The Distributive and Institutional Context
Chapter 2: The Political Economy of Macroeconomic Policy Making in Latin America
Rational self-interested individuals will not act to achieve their common interest . . . unless some separate incentive is oﬀered. Mancur Olson (1965, p. 2) This chapter reviews the institutional and political economy context of macroeconomic policy making in Latin America. Its objective is to identify and examine the political economy explanations that may be behind actual macroeconomic policies. It frames the analysis around the evolution and origins of the ‘right’ institutions and on how they are mainly the result of endogenous political and equity conditions and perceptions of how public and private markets serve, or not, the general interest and welfare. After the core of generally accepted macroeconomic principles is summarized, a perspective on Latin America’s macroeconomic and equity performance is presented and placed in the context of the strength or weakness of the political demand for macroeconomic stability and for attendant ﬁscal and ﬁnancial reforms. The general conclusion is that short term political interests and incentives, under asymmetric information restrictions, often have a stronger capacity to inﬂuence public policies than long term considerations of policy consistency. To mitigate these ‘collective actions problems’ there seems to be a need for externally enforced rules (Ostrom, 2000, p. 137). It ends oﬀering an information based strategy for policy reform and for institutional transformation. I. THE PRIMACY OF INSTITUTIONS AND INCENTIVES The emerging paradigm in the political economy of development and in the economics of politics is that institutions as constraints and rules, and the incentives they contain, are the main determinants...