Political Costs of Privatization

By Vallejo Acevedo, Maura Alejandra | Hemisphere, Spring 1998 | Go to article overview

Political Costs of Privatization


Vallejo Acevedo, Maura Alejandra, Hemisphere


After the debt crisis of the early 1980s, Latin America's leaders were forced to articulate new economic strategies to check inflation and renew the trust of international creditors. The last decade has seen an intensification of this process of economic readjustment, which led most governments in the region to adopt a neoliberal model of economics. The neoliberal model is based on the idea that through the market there will be a massive reallocation of resources through different sectors and processes. The direct intervention of the state in the economy is the first logical point of discussion within this context.

Analysts of Latin America have tended to ignore the political component of economic readjustment. They expected economic reforms to open the political arena to new actors, who would in turn create new channels of political participation. From the very beginning, however, economic modernization has been a highly centralized process, with decision making concentrated in the hands of the executive branch. Mexico and Peru are examples of countries whose presidents have adopted neoliberalism as a way to court new allies through clientelism, while closing avenues of participation to critics of the regime. The end result has been to reinforce centralist tendencies, limiting any potential progress toward democratization. Reforms implemented in this way may solve fiscal crises in the short term, but the absence of a broader social consensus precludes the creation of participatory mechanisms that could further the process of democratic transition.

This lack of consensus has been most obvious in the case of privatization, one of the most important and controversial components of neoliberal economics. Privatization brings fresh resources and allows the state to balance public finances, but it also leads to a redefinition of the very role of the state. Along with the economic effects of this redefinition, privatization strengthens certain political institutions--most notably, the executive branch--while socially, it eliminates the redistributive role of some state-owned enterprises. The neoliberal agenda has tended to ignore this redistributive function, leaving behind the discussion of the new political and social responsibilities of the state. In this sense, the process of democratization has also been affected by the neoliberal economic agenda.

REFORMING THE STATE IN PERU: THE INSTITUTIONAL OUTLOOK

Peru has implemented one of the most extensive privatization programs in all of Latin America. In just a few years, almost all of the country's state-run companies have passed into private hands. This rapid transformation is especially surprising given the Peruvian state's past record of intervention in the economy. In the 1960s and '70s, state-run companies were the main force behind industrialization, and a bloated public sector was a useful tool for defusing social protest. In the 1980s, however, economic collapse under President Alan Garcia and the outbreak of severe terrorist violence brought about a crisis of legitimacy for the state. When Alberto Fujimori took office in 1990 as a political outsider, he introduced a severe package of economic reforms to rein in hyperinflation and restore the country's credibility with international creditors. Privatization quickly became one of Fujimori's priorities. As of January 1997, he had raised over $6 billion through the sale of public companies to the private sector.

Given the speed of this transformation, it is easy to overlook the political and social costs of privatization in Peru. The program picked up pace in 1992 after Fujimori's self-styled coup, or autogolpe, which blamed Congress and the judicial system for hindering the course of modernization in Peru. A new constitution passed in 1993 strengthened the executive branch at their expense, in effect making the president the center of decision making. In this context, privatization became one of the most important aspects of Fujimori's agenda. …

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