the budget even more inflexible. Figure 8.11 shows the evolution o f the central government fiscal balance as a percentage o f G D P for the period 1961-91. Fiscal m anagem ent is p robably the hardest task fo r V enezuelan policymakers. A s already mentioned, fiscal revenues depend heavily on oil prices and production. N o n -oil tax revenues, although they have increased in Political crises, social conflict and economic development 304 8 6 4 2 Ph 0 § ^ 01 2 2 TJTJ IF nn JO -4 -6 -8 -10 r H ( T ) i r ) h ( ? \ H ( Y ) i r ) h a \ ^ C r i i r i h ( ? \ r 4 ( r ) I O h a \ r H \ D ^ D ^ D ^ D ^ D t ^ t ^ t ^ t ^ t ^ Q G Q C 0 C 0 C 0 C O \ O \ O \ O \ G \ a C\C\C\C\C\C\C\C\C\C\C\C\C\C\C\C\C\C\C\C\ F igure 8.11 o C entral governm ent fis c a l balance the last few years as a proportion o f G D P, continue to be one o f the lowest in Latin America. There is also widespread income tax and V A T evasion. In addition, the budget is extremely rigid with many revenues earmarked for specific purposes. On the expenditure side, most o f the budget allocations are to pay wages and salaries and public investment has been reduced to very low levels. However, as can be seen in Figure 8.12, public expenditures are o f the order o f 20 per cent G D P, which is below the average for Latin A m erica. There have been several unsuccessful attempts to reform the fiscal institutions, which are among the less developed o f Latin America. Recently, a set o f new laws aimed at diversifying revenues and adding more flexibility to the budget have been approved and other measures are still under discussion in Congress. Table 8.6 shows the main fiscal accounts o f the central government. Tax collection has improved considerably since 2003. A key feature o f the Venezuelan budgetary process is its lack o f credibility. In many cases, assumptions regarding revenues are overly optim istic and expenditures are underestimated, which in turn causes a misleading im pression o f the fiscal stance. F o r example, the N a tio n a l Assem bly approved the 2002 budget in N ovem ber 2001. K ey budgetary assumptions are: (i) 4.1 per cent econom ic growth; (ii) 2.87 million b/d oil production; (iii) $18.5 a barrel average oil price; and, (iv ) 4.3 per cent fiscal deficit. These assumptions appear to be overly optim istic given that econom ic growth during 2001 was 2.7 per cent and it is expected to be close to zero Venezuela: from stability to turmoil 305 40 30 Pl h 8 20- 10 0 X S o ~o U p4 p4 5 i) P - 1 » O 3 a £ a ^ ão -- *rt X t S a e 2 W O OT 3 a U ^ -5 rs Source: O AEF. F igure 8.12 G overnm ent expenditure in 2002. Furthermore, the budget assumes that oil production w ill exceed, by 300,000 b/d, the O P E C quota reduction agreed to by Venezuela, and the price o f oil w ill trade significantly higher than current levels. The 2002 budget also exemplified the rigidity o f public expenditures. Approxim ately half o f the budget is composed o f non-discretionary spending, primarily mandatory federal, state and municipal transfers such as education (14.8 per cent), social security (10.1 per cent), health (6.6 per cent), defense (6.5 per cent), housing (3.5 per cent) and governm ent (3.2 per cent). Rising Table 8.6 C entral governm ent fin a n c ia l operations (p er cent o f G D P ) 1997 Total revenue Current revenue Oil revenue Incom e tax Royalties P D V S A dividends N o n -o il revenue Capital revenue Total expenditure o/w interest payments Overall surplus or deficit ( - ) Sources: IM F , B C V and IIF. 1998 1999 2000 2001 23.0 23.0 13.3 7.3 3.7 2.3 9.8 0.0 21.1 2.4 16.4 16.4 16.6 16.6 6.3 2.1 19.6 19.6 10.0 4.3 4.2 1.4 20.4 20.4 1.9 6.2 1.9 2.3 2.0 10.2 0.0 20.5 2.4 -4.1 2.6 1.6 10.3 0.0 19.1 2.7 -2.5 9.6 0.0 21.2 9.8 2.8 3.2 3.8 10.6 0.0 24.5 2.5 -1.6 2.9 -4.0 306 Political crises, social conflict and economic development year-on-year personnel costs (27.2 per cent), which account for 16 per cent o f all government spending, underscore the large and expanding role o f government within the economy. In 1996, the fiscal stance o f the public sector strengthened due to a major increase in oil revenues and oil production. But there was also a decrease o f the non-oil deficit, and the virtual disappearance o f financial assistance to the banking system, which represented 16.5 per cent o f G D P in the 1994-95 period during the banking crises. However, in 1997 fiscal policy became expansionary and fiscal accounts shifted from a surplus o f 7.2 per cent to a surplus o f 1.9 per cent. Wages were increased by close to 117 per cent which in turn caused the central government’s wage bill to expand by 1.25 per cent o f GDP. A s a result o f the huge wage increase, transfers to regional governments by the central government increased significantly. The sharp reduction o f oil prices in 1998 caused a swing from a small surplus in 1997 to a considerable deficit o f 4.1 per cent in 1998. In 1999, an increase in oil revenue and the effort by the government to cut expenditure, principally during the first h alf o f the year, improved the overall fiscal position o f the consolidated public sector. The fiscal situation was relatively solid in 2000 when oil prices skyrocketed, but expenditure increased markedly. The consolidated public sector reached a surplus o f 2 per cent o f G D P. Nonetheless, 2001 was characterized by lower oil prices and oil production cuts to comply with O P E C agreements. In addition, public expenditures rose to 24.5 per cent o f G D P in 2001 form 21.2 per cent in 2000 mainly due to salary increases, higher interest payments and higher expenditures associated to welfare programs. L ow er oil revenues coupled with higher expenditures resulted in a central government deficit o f 4 per cent o f G D P in 2001. A recent trend has been increasing interest payments related to a rising dom estic public debt. Th erefore revenues declined, but prelim inary data shows that public expenditures remained at levels similar to 2000, which caused an important deficit for the consolidated public sector. G iven that the main pro-growth strategy o f the current administration has been the use o f expansionary public expenditures, further fiscal deterioration was to be expected in 2002. The administration’s current strategy at the time o f writing tends to prefer more emphasis on internal financing and less on external financing. A s a consequence, the external public debt has decreased steadily and the internal debt has increased keeping total debt relatively unchanged. In Figure 8.13, it can bee seen how although the total public debt as a percentage o f G D P has been around 29 per cent in 1997-2001, the composition has changed. In 1997 domestic debt as a percentage o f G D P was 4.5 per cent while in 2001 it reached 10 per cent o f GDP. Venezuela: from stability to turmoil O Public external debt H Public domestic debt 35„ Pl h 307 3025 c N J0i £7 15 10 5 0 1997 1998 1999 2000 2001 Year Source: B C V and IIF Figure 8.13 P ublic debt Rising debt service costs, which account for 24.6 per cent o f all expenses, increased by 24.1 per cent year-on-year to $8.4 billion, a strong signal that current and recurring expenditures were being financed primarily through the ‘rolling over’ o f public debt. This, in combination with the fiscal deficit o f 8 to 9 per cent, could potentially propel Venezuela into a vicious downward spiral, whereby debt issued to finance expenditures results in larger debt payments, which in turn, forces the government to issue increasingly larger amounts o f debt. In addition, the increasing amount o f domestic debt could have caused higher interest rates, given that the market is not w illing to take risky government paper. Poverty and Income Distribution Perhaps the most dramatic effect o f the collapse o f the oil rental m odel has been the gradual empoverishment o f the Venezuelan people. In 1970, exports per capita were $594, and in 1974 they reached $1844 due to the first oil shock. In 1997, exports per capita were even lower than in 1979 when they totaled $527. However, the oil resources helped to finance important improvments to the health and the education sectors. For example, the infant m ortality rate (under 5, per 1000 live births) was 61 in 1970 and reduced to 25 in 1998, while the illiteracy rate (percentage o f people aged 15 and above) went from 23.5 in 1970 to 8.0 in 1998. M ore recently, poverty and income distribution indicators have been worsening steadily. Political crises, social conflict and economic development 308 According to data from the official household survey produced by the National Institute o f Statistics (IN E ), Venezuela is a very unequal country. In 1999 the top 15 per cent o f households obtained more than 40 per cent o f total household income, while the bottom 70 per cent acquired less than 40 per cent. Incom e inequality increased markedly during the 1980s, but has kept constant since the mid-1990s. A lthou gh there are several sources o f poverty data, many o f them report very different outcomes. IN E reported that the proportion o f people living below the poverty line average around 46 per cent during the period 1995-98. People living in extreme poverty totaled 22 per cent o f total population. A s was mentioned earlier, people in the inform al sector are around 50 per cent o f the total labor force. The allocations in the budget for health, education, housing, and social programs (which comprise social expenditures) increased to 9 per cent o f G D P in 2000 from an average o f 6.8 per cent during the 1996-98 period due mainly to increases in the education budget. The anti-poverty strategy o f the government in the last several years has been centered on the Unified Social Fund (F U S ) which manages several anti-poverty programs and the Plan Bolívar 2000 administrated by the military, which pursues generation o f employment through small infrastructure projects. It seems that these programs have not been sufficient to reduce poverty because preliminary data shows that total poverty and extreme poverty might have increased recently (see Figure 8.14). □ Total H N ot extreme O Extreme 60 H 50 40 % 30 20 10 0 1998 1999 Year Source: UCAB. Figure 8.14 P overty in Venezuela (p er cent o f p o p u la tio n ) 2000 Venezuela: from stability to turmoil 8.5 309 GOVERNANCE AND ECONOMICS: THE MAIN LINKS IN THE VENEZUELAN CASE Governance affects in many ways the performance o f a country’s economy. Venezuela is no exception, and previous sections have highlighted some o f the negative consequences caused by p o o r governance in the case o f Venezuela. For example, the fragmentation o f the political system, shown by the voice and participation indicator, has made it much more difficult to implement reforms. A fte r 1992, the bipartisan control o f the Congress m ajority was lost and it became increasingly difficult to pass new laws without considerable delays. In addition, in those cases where reform projects were able to pass through, they were subjected to so many amendments to satisfy different interest groups that they failed to accomplish their objective. In such an environment it is very difficult to maintain a steady and coherent econom ic policy. The uncertainty that derives from this situation induces investors to prefer to take an approach o f wait-and-see, causing important delays for new projects. A n example o f the negative effects o f high political fragmentation has been fiscal reform in Venezuela. Despite the fact that there appears to be agreement on the need for diversification o f oil revenues, several tax reforms have been insufficient to solve the fiscal gap and the budget still depends heavily on oil prices. A n d what is even worse, given the decreasing returns o f the oil rental model, the budget has become very difficult to manage even with high oil prices, as shown by the present situation. A t the time o f writing, Venezuela faces one o f the deepest fiscal imbalances in recent history. H ow ever there have been important delays in approving key fiscal reforms such as the reduction o f exceptions to VAT, the approval o f a fiscal responsibility law which defines better tax responsibilities between the central government and the local states, and social security reform. W ith regard to political instability and violence, until 1989 Venezuela did not have any significant problems. A s was mentioned, the country has not had a history o f political violence and guerrilla movements as in other Latin American countries. However, with the deterioration o f institutions and the impoverishment o f the country, common crime has grown substantially and is more important than political violence. This has caused larger transaction costs fo r the private sector due to increasing security expenditures. M any companies have to spend heavily on security in order to keep their operations going. In fact, there is evidence o f foreign firms that have decided to leave the country due to safety concerns and probably many investments have been postponed fo r the same reason. The inefficiency o f the government and the deterioration o f the judiciary have contributed to making this cost 310 Political crises, social conflict and economic development even higher. It is important to notice that public protests by unions and professional associations to claim better working conditions are comm on and have become a favorite tool o f political pressure. Perhaps the main governance element that affects economic performance the most in Venezuela is government ineffectiveness. The provision o f public goods and services is extremely poor. In addition, civil servants are poorly trained and highly linked to political parties. This causes high rotation o f personnel, which disrupts the implementation o f public policies. A nother problem o f public administration in Venezuela is its lack o f transparency and credibility. F o r example, fiscal data is usually not available and sometimes is several months delayed. Macroeconom ic policies are extremely dependent on oil prices and are usually neither credible nor sustainable. These problems have become more acute in recent years and they threaten the establishment o f a favorable environment for investment and production. Despite important achievements regarding the reduction o f the regulatory burden, there are still im portant sources o f excessive regulation in areas such as international trade and business development. R ed tape is rampant and widespread through all government levels causing important obstacles to new business and the expansion o f existing ones. Unnecessary regulation is closely linked to corruption. Often, firms have to pay important amounts o f money to avoid red tape. This could prevent new projects taking place or simply cause foreign firms to go somewhere else. The deterioration o f institutions due to the collapse o f the oil rent model described so far implies that the rule o f law in Venezuela is among the worst in the region. Citizens do not trust most institutions, especially the judicial system. O f course this represents a source o f important costs, not only to people, but also to firms. Businesses would try to avoid at all costs going through the judicial system, trying to reach agreements outside o f the legal system. I f contracts cannot be enforced in an effective way by the parties through public institutions, then it becomes more difficult to development productive activities. In summary, governance is o f great importance in the case o f Venezuela’s p o or econom ic performance. It ’s recent history shows clearly that there are important economic costs associated with political fragmentation, political instability, violence, government ineffectiveness, graft, excessive regulation and lack o f credibility and transparency. A n d these governance problems have deteriorated even further during the last several years in accordance with the increased political turmoil, as we shall see in the remaining sections o f this chapter. Venezuela: from stability to turmoil 8.6 311 CHÁVEZ’S REGIME It has been traditional in each Venezuelan election to have a sort o f anti­ system candidate. A t the early stages o f the democratic period, when there was still great support for the system, it was usually a burlesque figure that gathered a few votes from people that wanted to express their dissatisfaction in a very irrational manner. These were people that used their vote more as an insult than a way to make a positive statement. But later on, when disillusion began to grow am ong the better-educated m iddle classes, especially in the capital city, this place was taken over by a prestigious figure independent from the ruling parties and distant from the political left. A respected diplomat, a great writer, a famous television anchorman played this role, but never reaching more than 5 per cent o f the votes. They were essentially public images that express a vague discontent rather than the aims o f a well-established political subject. They were one-time phenomena that faded away as soon as the election was over to be replaced by another figure in the next election. This changed in 1988, when a leader o f an independent trade union took this place, showing that the once occasional rage was now becoming a stable desire for reforms. In fact, this movement did not disappear as did all the others, but grew stronger during the events that follow ed and became a serious option in the 1993 elections, when the two old parties’ predominance was finally broken. Those fleeting images o f discontent at the fringe o f the political spectrum dominated by two main parties were now gaining the central stage, as became obvious during the Caldera administration. A s the election approached, the traditional parties’ images continued to deteriorate and the polls showed that a leading figure was a form er beauty queen: Irene Saez, mayor o f one o f the richest sections o f Caracas, renowned for having done what any mayor usually does anywhere else in the world. A politically shallow figure, in the line o f those early burlesque candidates, had now become a serious mainstream political option. It is d ifficu lt to im agine a stronger graphic representation o f the governance crises than this one. A mute, beautiful face that could be filled up with anybody’s wishes, ideas and hopes. In a far distant second place there was another face, not so beautiful but less shallow: that o f H u go Chávez; rendered famous by a few crucial seconds on the television screen the day o f the coup attempt, when he said: ‘I take responsibility for what has happened.’ In a country used to a political class that never took responsibility for anything, this was the most important anti-system political statement in many years. Enough to make him a serious political candidate; were it not for the fact that, once out o f jail, he began to speak 312 Political crises, social conflict and economic development his mind and people became rapidly disenchanted with his primitive and confused utterances. This was the starting situation in 1997, when the crisis o f governance reached bottom as shown by indicators previously analysed. It is important to remark that these faces were not the visible representations o f new emerging political subjects, but just icons o f discontent in the same tradition as the previous ones, but with a fundamental difference: they took leverage directly from the crumbling o f the old political parties. A t each step o f the electoral campaign the corruption and ineptitude o f a political class, completely out o f touch with reality, increased the anger and disappointment o f larger sectors o f the population. This mounting rage favored Chávez who offered a more aggressive image than the lollipop, cold face o f Irene Saez. A s Chávez rose in the polls, the mute beauty was forced to speak out and it was no longer possible to maintain the fiction o f her being a serious political option. So she started to fall at the same vertiginous pace as the old parties. One o f them, C O P E I, had nominated her as the party’s candidate, while A D had chosen its secretary general, a figure as old and w orn out as the corrupted system itself. A s election day approached, in the midst o f desperation, both parties w ithdrew their support for the lady and the old leader in a very shameful spectacle o f political opportunism that could only stir public rage even more. They gave their last minute support to a third more serious candidate, but this maneuver was too obvious and too late. Chávez was now the man that many people across all social classes wanted to clean up all that political trash. W e have indulged in this sequence o f events to show that Chávez’ victory was more the ugly face o f the collapse o f the old system than the expression o f a new political subject. There was not a form al ch a vista m ovem ent until the last minute when the M o vim ien to Quinta R epública ( M V R ) was organized, mainly to com ply with the electoral law. Behind Chávez’ face rallied a heterogeneous m ultiplicity o f dissatisfied people com ing mainly from the popular classes, but also from a considerable sector o f the impoverished middle class; and even some members o f the upper class voted for Chávez. People o f different ideological backgrounds, ranging from the old perejim enista right to certain fringes o f the old left mixed in the common cause to get rid o f the old system through democratic means. From this point o f view, Chávez’ face was also the symbol o f the willingness to do by democratic means what in Latin Am erica is usually done by barbarian coup d’état. Once again, a moment o f high political instability coincides with the deepening o f the democratic spirit. The chavista movement wanted to implement radical reforms. But not being a political subject, it did not have a clear objective and a viable program; and its proposal, in the end, was nothing more than a radical Venezuela: from stability to turmoil 313 form o f classical Latin American political nominalism: a new constitution in a country that already had more than 20. This is an all too Latin Am erican vice o f always substituting real changes in social practices and personal behavior for form al legal changes. Certainly, the exhaustion o f the oil rent model called for a radical change o f social practices and personal behavior and legal changes were justified as a mean to help these changes. But the chavista answer to this need concentrated solely on a new constitution and a new set o f laws that only added m ore instability to the already fragile governance, while reinforcing old behavior and social practices. On this point, the ch a vista m ovem ent behaved like a nom adic force unable to function within the fram ework o f democratic institutions, increasing the disruption o f the social order and having nothing to replace it with. Very soon the new government exhausted itself in bringing about legal changes that purported to be an enhancement o f democracy, while its practical behavior increased the degree o f arbitrariness. Chávez himself represents very well this dichotom y between a desire fo r more and better democracy on one side, and a clumsy authoritarian behavior on the other, that more than a political strategy, rests on an original incapacity to understand the nature o f democratic institutions. Since it is not a true political subject but a nom adic assemblage o f heterogeneous forces, chavism o does not have an articulated intention o f building a new despotic social order. In this sense, it is not an ideological movem ent, as those that have determined the history o f the twentieth century. But it implements a permanent harassment o f anything that it is perceived as an obstacle to the legitimate aspiration o f the people. A fter three years o f Chávez’ administration, the feeling that a growing number o f people were beginning to have o f the country sliding toward a dictatorship originated in this generalized arbitrariness. This movem ent is a strange blend o f dem ocratic desire trapped by a network o f intolerant behaviors at a micro level o f the social fabric. Instead o f an ideology, it has a sort o f im agery made out o f pieces drawn from elem entary school nineteenth-century republican heroes, rom anticized twentieth-century revolutionary events, retrieved portions o f traditional religious piety and native cultural expressions. It incorporates ideological pieces taken from any known political discourse and social theory to build an indigestible political delirium that fills up the entire mass media space in a society without social subjects and made exclusively o f audiences. It is less a traditional political movement than a mass media representation o f a social malaise that run deep across Venezuelan society and that can only be captured on the television set. That is what Chávez really is: a T V image that raves incessantly through the mass media in order to exist and by so doing keeps reminding people o f the unsolved problems. 314 Political crises, social conflict and economic development In a sense, chavism o, like many other ‘isms’ that have emerged since the 1980s around the world, it is a true neoarchaism , that is a bunch o f twisted old ideological representations mixed in a new functional context. By the same token, it generates its own foe on the same plane o f images. The mass media are the true political opposition to Chávez, not the political parties, not civil society organizations, not business or labor associations. This is further p ro o f that behind this theatre o f simulacra there are not political subjects, but only fragmented pieces left by the crumbling o f the old model. A society o f scattered interest groups cut o ff from their traditional channels o f rent acquisition and political power, unable to recompose around new organizations and new institutions, with no opinion but the one that the mass media have made up fo r them. Beneath the surface, there is a sort o f underground Somalia or Afghanistan-type society, ravaged by semiotic warlords, unable to establish any connection but through the com m on cause against Chávez w ho is just another semiotic warlord like them. That is why the political struggle has become a fight for audiences rather than fo r followers. This explains why the mass m edia feel so endangered at the finest hour o f their power and unfettered activity. Chávez’ contention that, during his administration, there has not been one single incident o f government harassment o f the press, as usually was the case in previous governments, has been so far certainly true. Nonetheless, it is also true that no other president had ever before subjected journalists and the mass media to such verbal abuses as they are subjected to now, although they are answering in kind. Recent Constitutional Changes and Governance Style The true nature o f chavism o is that o f a nom adic movement led by a raving image that plays the role o f chief o f government in a sort o f permanent mass media drama. A t times and only at times, the image becomes a real person, like those movies where cartoon figures mingle with real actors. The so-called Chávez revolution (revolución chavista) is nothing more than an effort to make strong social aspirations come true, not in reality but in a cheap T V drama w ith a neoarchaic script. This mass media performance is a surrogate for true governance and signals the extreme point reached by the crisis o f governance. This drastic reduction o f governance to an almost exclusively mass media perform ance is due mainly to three factors. In the first place, we have the disruption o f the public administration system that the Chávez government inherited. In the second place, the lack o f a government strategy to cope with this problem beyond the simplistic electoral offers to change the constitution and the legal fram ew ork. Finally, the third fa ctor are Venezuela: from stability to turmoil 315 the very low qualifications o f the appointed public officials, for the most part with no previous administrative experience. This has accelerated the traditional high rotation o f public officials up to an unprecedented rate. A s an example, let us take a look at what has happened with some o f the highest posts closely related to the economy. During the first three years o f the Chávez administration, there were five finance ministers, three ministers o f industry, commerce and agriculture, an equal number o f ministers o f infrastructure and also o f urban development, two ministers o f oil and energy and five presidents o f P D V S A . W hen we consider lower posts, things get even worse: technical teams in charge o f housing planning, disaster areas, social development programs are frequently replaced and each change means a total disregard for the previous w ork and a new start from scratch. The end result is that most o f the public administration is almost stuck at a never-ending initial stage. This relentless flow o f people through key decisionmaking posts is one o f the two main features o f these political nomads, the other being the lack o f understanding o f the functioning o f modern state institutions. Therefore, it w ould be w rong to confuse it with the old populism that was a more or less coherent ideology associated with well-organized parties having precise government programs and with a well-defined ideological framework. Chavez’ movement shows little concern with party organization. It has been pointed out (López-N aya 2000; Ram os 2001) that this feature connects this movement with the so-called neopopulism such as F u jim ori’s. This political orientation has, among its main features, the disavowal o f party organization and the overcoming o f democratic institutions when they are deemed useless or an obstacle (Kenney 1998). The Constituent Assembly and the series o f elections and referenda to approve the institutional changes sponsored by Chávez do not seem compatible with the second main feature o f the neopopulism. T h e main feature o f C h á vez’s electoral program was indeed a new constitution that was to be the new legal base for a long-run transformation o f the country. A fter a few months in power, Chávez called a referendum to approve a new election for a Constitutional Assembly that would elaborate the new constitution. H e won the referendum and in the subsequent election for the Constituent Assembly all but five o f the elected candidates were his followers. A fte r three months, a new constitution was ready and submitted to the people for the approval in a national referendum held on 15 December 1999. The people came out overwhelmingly in favor o f it. A fte r that, a new election fo r mayors, governors, deputies to the new N a tion a l Assembly, and fo r the presidency too k place in which once again Chávez w on and his movement got a wide majority. Chávez’ candidates did very well in one m ore election, fo r city council members. Therefore, in a tw o-year span, 316 Political crises, social conflict and economic development Chávez won six elections overwhelmingly. From this point o f view, Chávez’s democratic record is impeccable and places him at a great distance from people like Fujimori. N o w the tendency to resort to constitutional and legal reforms as a way o f solving social and political conflicts has been a constant feature in Latin A m erican history that has been labeled n o m in a lism . A n d this tradition fits quite well with Chávez’ verbal revolution. But Chávez’ constitutional reform has also had a real effect. It helped to w ipe out the remaining pockets o f old parties’ political control. A n d this is certainly the positive side o f its nomadism that was so appealing to so many Venezuelans. A t the beginning o f the year 2000, 80 per cent o f the population supported the President. Beyond this cleansing effect, the constitutional reform has had no meaningful impact on the real economic issues, especially in the direction o f changing the oil rental model. I f anything, some o f the reforms, such as the new constitutional article that assures the state property o f P D V S A , tend to reinforce the old model. This is another outstanding aspect o f the neoarchaic nature o f chavismo; an example o f its radical misunderstanding o f the nature o f the Venezuelan crisis and o f its lack o f a viable strategy to respond properly to it. The main constitutional changes are: (1) The new constitution adds to the three traditional branches o f the sovereign pow er - the executive, the legislative, the ju dicial - two more: the electoral branch and Citizen Pow er body made up o f the Fiscal General, Defensor del Pueblo, and the Contralor. These high officials ought to be elected by the National Assembly with the active (2) participation o f civil society that should propose candidates. A lthou gh the new constitution asserts the federal character o f the Republic, an unicameral N a tio n a l Assem bly replaces the old two- (3) chamber Congress. The presidential period is extended to a six-year term with the possibility o f immediate re-election instead o f the previous five-year term with (4) the possibility o f re-election only after two subsequent terms have elapsed. A s a step fo rw ard to a m ore p a rticip atory dem ocracy, the new constitution allows for the possibility to call for a referendum to revoke (5) the mandate to the President, governors and mayors, once half o f their term in office has elapsed. The chapter on human rights has also been enhanced and in general (6) the constitution provides for more participation by the citizen in the different levels o f the decisionmaking process. International treaties and agreements on human rights are considered part o f the constitutional framework. Venezuela: from stability to turmoil 317 (7) Mem bers o f the army have now the right to vote and can participate in political debate. (8) Mem bers o f the indigenous m inority have three permanent seats in the N ational Assembly. Private property is guaranteed, but its social function has been stressed, (9) although fo r all practical purposes it remains as before. Th ese are the m a jo r changes and in general they constitu te an enhancement o f democracy. But this particip atory spirit is som ehow countervailed by an increase o f the prerogative o f the executive branch. The prom otion o f high-ranking military officers no longer needs the approval o f Congress that has been replaced by that o f the President. For the rest, the constitution follows the old one. In general, given that the constitution, at least in principle, improves the participation o f civil society in many levels o f the decisionmaking process, one w ould say that the changes do not have any significant bearing on the design and im plem entation o f econom ic policies. A t the nominal level, the Chávez movement shows a great democratic sensibility. But a serious problem arises when we compare this drive for democratic formalities with the actual behavior o f public officials and the President himself. H ere a clear tendency to skip proper procedure and to disregard the autonomy o f the different levels o f responsibility comes out strongly. This dich otom y between nom inal dem ocratic drive and practical disruptive behavior o f democratic institutions and rules is the most striking feature o f the regime. A s soon as the new constitution was approved, there were new elections for president, governors and mayors in order to legitimize authority according to the new rules. This was certainly a show o f dem ocratic sensibility. But on the other hand, the justices to the Supreme C ou rt (Tribunal Supremo de Justicia) were chosen in the most old fashioned patronage style, taking advantage o f the m ajority o f votes in the N ational Assembly. A s for the other high officials such as the Fiscal General, Contralor, and D efensor del Pueblo that made up the new Citizen Power body, the new constitution requires the participation o f civil society in proposing candidates from which the N ational Assembly ought to choose. In spite o f this, they were elected directly by the National Assembly. Needless to say, all these justices and officials were drawn from the rank o f Chávez sympathizers. It is not only that the regime has show no sensibility fo r allow ing the opposition to have some institutional participation to ensure countervailing powers and the proper democratic balance, but what is worse, the whole institutional setup seems to collapse into a mess o f personal relations and in this mess, the w ill o f the President becomes predominant. Therefore, it is 318 Political crises, social conflict and economic development in the realm o f practical behavior that the nomadic character o f this Chávez movement loom s more strongly. A total lack o f disposition for consensus building, through negotiations w ith legitim ate stakeholders, gives the government’s behavior a strong sectarian tilt that has alienated an increasing number o f people and has created a feeling o f total exclusion among the m iddle classes. F or example, although the new constitution stresses the participatory character o f Venezuelan democracy, the government asked and obtained from the National Assembly the authorization to make important econom ic laws by decree (L e y habilitante). This has been a practice that every president before Chávez has used at a certain point. The difference this time was that the power given to the President was over a too broad range o f issues. Besides, Chávez used this prerogative to issue 42 laws related mainly to econom ic issues, without that widespread consultation process that the new constitution requires. M o st o f these laws are just remakes o f the old ones, but some o f them have important changes and incongruent dispositions that may negatively affect the economy. This is another g o o d exam ple o f the incapacity to understand the functioning o f modern institutions. In fact, the lack o f disposition by the government to built consensus around these laws was due to its tendency to confuse the legitimate claims fo r participation in the decisionmaking process with the old practices o f cronyism and patronage. Thus not knowing how to establish a proper consultation mechanism with the civil society, the government cut o ff all lines o f communication. I f we link this general behavior o f high officials with Chávez’ speeches in which he gives verbal orders to authorities that are supposed to be autonom ous in different matters, a general sensation o f utmost arbitrariness in public administration is created. A n d if we add to this permanent verbal abuse with which the President responds to any issue or claim raised by the civil society, we have a clear explanation for the contention by the opposition that Chávez’ governance style is an authoritarian one. But in our judgement this is so not so much because o f an authoritarian intention, but because o f its nomadic character, which fundamentally does not understand the proper meaning o f m odern institutions and therefore does not know how to make them function properly. Be that as it may, these circumstances have caused an increasing hostility among the middle classes that has affected economic behavior, neutralizing all the positive effects o f the recent oil boom. Although the macroeconomic conditions were favorable, the domestic propensity to invest has practically collapsed under the heavy political stress. C h ávez’ arbitrary style gives the impression that there are no clear and transparent rules and this has neutralized all the effects o f a very conservative economic policy. This same arbitrariness has shattered his ministers’ earlier efforts to achieve a fiscal Venezuela: from stability to turmoil 319 discipline and has fed sustained capital outflows financed mainly by the high oil revenue. This situation has forced the government to lift the foreign exchange anchor that was its means to fight inflation and represented half o f its econom ic policy, the other h alf being the high oil prices. W ith the first objective o f its econom ic strategy having crumbled and the second one shaken by recent events in the oil market, the regime has been left with no strategy. Th e governm ent needs to negotiate a new strategy to divert the path that is leading the country to a very deep crisis. But from this it is barred not only by its confrontational style but also by the fact that since it has no strategy o f its own it does not know what to negotiate. Therefore, in spite o f the constitutional intention to enhance civil society participation in governance affairs, the nomadic behavior o f the government and the sectarian attitude o f the political m ajority have set the country on a confrontational track, while the population splits in two halves very hostile to each other. N oth in g could be further from a participatory society. A n d no situation can be worse than this to keep a minimun o f governance. For these reasons we should not try to fit this politcal movement into some o f the boxes o f political science. C havism o should be seen as a new phenomenon partially linked to the globalization process (M edina 2001). In fact, as we have said before, Chávez’ regime is indeed the end stage o f the oil rental m odel, because o f the persistence o f all the old practices that no longer allow for a minimum o f governance. In this sense, it is just Venezuela’s anomaly. But from the point o f view o f its ideas, its imagery, it is a neoarchaism bred by a reaction to another previous neoarchaism that has been thrust upon this region since the 1980s. This is what in Latin Am erica and in other parts o f the w orld has been called: neoliberalism.2 Therefore, it should not be surprising that its policy proposals are a potpourri o f pragmatic approaches and ideological prejudices drawn from almost every known theory or doctrine. A t least for the time being, chavismo believes that the best economic policy is to reduce inflation by anchoring the foreign exchange rate, no matter what may happen to the employment and growth rates. M oreover, it believes, as some radical neoclassical economists do, that this fight against inflation is the only meaningful policy. It pays lipservice to the need for diversifying the economy, but it concentrates all its efforts on keeping the oil price as high as possible to m axim ize fiscal revenue fo r as long as possible, while it does not seem to feel any drive for a coherent program o f state reforms. It is convinced that privatization is evil and thunders against w ild neoliberalism, but considers hostile takeovers by foreign capital to be all right. It abhors graft but doesn’t see the need for competitive bidding and proper procedures. It has the conviction that p o o r people have the right to encroach on private property to survive, but it does not care for social and poverty alleviation programs. It deeply 320 Political crises, social conflict and economic development believes in people’s participation in the decisionmaking process, but gladly surrenders to Chávez’ whims. In short, chavism o is like one o f those religious syncretisms, so com m on in Latin A m erica, and in this sense is the true ideology o f a marginal and depauperated population. It is not the expression o f a true political subject. 8.7 A NEW POLITICAL ECONOMY FOR VENEZUELA A t this point and time in Venezuela, the governance crisis is much more than a simple set o f technical and institutional problem s that can be solved by such reforms as capacity-building programs, judicial reforms, ethical and skill improvement o f the bureaucracy and the like. A ll these are important shortcomings that, in Venezuela, are not due primarily to a lack o f knowhow, human capital or econom ic resources. They are caused by an adverse political w ill that is the expression o f the institutional crisis o f the old political and social model based on the oil rent distribution through the state. The absence o f the proper power relations among well-constituted political subjects is at the bottom o f the Venezuelan governance crisis. The reconstruction o f these political subjects would only be possible if based on a viable development strategy proposal. This is a condition all too often set aside by a functionalist perspective, always to o sim ple, to o elem entary, to o tech n ocratic, to o lim ited . Recommendations coming from this approach can be o f some use in a very backward society jum ping into the w orld o f modern national states from a very far removed and different historical experience. But in a complex society, as most Latin Am erica countries are, they can, at best, be o f partial help in solving some specific problems. It is worthwhile to remind ourselves, once more, that a technically sound policy that is not politically viable is as bad as the most unsound technical policy. To differentiate between the technical and the political aspects o f a given policy, as if they were independent o f each other, is an unhealthy technocratic delusion that has already produced too much suffering in this region. W e have tried to show that at the present stage there are no political subjects in Venezuela; only audiences participating in a sort o f mass media charade under which lies a fragmented society where everybody is guessing the oth er’s intentions covered under a pile o f meaningless words. The way out o f this situation is the form ation o f new political subjects that can agree on the general lines fo r a new m odel o f econom ic growth and social development that does not depend on the oil rent. Only then could a coherent and consensual development policy package be implemented and an institution-building program established. Venezuela: from stability to turmoil 321 For the time being, the country will remain in the limbo o f a state oil rent model that can provide enough resources to keep the economy running at a low performance level, without reaching the critical situation that we can see in other parts o f the region. A t least until drastic changes are made in world energy consumption, Venezuela will enjoy a floor superior to other countries to manage a sort o f permanent crisis. But although from the economic point o f view a long period o f mediocre performance is conceivable, such a state does not seem tenable from the social point o f view. Should the present state persist, two possible roads are open to Venezuela. The first one w ill lead to a sort o f permanent re-editing o f an unfinished chavista revolution, interrupted by periods o f anti-chavista government - a dynamic that, in the end, w ill permanently disrupt Venezuelan society much on the lines o f what happened in Argentina during most o f the twentieth century. The other possible outcome is the institutionalization o f the present fragmentation that w ill permanently exclude large sectors o f Venezuelan society and w ill breed endemic guerrilla movements as in Colom bia. A s far as the ongoing governance is concerned it reflects the true nature o f the present regime. W e have characterized the chavista movement as a nomadic force that has completely disrupted the old institutions without being able to replace them with new ones. Therefore, the form er inefficient governance has degenerated into plain chaos and pure incapacity. It would be just nonsense to try to discern patterns o f governance in an increasingly chaotic situation in which governance has becom e a theater, a sheer representation. Every economic, social, juridical, institutional policy has no longer a rationality o f its own, but it is dependent upon the dynamic o f a phantasmagoric revolution that in the chavista jargon means nothing more than a nomadic drive to nowhere. W hether it would be possible to rebuild political subjects around a new model o f open market industrialization fast enough to avoid such a gruesome prospect, is a question that actual events in the making w ill answer soon. 8.8 POSTSCRIPT A s we were going through the final draft correction o f this chapter, some o f those events in the making have gathered new momentum, putting the democratic institutions at high risk. A n ill-conducted dispute over the newly appointed president and directors to the board o f P D V S A unleashed the middle classes’ anger that had been simmering since 10 D ecem ber 2001. That day, all activities stopped follow ing the call by Fedecamaras for a paro nacional that essentially required everybody to stay at home. It was a major success for the opposition, especially fo r the President o f Fedecamaras, 322 Political crises, social conflict and economic development M r Carm ona. Later, on 23 January, there were street dem onstrations comm emorating the end o f the dictatorship in 1958: a huge one against the government and another not that big, but big enough, in favor o f the government. For the first time the opposition was able to show its strength on the streets. But the only response by the government was the usual verbal abuse and an intensification o f its policy o f confrontation, especially with the mass media. A lth ou gh the verbal battle between the governm ent and a group o f journalists went on fiercely, and a few active members o f the military came out asking for the President to resign, after a few weeks the tension eased, partially soothed by the comic aspects o f such a charade. W hen the P D V S A employees took to the streets to protest about the new members o f the board o f directors, the confrontation gathered a new momentum fueled by the violent speech o f the President. A n active and non-innocent involvement o f the main television channels, that suspended their regular programs to focus exclusively on the P D V S A issue, helped to gather the nations attention on the issue. From Thursday 9 A pril, thousands o f people spent their time alternating as viewers in front o f the television set and as street protesters in front o f P D V S A buildings. The opposition-controlled trade unions confederation (Confederación N acion al de Trabajadores) called a general strike, immediately supported by Fedecamaras. The strike was not as successful as was that on 10 December, but was extended for 24 hours more and then indefinitely. On 11 A pril, a huge march o f protesters that initially should have ended in front o f the P D V S A building was detoured by their leaders to the presidential palace, where there was a concentration o f Chávez’ supporters. A s they approached the palace, shooting started and several people died and many more were wounded. For the first time since Chávez took office, there was bloodshed in a demonstration. A fte r that, events became quite confusing. In the evening several chief commanders o f the arm y appeared on television saying that they were refusing to obey the presidential order to take the troops out into the streets to confront the protesters, and asking instead fo r the resignation o f the President. Later on, the joint staff commander appeared saying that Chávez had resigned. A t dawn, M r Carm ona showed up, backed by some o f the generals, announcing that he had accepted an invitation to head the new transitional government. Th e next morning people, mainly middle-class, rejoiced at the news that Chávez had resigned and been taken into custody by the army, while in the barrios people in dismay kept silence. Everything seemed to be rushing back to normal, but at five o ’clock in the afternoon, on all television screens, appeared the ugly spectacle o f M r Carmona taking the oath as President and signing a decree dissolving the N ational Assembly and all elected authority, and announcing new elections in a year. To most Venezuela: from stability to turmoil 323 o f the people w ho had not realized it until then, it was now clear that what had happened was not rebellion by civil society, legally protected by the constitution, but a blunt coup d’état by a bunch o f people who had taken advantage o f the protesters. The exclusion from the new government o f the trade unions, most o f the political groups and civil society organizations that had participated in the protest, made clear the sectarian tilt o f the new government. The quick and unjustified witch-hunt unleashed by the new ‘authorities’ , and the first policy measures taken, left no doubt as to the leaning o f the new regime, labeled by an outspoken anti-Chávez journalist as ‘light Pinochetism’ . Then, more and more people started asking for some p ro o f that Chávez had indeed resigned, and so did most o f the local m ilitary commanders. Meanwhile, after seeing the usurpation act on television, people from the b arrios started to take to the streets dem anding the return o f Chávez. Pretty soon it became clear that no such resignation ever existed. A ll the private television networks put a blackout on what was going on (the public television had been closed down the first night). W hile there were intense discussions among the military, street fights and looting was happening in many areas o f Caracas and other cities, and T V channels transmitted old movies only interrupted by images o f angry Chávez supporters at their gates. In 24 hours Chávez was back in M iraflores Palace. A t the time o f writing it was too early to make a final evaluation o f these events. But we can highlight a few points. It is clear that there was a massive upheaval by large sectors o f Venezuelan society, mainly middle classes and workers, demanding the resignation o f Chávez. This upheaval was the final outcome o f an intransigent policy o f a very inefficient government. It was an expression o f outrage with no political objective beyond the desire o f getting rid o f Chávez. It was not planned, but was skillfully manipulated by certain mass media totally out o f line. It is also clear that the protesters were goaded into a situation where it was easy to camouflage a coup d’état with a civil society legal disobedience act. A ll in all, the democratic institutions o f the country responded quite well as soon as the charade was unveiled, leaving many protesters with the sad feeling o f having been used by a small group o f the adventurers. I f the civil society has given Chávez a lesson, the country as a whole did the same to the extreme right and their friends. The m ajority in both contending groups is fighting over the proper rules o f governance, as a way to deepen democracy in Venezuela, not to destroy it. The episode also made clear that the last 20 years o f economic and social decline have created a deep division in Venezuelan society catalyzed by Chávez’ behavior. His speeches that so much enraged the middle classes make the marginalized population dream o f a better future. U n til 11 A pril, it was clear that the only thing that the 324 Political crises, social conflict and economic development opposition wanted was to get rid o f the nightmare and after that day it was all too clear that what the p o or people wanted was their dream back. N o w the country is enjoying a wave o f reconciliation. Chávez says that he has learned his lesson and is calling fo r a national dialogue. The mass media and other leaders o f civil society, whose commitment to democracy has been seriously com prom ised by their behavior during the crisis, are doing the same. But we cannot end this story w ith the usual fairy tale finale, because all the problems are still there, while the econom ic situation is deteriorating. After the Indefinite General Strike (Second Postscript) The above postscript was written in the aftermath o f the failed coup o f 11 A p ril 2002. The spirit o f reconciliation lasted only a few months and by the beginning o f the last quarter o f the year the tension rose once more to a high level. In the early days o f D ecem ber 2002, the opposition decided to try to bring down the government through a general strike and a business lockout, which initially was not very successful, and by the end o f the third day was fading away. Then the oil industry management and a considerable part o f the workers joined the strike in a move unprecedented since 1936. This situation lasted until the end o f February 2003, but had no significant effect in weakening the governm ent’s position. However, it caused considerable damage to the econom y that was already in a bad shape. Since the end o f 2001, President C h ávez’ popularity has stabilized at around 28-29 per cent approval which is close to the figure w ith which he was elected the first time (Figure 8.15). This means that he has lost all the popularity that he has w on in the aftermath o f his first election that rose to 80 per cent approval, but he retains the hard core o f his followers coming mainly from the lower classes. However, the intensity o f rejection increased enormously during the year 2002 creating a political polarization that has no precedent in twentieth-century Venezuelan politics. The political confrontation had no significant effect on the economy until the coup d ’état o f 11 A p ril 2002, but after that has been causing significant damage to it. In our opinion, the bizarre political events that started with the first general strike in D ecem ber 2000 can only be explained by taking into account the extreme inefficiency o f the government in delivering on its promises, that we have analysed in the chapter, but also by the nature o f the opposition that has emerged in the recent confrontation. The bulk o f the opposition is made up o f the disenchanted middle-class and working-class elements that had been hard hit by the econom ic crisis and irritated by C hávez’ rhetoric. Chávez’ government is an interesting case o f how neoarchaic symbolism can have an intense effect on the economy and social behavior even without any Venezuela: from stability to turmoil 325 Month-Year Source: Datanalisis Figure 8.15 P resident C h á vez’ approval rating specific policy implementation. This mass opposition has no other cohesive factor than the disapproval o f Chávez’ government. It cut across the entire ideological and political spectrum from the far right to the far left. But the leadership has been provided mainly by figures o f the old parties and the old trade union organization. M ore recently, some o f the figures o f the rebel oil management had been incorporated into the leadership. Such leadership, identified as the Coordinadora Dem ocrática, has no organic relation with the bulk o f opposition masses and no alternative proposal to offer. Their relation with those they purport to represent is only through the mass media, which play a central role in motivating opposition protests and in providing the necessary fora for the opposition leadership to emerge. This fact is quite im portant fo r understanding recent events. In fact contrary to what was explicitly stated, the opposition leadership did not want a solution through election and implemented a strategy that sought to oust Chávez by forcing him to resign, first by a coup d’état that was intended to be camouflaged by voluntary resignation brought about by a huge mass dem onstration and b lood y reaction o f the governm ent that forced the generals to disobey an unlawful order. It is impossible not to recognize the neoconservative flavor o f this plan that fits quite well the new international environment where old fashioned coups d ’état are no longer acceptable to topple democratically elected governments. But this manner o f regime change failed for a lack o f proper coordination, probably because there were 326 Political crises, social conflict and economic development different actors interfering with each other. The second act o f this strategy was the intent to cheat by tampering with the constitutional system o f referenda, which allows for consultative referenda and referenda designed to revoke the tenure o f elected officials after they have completed the first half o f their period. The opposition collected signatures to consult the people as to whether they wanted Chávez to resign and at the same time they tried to force the government to accept this exercise o f democracy by street protest and a one-day general strike on the 11th o f each month to commemorate those who lost their lives on 11 A pril 2002. Finally in December, they started the indefinite general strike that asked for the outright resignation o f the President irrespective o f the consultative referendum that was supposed to be held in early February 2003. Other ways, constitutional ways, such as a referendum for amending the constitution and so on, were completely disregarded. This series o f events shows quite clearly that the appeal o f an election was mere rhetoric - Chávez-style - to cover fo r some sort o f rapid ousting o f Chávez. The question is: why? The answer is that the loose bunch o f people constituting the opposition leaderships were afraid to confront Chávez in a free election. First o f all, they represent only small groups and were unwilling to yield their claim to the presidency and other posts in order to form a broader alliance strong enough to defeat Chávez’ 30 per cent electoral strength. Second, in a situation o f ‘power vo id ’ created by an abrupt resignation by Chávez, they would be in a better position to negotiate a power distribution to their personal benefit. Third, they know that most o f them have been unwillingly accepted as leaders o f the opposition due to the strong rejection o f Chávez, but most o f the opposition people have not forgotten these leaders’ past behavior. N o w after the tremendous failure o f the indefinite general strike that has weakened the econom ic base o f the opposition and has made possible the ousting o f m ore than 25 000 employees o f P D V S A , finally the opposition leadership seems resigned to follow ing the road o f the electoral solution according to the constitution. A fte r 19 August 2003, it became possible to hold a referendum to revoke C hávez’ mandate and that o f other elected officials. Since this is a ‘yes’ or ‘n o ’ decision it was quite probable that Chávez would lose. Then the true problem w ould show itself in the election afterwards to choose the new authorities. Once again, a divided opposition with no effective organizations, a viable government program and a consensus candidate w ould have to face a chavista movement, without Chávez but with a solid quarter o f the voters. Would it be possible for the non -chavista Venezuela to do what it has not been able to do in many years? W e do not know. Sometimes historical situations change rapidly, but then again sometimes they do not. W hat, in our opinion, comes out o f this short briefing on recent events, is that, as argued in this chapter, Chávez is not the problem, but a symptom Venezuela: from stability to turmoil 327 o f Venezuela’s structural malaise that w ill remain unchanged even if his government were to end soon. The reshaping o f political actors capable o f putting in place a roadmap to sustained development, poverty reduction, elimination o f exclusion and a more beneficial integration into the world econom y is not an easy task. It requires the transformation o f Venezuelan social practices in order to breed a new kind o f citizenship as the base for better economic and political agents. This true revolution should be opposed to the caricaturesque neoarchaic revolutionary rhetoric o f chavism o. A fter all, chavistas dream o f a new Venezuela with the mind and feeling o f the oil-rented Venezuela and as in the old times they long fo r results without the proper effort. This being said, it is also true that the actual impasse is taking an increasing toll on the economy, since there cannot be imagined a worst scenario fo r investment and spending. The year 2002 was a difficult one fo r the Venezuelan econom y due m ainly to the negative expectations generated by the political turmoil and lack o f confidence in the ability o f the government to manage the fiscal deficit. In spite o f the stable flow o f oil revenue, there was a huge amount o f capital outflow and the floating o f the foreign exchange rate within certain pre-established limits (+ 7 and -7 per cent) was abandoned. The G D P dropped 8.9 per cent in 2002 and at least a similar decrease was expected for 2003. Consumption fell 5.5 per cent due mainly to private consumption contraction, gross investment decreased by 22 per cent, the unemployment rate soared to 20 per cent, while 51.5 per cent o f the w ork force is in the inform al sector. The fiscal deficit o f the central government for the year 2002 was 3 per cent o f G D P, lower than the 4.7 per cent in 2001. This reduction was caused by the difficulty confronted in the international loan market. Actually foreign financing for the year was negative at around 1.7 per cent o f GDP. Chavez’ administration was then forced to adjust by reducing public spending from 24.5 per cent o f G D P in 2001 to 23.1 per cent in 2002. Fiscal revenue was kept at a steady rate 20 per cent o f G D P, so that most o f the resources to finance the deficit, around 1.6 per cent o f G D P , came from F IE M . Borrowing heavily on the domestic market covered the rest. A 46 per cent devaluation in 2002 spurred inflation up to 31.2 per cent from the 12.3 per cent level in 2001. Prices were also affected by adjustments in certain administered prices, the increase in V A T and the elimination o f exemptions. On the other hand, the main monetary variables experienced an important decrease in real terms due to severe economic contraction and capital outflows. The monetary base decreased 9.4 per cent in real terms whereas liquidity (M 2 ) fell 8.8 per cent during the same period. This is the greatest fall since 1996. During the first quarter o f the year, the strong pressure on the bolívar that caused the devaluation raised interest rates. However, after the modification 328 Political crises, social conflict and economic development o f the exchange regime they started to fall during the second and the third quarter. Then again, they rose once more during the last quarter o f the year. Th e crisis also had an effect on the financial system. Th e private sector p o rtfo lio dropped 25.6 per cent in real terms. N on -collectab le outstanding loans rose from 5.1 per cent in 2001 to 6.8 per cent in 2002. The persistence o f ID B (Im puesto al D ébito Bancario) and the preference for foreign currency as a shield for further devaluation caused a contraction o f deposits o f 21 per cent in 2002. The external sector enjoyed the benefit o f sustained oil prices in 2002. Im ports dropped considerably due to the recession from $17 391 million in 2001 to $12 280 million in 2002. Exports showed a small decline from $26 726 million in 2001 to $26 219 million. The fall o f oil exports at the beginning o f December caused by the strike had little impact on revenue. In fact, current account surplus was $7643 millions in 2002, while in 2001 it was $3932 million. However, the deficit on the capital account was $8883, greater than the current account surplus, and the total payments balance was negative causing the international reserves to shrink. The capital account deficit was ten times bigger than that o f the previous year. The factors that contributed to such a huge change were: the collapse o f foreign direct investment that fell from a level o f $3300 million in 2001 to $496 m illion in 2002; and the outflow o f capital showed by the item ‘errors and omissions’ that increased from $9899 million to $10 547 million. The outflow o f capital has been one o f the items most sensitive to the political turmoil. However, the change o f the foreign exchange regime in March 2002 was also due to an unsustainable economic policy. However, the oil industry strike, initiated in December, had a devastating impact on the external sector o f the econom y and forced the government to suspend all operations on the foreign exchange market, and to announce a temporary exchange rate control. A fter almost three month, the market was still closed. It is hard to tell if this situation was due to mere administrative inefficiency or some sort o f political retaliation on the part o f the private sector. Be that as it may, the consequences fo r econom ic activity w ill be considerable. This peculiar situation has shown another side o f the inefficiency o f the Venezuelan economy. U p until the time o f writing (the end o f A p ril 2003) there had been no shortages o f any kind, which may be taken as a signal o f the fact that the econom y works with extremely great amounts o f inventories. A nother sign o f the inefficiency o f the Venezuelan econom y was the general strike that lasted for more than two months with few visible effects. One may wonder i f a highly developed and efficient econom y could stand such a prolonged strike w ithout undergoing a m ajor catastrophe. W hat has happened in Venezuela hints at the conclusion that people working or not working is o f little significance fo r the economy and this conclusion Venezuela: from stability to turmoil 329 fits quite well with the nature o f an econom y fueled mainly by oil rent and not by labor effort. NOTES * The author appreciates the contribution o f Germán Ríos in the preparation o f the economic part o f this chapter. 1. A fter the death o f Juan Vicente G óm ez in 1935, the political class that was formed under his long regime continued in power with two administrations led by López Contreras and M edina Angarita, both o f whom were generals o f the ancien régime, that ruled with a mild authoritarian style and with a Congress elected on a restrictive basis. 2. This is n ot the place to analyse neoliberalism. Suffice it to say that it is also a mix o f old liberal ideas, oversimplified views o f how a modern market economy functions, and despotic principles that has little to do with the old classical liberalism that sponsored a society o f free and equal men. Islamic fundamentalism is another neoarchaism insofar as it is local nationalism. REFERENCES Baptista, A. (ed.) (1991), Bases cuantitativas de la economía venezolana 1830-1989, Communicaciones Corporativas, Caracas. Baptista, A. (1997), Teoría económica del capitalismo rentístico, Ediciones IESA, Caracas. Clemente, L. and A. Puente (2001), Choques externos y volatilidad en Venezuela, Venezuela Competitiva, Caracas. Hausman, R. (1990), Shocks Externos y Ajuste Macroeconômico, Banco Central de Venezuela, Caracas. Kaufmann, D., A. Kraay and P. Zoido-Lobaton (1999), Governance Matters, The World Bank. Kenney, C. (1998), ‘Anti-politicos intrusos y política democrática’, Politike 2 (3). Lewis, A . (1953), ‘Economic development with unlimited supply o f labor’ , Manchester Journal, May. López-Naya, M. (2000), ‘Organización y discurso en el M V R y el P P T ’ , paper presented at workshop on ‘Venezuela: logros, problemas y desafios del actual sistema político, Instituto de Estudios de Iberoamérica y Portugal, Universidad de Salamanca. Mainwaring, S. and T.R. Scully (eds) (1995), Building Democratic Institutions: Parties System s in Latin America, Stanford University Press. Medina, M. (2001), ‘Chávez y la globalización’, Revista Venezolana de Economía y Ciencias Sociales, 2 (7), May-August. Ramos, M. (2001), ‘Partidos y grupos políticos en Venezuela (1998-2000) dimensiones ideológicas y cohesión pragmática’ , Revista Venezolana de Economía y Ciencias Sociales , 2 (7), May-August. Roberts, K. (2001), ‘La descomposicion del sistema de partidos políticos en Venezuela vista desde un análisis comparativo’, Revista Venezolana de Economía y Ciencias Sociales , 2 (7), May-August. Index Abusada, R. 213, 229 Acción Democrática 264, 269 Acción Nacionalista Democrática 77 accountability 19, 29-30, 40, 82-3, 136, 180, 210, 214-15, 241-2, 253-5,257 Acemoglu, D. 22 active population 91, 98 ADECO 11, 37 adjustment 10, 62, 73, 77-8, 95, 115, 122, 125, 128, 130, 150, 159, 170, 177, 181, 204, 231, 246, 249, 257 Africa 22, 46, 48, 55, 265 Afro descendants 52, 65 agency problems 19 Agenda Venezuela 294 Aghion, P. 17 agrarian reform 111, 141 agricultural 106, 118, 120, 122, 133, 141, 151, 171, 229, 241, 244, 259, 315 Alarcón, F. 160 Albornoz, V. 160 Alesina, A. 17, 59 Allende, S. 26 Alvarez, A. 232 Amazonian forest 217 A N D 77 Andean Community of Nations 11 see also C A N Andean subregion 45-7, 49-50, 52-3, 57, 62, 66 Anderson, B. 258 Andrade, A. 253 Antioquia 144 A P R A 38 Aravena, C. 48 arbitraring institutions 74 Argentina 48, 65-7, 88, 104, 106, 148, 151, 161, 164, 167-8, 214, 230-31, 239, 245, 251, 265, 286, 290, 305, 321, 329 Aristotelian-Polibian tradition 279 armed conflict 5, 8, 9, 10, 21, 27, 51, 115, 140, 172 armed forces 23, 139, 147, 158, 195-6, 210-11, 222-3, 232, 235, 248-9, 253-4 armed group 144, 146-7, 150 army 21, 39, 89, 147, 159, 160, 168, 196, 223, 235, 317, 322 Aron, J 42 . Arosemena, C. 25 Arriagada, G. 149 Arteaga, R. 25 Arteta, G. 10, 37, 156, 181, 183, 203-204 Asian countries 127 Asian crisis 32, 80 Asian financial crisis 171 Aspiazu, F. 203 asymmetries o f information 74 Atlantic Ocean 266 Attanasio, O. 56 authoritarian 2, 10, 23-7, 80, 88, 169, 208-209, 253, 263, 272, 313, 318, 329 authoritarianism 5, 215, 249 automobile 121-2, 187, 191 autonomous 126-7, 130, 179, 211, 227, 233, 239, 255, 318 autonomy 5, 126, 199, 200, 211, 223, 226, 254-7, 317 aymara 39, 89, 90-92, 111-12 Badel, M.E. 151 balance o f payments 96, 123-4, 224-5, 231, 246, 259, 280, 301-303 Ballivián, H. 24 Banco de la República (Colombia) 118, 121, 123, 125-8, 130, 148-9 Banco Mundial 164 bandolerismo 141 331 332 Political crises, social conflict and economic development bank 8, 94, 157, 166, 174, 187, 192, 193, 203, 209, 225, 227-9 Bank Superintendent 90, 166 bankers 7, 20, 157, 203 banking crisis 16, 294, 299, 306 system 4, 16, 174, 178, 204, 227, 299, 300, 306 Banzer, H. 24, 79-80, 84, 86, 92 Baptista, A. 264, 296 Barco, V. 121, 122, 146-7 Barlovento, plantation lands o f 265 Barrientos, R. 24 Barro, R. 29 Batista, F. 273 Baus, C. 183 Beckerman, P. 41-2, 202 Behrman, J 56 . Bejarano, M.A. 151 Belaude, F. 25 Belize 54 Betancourt, R. 270-71, 275 Betancur, B. 139, 146 Birdsall, N. 51, 56, 103 Bolivia 3, 5-9, 16, 22-4, 27-30, 32-7, 39-40, 46-8, 50-52, 54, 56, 65-7, 73, 75, 77-8, 80-85, 87-90, 98-9, 101,103-104, 106-12 Bolivian economy 78, 92-3, 95, 105-106, 108 Boloña, C. 222 Bonilla, H. 217, 258 BONSOL 98 Bordaberry, J.M. 26 Borja, R. 160, 163, 165, 193 Bouillon, C.P. 47, 51 Brady Bonds 302 Brady Plan (Ecuador) 177 Brautigan, D. 215 Brazil 47-8, 54, 65, 67, 88, 106, 148, 150-51, 161, 164, 167-8, 214, 231, 239, 273, 285-7, 289-92, 305 Brazilian devaluation 80 breakdown 2, 18, 28, 36-7, 66, 146 Bretton Woods 8 Bucaram, A. 25, 28, 160, 163, 193, 196 Buchanan, J.M. 17, 41, 197 Burbano de Lara, F. 202 bureaucracy 74, 87, 169, 180, 192-3, 214, 288, 320 bureaucratic 76-7, 82, 87, 178, 236, 275, 288, 290 Burki, S. 213 business 7, 15, 77, 79, 90-91, 95, 97-9, 103-104, 109-11, 142-3, 148,184, 192, 195, 197, 202, 211, 232-3, 235-6, 238, 250, 264, 290, 297, 310, 314, 324 cycles 115 micro 90, 91, 110-11 businessmen 109, 203, 272, 277 Cagan, P. 203 Caldera, R. 264 Calderón, F. 275, 282-3, 286, 288, 311 Camacho Guisado, A. 150 campesinos 148 C A N 11, 41 see also Andean Community of Nations capital 39-40, 97, 123, 173, 181, 183, 203, 211, 226, 228, 234, 244, 258, 295, 297 account 96, 225, 231, 247, 301-303, 328 accumulation 6-7, 51, 59, 60 assets, non-human 56 controls 299 flows 2, 10, 123, 126, 171, 228 foreign 232, 319 formation 42, 45 human 47, 53-4, 60, 104, 109, 111, 145, 264, 268, 278-9, 320 inflows 7 markets 7, 111, 227-8 outflows 299, 301-302, 319, 327-8 physical 60, 182 social 56, 60 capitalist 41, 279 capitalization 79, 97, 104, 110, 299 capitalized 79, 97-8, 113, 271, 299 capture 20, 51, 57, 178, 192, 248, 282, 313 Caracas 265, 267, 311, 323 Cárdenas, M. 145, 150 Caribbean 29, 34-6, 40-41, 53, 55, 66-7, 265, 274 Carmona, P. 322 Caroní river 266 Carrasquilla, A. 149 Index cash 51-2, 275 Castañeda, L. 253 caudillos 265, 267, 288 CELADE 33, 36 Central America 52, 274 Central Bank 19, 94, 96, 126, 130, 174, 181-2, 185, 192-3, 199, 203-204, 226, 243, 258, 294, 297-300, 302 o f Ecuador 175, 179, 185, 192, 203 o f Reserves 226, 243, 258 o f Venezuela 294, 300 Central Government 95, 128, 131, 150, 200, 275, 285, 294, 303-306, 309, 327 Central Workers o f Bolivia 75 see also COB CEPAL 62, 202, 239 see also ECLAC; Economic Commission for Latin America and the Caribbean Cepeda Ulloa, F. 149 CEPROBOL 96 Chapare 76 Chávez, G. 9, 73 Chávez, H. 11, 15, 25, 28, 37, 39, 94, 263, 275, 282-3, 286, 289-90, 296-7, 299, 311-19, 322-6 chavismo 313-14, 316, 319-20, 327 child labor 53 Chile 11, 26-7, 29-30, 32, 48, 54, 59, 65, 67-8, 151, 161, 164, 167, 168, 170, 202-203, 230-31, 239, 258, 285-7, 289-92, 305 C IA 209-10, 223 citizens 28, 31, 56, 76, 97, 97-8, 159, 163, 169, 197, 200-201, 214, 216, 218, 223, 234-6, 255, 257, 268, 281, 284-6, 291, 310, 316-17 citizenship 201, 327 civil war 41, 141, 146, 267 civilian 24-6, 158-9, 168, 235 CLAS 242 Clement, L. 298 coalitions 75, 87-8, 195 COB 75, 77, 86 coca 4, 7-9, 76, 80, 86, 105, 110-111, 142, 143-4, 151, 155 Cochabamba 75 coffee 119, 120-122, 265 Cold War 210, 272 333 Collier, P. 21-2, 41, 218 Collor de Melo, F. 214 Colombia 3, 5, 7-10, 15-16, 21, 23-25, 27-30, 32-8, 41-2, 46, 48-52, 54-5, 60-63, 65-7, 81, 85, 88, 115-17, 119-21, 123-7, 131, 133-41, 143-8, 150-51, 161,164, 167-8, 230-231, 273, 285, 287, 289, 291-2, 301, 305, 321 colonization 9, 115 CO M IBO L 78, 94 Comisión de Estudios sobre la Violencia 150 commerce 105, 171, 229-30, 244-5, 315 commodity 6, 7, 10, 49 Community o f Andean Nations 40 competition 20, 98-9, 103, 111, 138, 185-6, 191-2, 196, 213, 227, 229, 230, 232, 235, 256 competitive 100, 105, 109, 119-20, 184-5, 221, 238, 279, 319 Comunidad Andina 203 C O N AIE 39, 167-8 concentration 90, 111, 133-4, 145, 151, 157, 187, 191, 197, 202, 262, 322 concessions 75, 98, 232, 267 conflict 115, 146, 173 border 173 internal 145 social 15, 17 congress 18, 78-9, 95, 126, 131, 140, 150, 160, 163-8, 194-6, 198-200, 202, 204, 209-10, 222-4, 235, 248-9, 255, 258, 271, 282, 304, 309, 316-17, 329 congressional 78, 139, 162, 164-5, 170, 199-200, 222, 235 consensus 22, 33, 37, 56, 63, 88, 128, 135, 142, 149, 159, 162, 169, 190, 193-5, 197-8, 201, 210, 224, 253-4, 269-70, 281-2, 318, 326 Conservative Party 136 constitution 3, 8, 10, 17-18, 23, 25, 26-7, 37, 65, 79, 117, 122, 126, 128, 131, 135, 139, 147-8, 158-61, 163, 168, 198-200, 204, 224, 226, 232, 236, 239, 259, 313-18, 323, 326 constitutional 2, 3, 10, 16, 17, 23-8, 36-40, 79, 126, 138-9, 148, 334 Political crises, social conflict and economic development 158-63, 195-6, 198-203, 209-10, 248, 255, 257, 314-16, 319, 326 Court 139, 148, 195 reforms 3, 16, 23, 27, 37, 39, 41, 158, 161-2, 196, 200 theory 17 construction sector 105-106 consumption 51, 65-6, 95, 113, 171, 179, 185, 189, 217, 229, 244, 276, 321, 327 Contingency Plan o f Social Protection 241 contract 17, 19, 38, 64, 167, 215, 236-7, 278 political 19 social 17, 64, 215 contractarian approach 17 Coordination o f Water 75 Cooter, R.D. 17 COPEI 11, 37-8, 264, 269-71, 282, 312 Coppedge, M. 41, 88 Cordero, F. 160, 163, 196, 204 CORDES 190, 202-4 corrupt 144, 167, 178, 192, 197, 282, 288-90 corruption 2, 4, 7, 9, 10, 15, 17, 20-21, 29-32, 40, 43, 59, 76-7, 82-5, 98, 104, 109, 136-7, 139, 144, 156-7, 160, 166-7, 169, 198, 204, 208, 223, 226, 230, 263, 268, 272, 274-5, 278-9, 282, 284, 310, 312 Costa Rica 27-9, 32, 65, 88, 164, 285-6, 290 Cotler, J 224, 257 . coup 2, 15, 25, 27-8, 77, 158, 223, 263, 268-9, 281-2, 286-7, 311-12, 323, 324-5 Crain, M. 197 credibility 15, 74-5, 86, 94, 105, 122, 157, 173-4, 192-3, 304, 310 crises economic 2, 4, 76, 170, 187, 198, 203, 209 financial 49, 290 political 1-4, 9, 15, 18, 28, 40, 112 presidential 2-4, 16, 23, 27-8, 36, 39 crisis economic 4, 28, 76, 80, 110, 112, 114, 116-17, 136, 144, 208,241,324 political 4, 18, 84, 86, 110, 221, 244 cross-country analysis 5, 13 differences 29, 31 studies 2 CSUTCB 86, 89 C TAR 239, 258 CTV 264 Cuba 161, 168, 273 Revolution 273 Cuba, E. 244 cultural 33, 65, 101, 111, 156, 197, 200, 267, 289-90, 313 currency 175, 199, 200, 225, 228, 259, 264, 278-9, 328 convertibility of 97 crisis 171 depreciation o f 4, 16 devaluation o f 4, 10 domestic 125 emission o f 95 foreign 94, 125, 225, 228, 259, 278-9, 328 national 200, 264 regime 16 current account deficit 248 Cuzco 218 Dahik, A. 160, 196 De Ferranti, D. 50, 51 De Gregori, I. 42 De Janvry, A. 51 de Toqueville, A. 204 debt 96, 102, 129, 171, 177-8, 181, 229, 275, 301, 306-307 crisis 51, 172-3, 176 domestic 124, 178, 306-307 exposure 184 external 124-5, 150, 204, 301-306 foreign 177-8, 203, 274-5, 282 private 124 public 98, 128-30, 165, 176-7, 203, 264, 307, service 128, 131, 177-8, 180, 276 decentralization 3, 37, 79, 97, 101, 110, 199, 218, 255, 285 deficit 150, 176 current account 248 Del Bufalo, E. 11, 161, 263 Delgado, C. 25 Demichelli, A. 26 Index democracy 2, 5, 10, 15, 18, 23-6, 28, 31-3, 36-7, 73, 75-8, 80-81, 87, 93, 117, 128, 136-7, 139-40, 148-9, 156-9, 162, 165, 169, 187, 191, 196-201, 204, 209, 210, 214, 223, 248, 257, 263, 265, 267, 269-70, 272-3, 281-3, 286-7, 289, 291-2, 313, 316-18, 323-4, 326 democratic culture 286, 288 system 5, 7, 32, 75, 156, 159, 167, 169-70, 196, 199, 256, 264, 270, 271 transition 73, 77, 214, 282 Denmark 167 devaluation 4, 80, 94, 123, 127, 131, 165, 172, 174, 176, 181, 274, 283, 298-300, 327-8 Díaz, J 220 . dictator 158 dictatorship 156, 159, 168, 196, 248, 264, 269-70, 272,313,322 discrimination 52, 59, 65, 267 Dixit, A. 19, 41, 74 D N P 128, 132, 134, 149, 150-51 dollarization 10, 16, 94, 172, 174, 183-4, 203, 226 dollarized 181 Domínguez, J 217 . Dominican Republic 65, 164 Dornbusch, R. 130, 149 downturns 62, 64 Drazen, A. 41 drug cartels 41, 42 dualism 116, 135, 138 Durán, S. 160 Duryea, S. 52, 55, 56, 58-9, 66 dynamics 9, 52, 59, 125, 127, 217 earthquake 172-3, 193 Easterly, W. 22 Echeverry, J.C. 149 ECLAC 35, 40, 121, 131, 133, 149, 151 see also CEPAL; Economic Commission for the Latin America and the Caribbean economic block 9, 92, 215 Economic Commission for the Latin American and the Caribbean 34-6, 40 see also CEPAL; ECLAC 335 economic crises 2, 4, 76, 170, 187, 198, 203, 209 crisis 4, 28, 76, 80, 110, 112, 114, 116-17, 136, 144, 208, 241, 324 dependence 9 development 2, 9-10, 16, 32, 61, 73, 112, 115, 119, 156, 169, 218, 257, 274 growth 2, 7-9, 15-16, 19, 22, 31, 35, 40, 42, 45, 49, 62-3, 92-3, 97, 101, 103, 106, 110, 115-16, 118­ 20, 132-5, 145, 156, 171-2, 191, 183, 189, 194, 201, 203, 213, 248-9, 264, 271, 294, 304, 320 inequality 7, 87, 111 openness 10, 133 performance 8, 10-11, 16-17, 19, 22, 29, 35, 42, 64, 157-9, 170, 172, 181, 186, 191, 208, 211-13, 215-16, 253, 257, 273-4, 297, 310 policy 73, 74, 78-9, 92, 104, 121, 126, 149, 160, 204, 222, 225, 249, 254, 280, 296, 309, 319, 328 reforms 9, 10, 35, 40, 75, 79, 119, 127, 133, 192, 209-10, 212, 224-5 rents 119 rights 3, 37 structures 6 Economist Intelligence Unit 84 economy 2, 4, 6-11, 16, 19-20, 27, 37, 40, 42, 45, 59-60, 62-3, 73, 76, 78, 80, 92-6, 104-106, 108-11, 115, 117-23, 125, 127-8, 145, 149, 156-8, 161, 170-173, 181, 183-4, 190-192, 194-5, 197, 199, 202, 203-4, 210-13, 215-17, 222, 228-31, 233, 236, 242-4, 249-51, 253-4, 256-9, 270, 273, 276-7, 279-82, 292-302, 306, 309, 315, 318-21, 324, 327-9 international 11, 120 open 104, 119-20, 296 world 63, 120, 327 Ecuador 3-6, 8, 10, 15-16, 22-3, 25, 27-37, 39-40, 46, 48-51, 53-4, 63-7, 81, 84-5, 88, 156-62, 164, 167-8, 170, 173, 175, 177, 179-85, 336 Political crises, social conflict and economic development 188-92, 194-5, 197-8, 201, 203, 252, 285, 287, 289, 291-2, 302, 305 Ecuadorian Social Security System 193 Eduardo, P. 107 education 37, 40, 52-6, 59-60, 62, 64, 68, 79, 97, 101, 103-104, 131-2, 135, 160, 174, 189, 198, 201, 220, 239-41, 268, 305, 307-8 reform 79, 97, 101 Edwards, S. 130 El Niño 171-3, 177, 184, 203-204, 248 El Salvador 65, 164 E LA P 242 Electoral Tribunal 163, 200 electricity 56, 97-100, 109, 113, 174, 187, 232-3 Emergency Social Fund 78 endogenous growth 22, 39 Escaith, H. 257 Escobal, J 56, 217, 229 . ethnic conflict 218, 220, 266-7 diversity 16-17, 22, 32, 38-9, 40, 59, 65, 111, 218, 266-7 divisions 21, 87-9 fragmentation 9, 21, 76-7, 89-90, 111-12 groups 5, 33, 198, 218, 266-7 political movement 112 ethnically homogeneous societies 22 ethnolinguistic fractionalization 22 exchange rate 92-4, 109, 111, 119-20, 123, 126-7, 173-4, 184-6, 191, 225-6, 228, 244, 246, 248, 295, 297-300, 302, 319, 327-8 external account 248, 294 borrowing 124, 126 debt 124-5, 150, 203, 248, 301-2, 306-307 financial cycles 10, 115 financing 95, 125, 247, 306 savings 104, 246 sectors 293, 300, 303, 328 shock 78, 104-105, 171, 173, 243 vulnerability 6, 10, 184, 301 failures o f information 74 Fajnzylber, P. 59 FARC 139, 141, 148 F D I 185, 302 see also investment Febres Cordero, L. 160, 163, 193, 196, 204 FE D E C A M A R A S 264 female heads o f household 47 Fernández, G. 172-3, 203 Fernández, J 149-50 . financial crises 49, 290 intermediation 96, 228 Finland 161, 167-8 fiscal accounts 178, 303 adjustment 277 instability 176 policy 169, 226 volatility 176, 178 Fisher, S. 149 FO N AVI 237-8 FONCODES 239, 241-2 Ford Foundation 40, 149, 202, 257 foreign currency 225, 228, 259, 278-9, 328 debt 177-8, 203, 274-5, 282 direct investment 97, 108-109, 112, 184, 228, 232, 302, 328 exchange 6, 126, 276-7, 279, 282, 297-8, 301, 319, 327-8 trade 225, 229, 256 formal institutions 17, 21, 75, 140 political 3, 76, 87, 138 system 75-6, 87-8, 90, 116, 138-9, 146, 148 Four Strategies plan (Colombia) 119 fragmentation 9, 37, 60, 75-7, 86-90, 111-12, 115, 136, 148, 162-3 194, 198, 217, 309-10, 321 free 20, 79, 120, 210, 242 convertibility 264, 276 elections 169, 264, 326 market 10, 97 freedom 38, 40, 104, 197, 272, 284-5, 291 FSE 78 Fujimori, A. 4, 10, 15-16, 25, 29, 310-11, 214, 218, 220-24, 226-7, 229, 232, 238, 242, 248-9, 252-7, 315-16 Fukuyama, F. 204 Index Gaitán Daza, F. 150 Gaitán, J.E. 141 Galán, L.C. 139 Gallardo, J 180 . Gallegos, R. 272 Gamarra, E. 75 game theory 18 Garay, L.J. 149, 150 García, A. 38, 86, 224, 244, 254 García, L. 24 García, M. 150 Gaviria, C. 121-2, 130, 147, 149 GDP 4, 37, 51, 61-2, 64, 90-95, 104-105, 108, 110-11, 118, 124-5, 128, 130-31, 144-5, 150-51, 166, 171-3, 177-8, 180, 184-5, 194, 203-204, 221, 226, 231, 238-40, 243, 245-8, 258, 264, 292-6, 300-308, 327 growth 50-51, 96, 102, 105, 118, 124, 170-171, 181, 183, 193, 203, 243, 276-7, 293-6 per capita 36, 50, 53, 66-7, 104, 119, 170, 184, 187-8 see also gross domestic product general equilibrium 20 geography 11, 76, 91, 104, 108, 112, 115-17, 141, 217, 259, 265 Germany 26, 27 Gini 66-7, 111 coefficient 33-4, 48, 103, 189, 264 index 47-8 Glassman, A. 9, 45 Global Competitiveness Report 29 globalization 55 Gómez Buendía, H. 150 Gómez Restrepo, H.J. 151 Gómez, J.V. 278, 288, 329 Gómez, L. 24, 141 governance 1-2, 7-11, 15-21, 23, 27-32, 35-40, 42, 45-6, 57-8, 63, 66, 73, 75-80, 83, 86-7, 99, 105, 110, 112, 115-17, 135-6, 149, 156-9, 162, 169, 190-91, 194, 196, 198-202, 217, 257, 263, 265, 267-72, 274, 276, 279-81, 283-7, 289, 291-2, 301, 309, 310-14, 318-21, 323 Gozáles de Olarte, E. 215, 242, 258 G R A D E 219 337 Graham, C. 40, 56, 60, 73, 75 Gray Molina, G. 9, 39, 56, 73, 75, 90 Great Britain 27 Grindle, J 75 . Grompone, R. 257 gross domestic product 4, 16, 170, 172 see also GDP Growth Competitiveness Index 31-2 Guaraní 89-91 Guatemala 47, 54, 65, 151, 161, 167-8 Gueilier, L. 24 Guerra Federal 267 Guerra-García, G. 257-8 guerrilla 41, 117, 139, 141-3, 145, 147, 151, 263, 270, 271, 273, 287, 309, 321 Guevara, W. 24 Gutiérrez, L. 160, 163, 169, 193, 196, 200 Guyana 54 Guzmán, A. 248 Haití 54, 161, 168 Hakim, P. 40 Hall, R. 58 Hamilton and the Founding Fathers of the US Constitution 17 Handa, S. 9, 45 Harrison, L. 204 Hartlyn, J 41 . Harvard University 16, 29 Hausman, R. 264 Hayek, F. 17 H D I 53, 63 health 37, 54, 60, 62, 80, 101, 103, 131-2, 189, 198, 239, 241-2, 255, 264, 268, 299, 305, 307-308 Herrera Campins, L. 274-5, 289 Hilgert, M. 46, 65, 67 Honduras 48, 54, 65, 67, 151, 161, 164, 167, 168 House o f Representative 164, 270 human rights 117, 138-40, 169, 209, 222-3, 316 Huntington, S. 159, 202, 215 Hurtado, O. 10, 37, 156, 160, 163, 193, 202-204 Iceland 167 IDB 45-7, 49-50, 52-3, 62, 65, 328 338 Political crises, social conflict and economic development IESS 193 Illescas, J 229 . illiteracy 54, 103, 170, 268, 307 IM F 8, 103, 128-9, 169-70, 177, 195, 263, 280-81, 283, 294, 300, 303, 305 see also International Monetary Fund import substitution 38, 119, 191, 235, 271, 274, 280, 297 income 2-4, 22, 38-41, 47-9, 51-3, 56, 60, 62, 64-6, 90, 92, 104, 110, 133-5, 174, 179, 189-90, 199, 202, 220, 230, 249, 252, 258, 294, 303-305, 308 concentration 90, 111, 134, 151 distribution 33, 47, 53, 66-7, 92, 133-5, 144, 150, 156, 189, 197, 217, 264, 274,307 inequality 17, 21, 48, 55-6, 134, 220, 308 low 7, 22, 104 national 7, 22, 47 per capita 31, 35, 156, 170 ,187-8, 268 real 22, 93, 134, 278, 297 tax 174, 179, 202, 304-305 index consumer price index 174, 299 contracts and law sub-index rank 32 corruption perception index 85 corruption sub-index rank 32 Gini index 47, 48 governance index 57-8 Growth Competitiveness Index 31-2 Human Development index 53, 132-4 human poverty index 54, 103 institutions index 31 macroeonomic environment index 31-2 quality of life index 134, 145 technology index 31-2 World Bank’s governance index 136 indigenismo 220 indigenous 4-5, 9, 15, 32-3, 37, 39, 47, 52-3, 87, 89-90, 92, 141, 151, 160, 167-8, 187, 196, 198, 218, 220, 258, 266, 317 industrialized countries 50 economy 244 nations 191 inequality 2, 7, 9, 15, 17, 21-2, 32, 33-4, 36, 38-40, 45, 47-54, 56, 59-60, 63-4, 66-7, 73, 76-7, 87, 90, 111-12, 151, 156, 187, 189, 215, 217, 220 economic inequality 7, 87, 111 inequality 16, 38, 144, 287 wealth inequality 2, 38 inflation 109, 113, 246, 277 informal economy 109-10 employment 133-4 power 215, 227, 255 sector 142, 244, 297, 308, 327 systems 76, 88, 116, 139 information 53, 59, 82, 84, 89, 136, 178, 209, 218, 233, 249, 255, 257, 259 asymmetries o f 74 failures o f 74 public 62 IN PE X 96 IN R A 79, 99 institutions 2, 6-8, 17-22, 28-9, 31 political institutions 5-7, 18 quality o f 2, 6, 8-9, 16-17, 23, 28, 31 integration 11, 100, 120, 142, 208, 217-18, 231, 274, 327 Inter American Development Bank 40, 48, 65-6, 149, 202 Inter American Dialogue 40 interest rates 96, 127, 130-31, 174, 227-8, 248, 258, 290, 296-7, 299, 302, 307, 327 intermediation 88 financial 96, 228 political 86-7 internal credit 94, 96, 227 international market 108, 122, 228 International Monetary Fund 63, 77, 194, 227, 263, 294, 300 see also IM F international ranking 49, 80-81, 90, 110, 112, 115, 127, 130 ,133-4, 171, 220 intervention 126, 166, 195, 198-9, 212, 225, 231-2, 235-6 military 28 Index interventionism 119 investment 16, 19, 59, 78, 97, 104-106, 184, 209, 211, 232-3, 239, 242, 246-7, 258-9, 271, 274, 290, 293, 296-7, 302-303, 309-10, 327 domestic 109 foreign 108-109, 112, 184, 228, 232, 302, 328 human capital 279 private 35, 97, 105, 125, 209, 225, 232-3, 244, 246, 251, 276, 295 public 19, 78, 95, 97, 101, 109-10, 247, 297, 304 investors 6-7, 28, 97, 109, 195, 216, 232, 259, 309 Ireland 161, 168 Italy 26, 27-8 Jamaica 54 Japan 10 Jaramillo, C.F. 149 Jaramillo, F. 40 Jaramillo, M. 10, 208 job creation 110 Jones, C. 58 judicial system 109, 117, 138-9, 144, 167-8, 214, 291-2, 310 justice 21, 74, 131, 144, 149-50, 194, 198-9, 214, 239 Kalmanovitz, S. 150 Kaufmann, D. 28, 30, 56-8, 76, 82, 136, 257, 283, 285, 287, 289, 291-2 Keefer, P. 29, 42 Kennedy, J.F. 26 Kisic, D. 257 kleptocracy 20 Knaack, S. 29, 42 Kraay, A. 28, 76, 82, 136, 257, 283-5, 287, 289, 291-2 Krueger, A. 41 La Guaira, port o f 265 La Porta, R. 42 labor market 9, 45, 52-3, 63-4, 210, 220, 225, 234-5, 244, 259, 267 lack o f transparency 4, 109, 191, 310 Lara, C. 172-3, 203 Latin America 5-6, 8, 10, 15-16, 27-9, 31-7, 40-42, 45-51, 54, 59, 61, 339 63, 65-6, 81-2, 87-8, 103, 105, 108, 115-17, 119, 120, 122-4, 131, 133-5, 137, 139-40, 144-5, 150, 158-9, 161-2, 164, 167, 209-12, 214-15, 224-5, 229, 235, 239, 242, 254, 257, 263, 265, 267-8, 272-3, 277, 283, 287-8, 304, 309, 312-13, 316,319-20 Latin Barometer 31 Latinobarómetro 33, 59-60, 80-81, 112, 136-7, 140, 150, 169 Leal Buitrago, F. 150 legal system 23, 213-14, 310 legislative 18, 131, 162, 165, 191, 193­ 4, 196, 199, 223, 236, 270, 316 legitimacy 10, 18, 36, 74, 86, 146, 169, 196, 210, 215 LeGrand, C. 150 Leguía, A. 208 Leoni, R. 275 Lepage, O. 275 Levine, R. 275 Lewis, A. 267 Liberal Party 136, 141 liberalization 10, 78, 93-4, 96, 116-17, 119, 122-3, 133-4, 149, 210, 225, 227-8, 263, 300 life expectancy 53, 103, 170, 189-90 Lima 46, 60, 208, 217-19, 249, 253 Linz, J 18, 28, 41 . literacy 53 Llorente, M.V. 150 Londoño, J.L. 150 López Contreras, E. 329 López-Naya, M. 315 Lusinchi, J 275, 300 . Lustig, N. 51 macroeconomic 51, 127-8, 130, 212, 224, 243, 247, 250, 271, 276, 293, 296, 318 aggregates 51 crisis 4, 51 indicators 96, 102, 294 instability 123, 125, 184 policies 76, 209, 215, 222, 225, 275, 280, 282, 310 shock 80, 86, 110 stability 64, 94, 97, 104, 126, 159, 162,194 340 Political crises, social conflict and economic development Stabilization Fund 293, 302 volatility 117-18 Mahuad, J 4, 8, 15, 25, 28, 39, 160, . 163, 168, 193, 196, 199, 200, 204 Mainwaring, S. 41, 88, 283 Mallku 75 Mallon, F. 258 malnutrition 51 Manrique, N. 258 Maracaibo 265 Marxian theory 41 Mauro, P. 29, 42 M B L 79 McIlwaine, C. 60 Medellin 151 Medellin cartel 144 Medina Angarita, I. 329 Medina, M. 319 megacoalition 79 Mejía, A. 163, 202 Menem, C. 214 mexicanization 270-71 Mexico 48, 54, 65, 67, 88, 148, 161, 164, 167-8, 285-7, 289, 290-92, 305 middle class 7, 22, 38, 234, 255, 264, 268-70, 272, 277-8, 288, 311-12, 318, 321-4 migration 38, 65, 111, 170, 266 military 4-5, 15, 24-5, 27-8, 77, 80, 92, 139, 141, 150, 158-9, 169, 177, 195-6, 223, 263, 268-70, 272-3, 281, 286, 308, 217, 322-3 Millennium Development Goal 64, 66 Miller, J.G. 257 Ministry o f Defense 196, 204 o f Economy and Finance 230, 254, 258 o f Finance 178 o f Labor 84 o f the Presidency 239, 257-8 o f the Promotion o f Women and Human Development 239 M IPR E 239 Mitroti, J 149 . mixed model 119-20 M N R 75, 78-9, 86, 89 modernization 117, 120, 128, 135, 195, 226, 268-70, 272, 282 monetary policy 19, 22, 93-4, 204, 225-6, 244, 256, 276, 294-5, 297, 299 money 225 monopoly 5, 21, 100, 113, 149, 236 Montenegro, S. 144, 149-51 Montes, J.L. 47, 51, 65 Montesinos, V. 4, 10, 15, 221, 223, 249-50, 255 Montesquieu, C. 17 moral hazard 174 Morales, J.A. 79, 112 mortality 54-5, 103, 150, 189-90, 307 Moser, C.O.N. 60 Movimiento Bolivia Libre 79 Movimiento Indígena Rachacuti 112 Movimiento Nacionalista Revolucionario 78 Movimiento Revolucionario Tupac Amaru 221 M R T A 221-2, 249 Muhlstein, E. 65 Naím, M. 257 National Front 135 National Fund o f Compensation and Social Development 239 National Housing Fund 238 National Institute o f Exports 96 National Planning Department 128, 131,134 National Rehabilitation Plan 141 natural resources 2, 6-7, 9, 39, 41, 99, 104-106, 111 Natusch, A. 24 negotiation 74-5, 77-80, 86-7, 136, 139-40, 146-7, 151, 159, 177, 190, 201, 236, 318 neoarchaic 314, 316, 324, 327 neoarchaism 314, 319, 329 neo-authoritarian 4, 10 neoclassical 181, 215, 319 neoliberal 215, 250 neoliberalism 319, 329 neopopulism 11, 315 neopopulist 79 neostructural 215 Netherlands 161, 168 Index New York 40, 234, 297 New Zealand 161, 167-8 N G O 209, 264 Nicaragua 48, 54, 65, 67, 151, 161, 164, 167-8, 305 Niskanen, W. 192 Nixon, R. 26 Noboa, G. 15, 160, 193, 196, 200, 204 Nogales, X. 107 nomadic 313-14, 318-19, 321 nomadism 290, 316 non-Andean 47, 49, 50, 54, 61-2 non-cooperative game 93 North, D. 19, 41, 74, 212 nutrition 60, 62, 241 Ñopo, H. 258 Obando, E. 233 Ocampo, J.A. 9-10, 40, 42, 115, 149, 150 O’Donnell, G. 87, 214, 257 OECD 6, 27-30, 32, 37, 55 oil 6, 10-11, 16, 37, 95, 105-106, 108, 121-3, 156, 160-61, 170-73, 166-77, 183-5, 191, 193, 195, 196, 199, 204, 213, 263-5, 267-77, 279, 281-4, 288-307, 307-10, 313, 315-18, 320-21, 324-5, 327-9 Olivera-Tanzi effect 113 Olsen, M. 41 OPEC 170, 203, 274, 297, 305-6 Orinoco River 266 Orozco, I. 151 Ortiz de Zevallos, G. 217, 257 Ovando, A. 24 Pachakutik 160, 168-9 Pacó-Font, A. 234, 237 Pact for Governance 79 Pacto de Punto Fijo 270 Pagés, C. 55-6, 58-9 Palacio Rudas, A. 150 Palacios, M. 151 Panama 48, 54, 65, 67, 140, 151, 167, 305 Panizza, U. 63, 73 Panorama Social 66, 214 Paraguay 48, 54, 65, 67, 161, 164, 168, 305 paramilitary 139, 143-5, 150 341 Paris 273 parliamentary 3, 18, 26-8, 37, 253 Parra, M.A. 149 Pastrana, A. 122, 136-7, 146-7, 329 Pastrana, M. 119 Patriotic Union party 144 patronage 138, 270-72, 275, 317-18 Paunovic, I. 202 Paz Entenssoro, V 78-9, 92-4 peace 39, 60, 117, 136, 139, 141, 146, 217,252 Pécaut, D. 146, 151 Peñaranda, R. 150 pension reform 79, 97-8 pension system 97-8 Pereda, J 24 . Pérez Jiménez, M. 264, 272-3 Pérez, C.A. 25, 263, 274-5, 286, 288, 290 Pérez, M. 25 Pérez, R. 25 Perry, G.E. 213 Perry, S. 149 Persson, T. 42, 59 Peru 1, 3-8, 10, 15-16, 22-3, 25, 28-33, 35-40, 46-52, 54, 56, 60-62, 64-7, 81, 85, 88, 142-3, 161, 164, 168, 173, 177, 208-15, 217-18, 220-21, 224-6, 230-31, 233, 236, 239-40, 243, 245-8, 253-4, 256-9, 285, 287, 289, 291-2, 305 PETROECUADOR 160 Pettinato, S. 73 Peyrefitte, A. 204 Pindyck, R. 42 Pizarro, E. 150 Plan Bolívar 2000 308 Plan Colombia 8, 147 Plan de Reestructuración Jurídica del Estado 158 Plan for A ll 79 PN U D 150-51, 203-204 political crises 1-4, 9, 15, 18, 28, 40, 112 crisis 4, 18, 84, 86, 110, 221, 244 culture 3, 87, 138, 220, 276 instability 136, 138, 156, 159-61, 191, 177, 190, 193-5, 197, 225, 263, 283, 286-8, 294, 301, 309-10, 312 342 Political crises, social conflict and economic development Popular Action 98 populism 130, 157, 194, 201, 220, 249, 315 Porter, M. 32, 42 Posada Carbó, E. 146, 150 Posada, C.E. 144, 150-51 poverty 7, 9, 15, 32-4, 45-54, 56-7, 59-60, 62-7, 73, 76-7, 79-80, 90-92, 103-104, 110-11, 116, 132, 134-5, 144, 156, 187-9, 198, 215, 238-40, 242, 258, 307-308, 319, 327 PPP (power parity o f purchase) 46-7, 52, 65-6 Prado, M. 25 presidential crisis 2-4, 16, 23, 26-8, 36, 39 prices 6, 16, 49, 78, 92-4, 97, 122, 130, 165, 170-74, 176-7,186-7,191, 185, 204, 226, 229, 231, 244, 275, 283, 292-7, 299, 300, 302-303, 306, 309-10, 319, 327-8 private sector 78, 104, 108-109, 124-5, 127, 189, 192, 229, 232, 236, 251, 278, 296-7, 309, 328 privatization 10, 20, 79, 97, 99, 195, 210, 225, 228, 231-5, 247, 255, 259, 319 PRODEM U H 239 productivity 7, 35, 38, 76, 96, 103-104, 135, 145, 181-4, 187, 190, 192, 203, 244, 274, 276, 295 PROFINES 242 P R O N A A 239, 241 protection 20, 110, 119-20, 122, 186, 191-2, 195, 197, 202, 222, 229-30, 234, 241, 255-6, 277 protectionist 119-20, 229, 235 Puerto Cabello, port o f 265 Putnam, R. 204 Qechua 39, 89-92, 218-9 Quiroga, J 80, 86, 92 . Quispe, F. 75, 112 Quito 166, 189 Ramírez, J.C. 149 Ramos, M. 315 recession 225, 241-3, 248, 250-52, 276, 295-6, 328 redistribution 40, 110-11, 133 regression analysis 183 degrees o f 232 fixed-effect method 56 regulatory framework 97, 109, 113, 284 rent seeking 7 Reyes, A. 151 Riesgo, G. 259 Rincón, H. 149 Ríos, G. 161 Roberts, K. 283 Rocha, R. 151 Rodrick, D. 42, 59 Rodríguez, G. 25, 158 Rodríguez, M. 229 Rojas, G. 24, 141 Roldós, J 25, 159, 202 . Rowland, M. 202 Rubio, M. 151 Ruíz, L. 188 Rural Highlands 46 Rural Jungle 46 Saavedra, J 10, 51, 53, 208, 220, 237-8, . 244, 258 Sachs, J 77, 108, 112 . Sadoulet, E. 51 Saez, I. 311-12 SAFCO Law 99 Safford, F. 151 Salazar, A. 151 Samaniego, P. 204 Samper, E. 122, 130, 139, 147, 150 Sánchez de Losada, G. 4, 15, 39, 79, 84, 86, 92 Sánchez, F. 133, 150 Sánchez, G. 151 Santa María, M. 151 Sarmiento Gómez, A. 151 Sarmiento Palacio, E. 149 Schady, N. 242 Scully, T. 41, 283 seminomadism 266 Sendero Luminoso 5, 10, 221 Shugart, S. 88 Siles Suarez, H. 24, 77, 84, 86, 92-3 Siles, L. 24 Singapore 167 SIRSE 98 Index Smukler, A. 75 Solidarity Bond 98 Solimano 1, 8, 15, 42, 51, 56, 149-50, 202 Soto, R. 51 South America 265 Soviet 20, 272 Spain 217 Spanish Caribbean 265 Steiner, R. 150 Stigler, G. 191, 197 Switzerland 161, 168, 267 Syrquin, M. 149 Székeley, M. 51 Tabellini, G. 42, 59 Taboada, S. 229 Tanaka, M. 217 Taylor, L. 41 Third World 272, 291 Thorpe, R. 42 Thoumi, F. 151 Tillet, A. 149 Toledo, A. 220, 253 Tollison, R. 197 Tommasi, M. 41 Torero, M. 217, 234, 238, 258 Torrelio, C. 24 Torres, J.J. 24 Tovar, C. 149 Trebbi, F. 17 Trinidad and Tobago 54, 305 Trujillo, E. 151 Tuesta, F. 209, 257 Tullock, G. 17, 41 Turbay, J.C. 146 Turkey 167 uncertainty 7, 93, 105, 195, 259, 287, 296, 301-302, 309 U N D P ’s Human Development Index 53-4, 132 unemployment 52, 60, 78, 133-4, 170-71, 264, 278, 293, 296-7, 327 United Kingdom 27 United States 8, 18, 26-7, 142, 147, 167, 209-10, 221, 223, 273-4 University o f Syracuse’s Political Risk Service 84 Uprimmy, R. 150 343 urbanization 111, 218 Uribe, A. 137, 146 Urriolagoitia, M. 24 Urugay 26-30, 32, 41, 48, 54, 65, 67, 88, 138, 161, 164, 167-8, 239, 305 U SA see United States Valenzuela, A. 18, 28, 41 Vallejo Plan 149 Vargas Llosa, M. 220-21 Vázquez, E. 258 Velarde, J 229 . Velasco, J.M. 25, 158 Velázquez, R.J. 275 Venezuela 3, 5-6, 11, 15-16, 23, 25, 28-30, 32-7, 40-41, 46-8, 50-52, 54, 61, 64-7, 81, 85, 88, 147-8, 151, 161, 164, 167-8, 263-77, 279, 280-97, 301-303, 305, 307-13, 315-21, 323, 325-8 Vildoso, G. 24 Villar, L. 149-50 violence 2, 5-6, 20-21, 29, 32, 38-40, 59-60, 67, 76, 82, 84, 112, 115-16, 125, 135-8, 140-46, 150, 220, 274, 283-4, 286-8, 309-10 Vos, R. 49 vulnerability 10, 105, 283 external 10, 184, 301 financial 16 to external financial cycles 115 wages 22, 52-3, 63-4, 92-4, 134, 170, 179-80, 188, 204, 264, 296, 304, 306 Wagner, R. 197 War of Thousand Days 140-41 War of Water 75 Washington Consensus 63, 169, 210, 224,253-4, 282 Weber, E. 258 Weber, M. 23 welfare 6, 59, 156, 159, 166, 194, 202, 242, 259, 306 Whitehead, L. 77 Wise, C. 257 World War 27, 266 Zoido-Lobatón, P. 28, 76, 82, 136, 257, 283-5, 287, 289, 291-2