The Political Economy of Macroeconomic Policy Reform in Latin America

The Political Economy of Macroeconomic Policy Reform in Latin America

The Distributive and Institutional Context

Eduardo Wiesner

Eduardo Wiesner’s book makes an important contribution to the understanding of development by blending together the interdependent issues of (i) macroeconomic performance and volatility, (ii) equity and distributive justice, (iii) fiscal deficits and the redistributive effectiveness of social public expenditures, and (iv) the demand for the ‘right’ institutions and for policy reform in Latin America. It does this by examining recent macroeconomic crises from a political economy perspective, and finds that information is the critical algorithm that links together the demand for macroeconomic stability, macroeconomic performance and, ultimately, distributive justice.

Chapter 4: Brazil: The Market Enhancing Role of Political Economy Factors

Eduardo Wiesner

Subjects: development studies, development economics, economics and finance, development economics, political economy, politics and public policy, political economy

Extract

Research in institutional economics must focus on actual rules rather than on conceptually ambiguous assessment of institutional outcomes. Glaeser et al. (2004, p. 26) I. THE LULA FEARS IN REVERSE Normally, distributive politics and political economy restrictions limit the role of markets and of competition in inducing efficient private and public outcomes. The case of Brazil since the mid-1990s may be the beginning of the reverse situation. In this country political economy factors appear to be the ones that increasingly enhance or protect the role of markets and restrict political opportunism. In 1994 with the Real Plan1 this country finally tamed hyperinflation, bringing it down from 2000 per cent in that year to less than 4 per cent in 1998. Then in 1999 Brazil adopted an integrated macroeconomic policy regime anchored on inflation targeting which allowed it to manage a serious economic crisis successfully. Although there is still ample room for further macroeconomic improvement it appears that the public at large wants to preserve the lower inflation rates observed during the last ten years. Low inflation seems to have politically redeemed orthodox macroeconomic management in the eyes of a public hitherto very distrustful of markets. Early after having won the elections in 2002, the incoming Lula administration flirted with some populist policy postures which had to be quickly abandoned when market signals (spreads and the like) indicated the imminent costs of such an overture. The political demand for macroeconomic stability transformed itself into a demand...

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