The Political Economy of Macroeconomic Policy Reform in Latin America
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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.
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Chapter 2: The Political Economy of Macroeconomic Policy Making in Latin America

Eduardo Wiesner


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...

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