Academic journal article Political Research Quarterly

The Determinants of Economic Liberalization in Latin America

Academic journal article Political Research Quarterly

The Determinants of Economic Liberalization in Latin America

Article excerpt

Previous work on political institutions and economic reform provides a number of testable hypotheses that are rarely examined in a multivariate framework. Divided government, political polarization, fragmented legislatures, ideology, external factors, the strength of the presidency, and democracy itself have all been forwarded as possible constraints that influence the depth and speed of economic reform. Using time-series cross-sectional data, this research note provides a multivariate test of the impact these institutions have on different components of structural reform. Our findings suggest that specific institutional arrangements are important for achieving some specific kinds of economic reform. However, our main finding implies the kind of institutional and ideological constraints prominent in the literature do not constrain politicians from enacting reform.

During the 1980s and 1990s, nations undergoing democratization faced economic challenges that required painful austerity measures. As democratization proceeded, interested onlookers wondered whether elected officials could initiate structural reforms that often incite strident protests without jeopardizing their political survival (Bates and Krueger 1993; Haggard and Kaufman 1992; Remmer 1986). As many democratic countries initiated reforms, a sub-regime type of inquiry-the new institutionalism-formed to explain what appeared impossible only a few years earlier.

Much of the new literature posits that institutions which promote autonomy or that contribute to fewer veto players are best suited for initiating economic reforms. Among state autonomy arguments, the concentration of presidential authority (Haggard and Kaufman 1995; Remmer 1991; Nelson 1990), the relationship between the legislature and the executive branch, the number of effective parties in the legislature, executive ideology, and the electoral system itself (Ames 2000; Milner 1997; Shugart and Carey 1992; Stokes 2001) all figure prominently. Veto player approaches similarly assess the effect of institutions on policy reform, showing that more veto players inhibit economic liberalization (Tsebelis 1995, 2002). Although previous work provides many useful insights on institutions and their impact on policy outcomes, most have not established an empirical relationship between institutions and policy outcomes in a multivariate framework.1

In addition, few studies examine how diverse components of economic reform programs are affected by different kinds of political institutions. Whereas political institutions that promote state autonomy or fewer veto players are arguably critical for privatization, trade, and tax reform (reforms that usually require legislative action), these institutions are expected to be less important for capital and financial reform (reforms that can be enacted by presidential decree).

This research note tests existing theory to determine whether all forms of economic liberalization are created equal. We provide an analysis of political institutions and economic reform that includes three groups of independent variables: (a) political institutions and the domestic political context; (b) macroeconomic variables; and (c) international factors. Controlling for macroeconomic and international constraints, we test whether political institutions and the domestic political context form important constraints on economic reform. We analyze the following kinds of economic reforms: tax, trade, and financial reform, privatization, and capital liberalization.

Using Time-Series Cross-sectional data for 15 Latin American countries between 1980 and 1995, this study shows that institutional and domestic political factors do not systematically prohibit economic reform.2 Inflation is the most important factor that affects economic liberalization.3 High inflation tells us what presidents will decide to do; institutions may affect what they can accomplish.4 We also discover that only in a few instances are institutional and ideological variables correlated with economic liberalization. …

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