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Private investment response to neoliberal reforms in a delegative democracy: reflections on Argentina.


When Warren Christopher, then U.S. Secretary of State, visited Buenos Aires in February 1996, he declared that Menem and Cavallo "had done in Argentina one of the great economic successes of the century," (Clarin, International Edition, 27 February to 14 March 1996, p. 1). Certainly, there have been some remarkable successes in economic performance since Menem became president in 1989, e.g., in the areas of inflation and fiscal accounts.(l) Yet ultimately, the measure of success of economic reforms is whether sustained economic growth ensues. This criterion of success is acknowledged by Domingo Cavallo, the main architect of the most intensive phase of economic reforms. He states that the reform program was conceived mainly as a tool to overcome decades of economic stagnation and achieve sustained growth (Cavallo and Mondino, 1995).

But there are serious doubts as to whether a foundation is being laid for sustainable economic growth. Despite all the economic reforms implemented under the Menem administration, the pattern of private investment behavior is very similar to the pre-1990 period. Investment is not focused on increasing the international competitiveness of tradable goods.

As is typical in the study of social phenomena, one can find multiple explanations for an inadequate private investment response in Argentina. One might think that Hirschman (1958) is right and that the problem is one of scarcity of entrepreneurship. Yet it is doubtful that there is an scarcity of entrepreneurship in Argentina.(2)

Another view is that once market reforms are implemented, investment must decline for a number of reasons, e.g., reduction of subsidies and increases in interest rates (Przeworski, 1994). Yet Argentina is already beyond the short-run phase of the post-reform period and there are strong indications that the private investment response is not strong.

A more plausible explanation would be that the neoliberal model, adopted by the Menem government, has important shortcomings (Przeworski, 1992). The neoliberal model places too much faith in the virtues of markets and underestimates the positive role that the state can play in the economy. Theory and evidence indicate that the state can play a critical role in achieving sustainable economic growth, e.g., selective industrial policies (Przeworski, 1992; Fishlow, 1990; Stiglitz, 1996; Smith, 1993). Gerchunoff and Machinea (1995) argue that economic policy makers in the Menem government have not been interested in implementing industrial policies.

In this article I argue that characteristics of state institutions in Argentina have an important negative impact on the investment response to structural economic reforms and consequently undermine the attainment of sustained growth.

The focus in development economics has shifted to the impact that the quality of state institutions in democratic regimes have on economic performance (World Bank, 1997; Haggard and Webb, 1993). For example, state institutions are central in accounting for variations in investment response after the implementation of structural economic reforms (World Bank, 1997). The question of how to design state institutions so that state intervention promotes good economic performance cannot be avoided by assuming that the state can be removed from the economy (Przeworski, 1992; World Bank, 1997).

Various institutional characteristics are seen as vital for sustainable development. Arbitrary behavior by the state generates uncertainty among businessmen and consequently hinders private investment (World Bank, 1997). Checks and balances, e.g., having an independent judiciary overseeing the executive branch, restrains arbitrariness on the part of the state (World Bank, 1997). Elster (1995) claims that constitutional guarantees of property rights are credible only when embedded in a system of checks and balances, in contrast to a system of concentration of power in the executive.

Formal checks and balances can also help reduce official corruption (World Bank, 1997). There is a positive association between unpredictability of the judiciary and corruption in government (World Bank, 1997).(3) And corruption in government lowers the level of private investment (Mauro, 1997).

Another factor that is connected with better economic performance is a participatory style of policy making (O'Donnell, 1994; World Bank, 1997; Bresser, Carlos, Maravall, and Przeworski, 1993). When government officials consult and concert with business, labor unions, opposition political parties and citizens in the formulation and implementation of policies, officials obtain feedback and information.(4) Policy mistakes are less likely. Policy mistakes can produce economically unsustainable situations that make policy changes necessary, at a cost of increasing policy uncertainty among investors. Survey data shows that lack of participation by businessmen in government policy making increases the fear among entrepreneurs of policy surprises (World Bank, 1997).

Viola (1992) indicates that in Chile the extreme neoliberal policies implemented after 1973 that led to an economic crisis by 1982-83 were formulated by technocrats insulated from social groups, including entrepreneurs. Then, in the pragmatic neoliberal phase that led to sustained growth in Chile, business associations had more access to economic policy making. In the East Asian developmental states, networks between the government officials and the private sector, is a significant factor in accounting for the economic miracles in that region (Evans, 1992). Evans argues that despite the autonomy of the state, these networks performed the crucial tasks of gathering information, consulting, and building consensus for policies.

A participatory policy style can also build political support for particular economic policies (Nelson, 1994; Bresser et al., 1993; Briceno, 1993). Several scholars maintain that in a democracy, consensus among political actors over certain economic policies is necessary for sustainable growth (Nelson, 1994; Briceno, 1993; Fajnzylber, 1990). Nelson (1994) affirms that the sustainability of economic reforms depends on building a consensus regarding the guiding principles of economic reforms and the kind of society that is sought. She argues that without progress toward such a consensus, economic reforms may fail to achieve strong investment because investors may perceive that economic reform policies will not endure, since under democracy governments are bound to change. According to Fajnzylber (1990), to achieve sustainable economic growth, it is necessary to establish an institutional climate that promotes cooperative relations between government, the business sector, and labor to reach agreements that give permanence to economic policies.

The case of Argentina supports hypotheses presented above concerning state characteristics that foster good economic performance. O'Donnell (1994) has portrayed many of the key features of the state that are pertinent for the discussion here. He classifies Argentina as a delegative democracy in which there are virtually no checks and balances to the executive on the part of congress or the judiciary. In delegative democracies, policy making power is concentrated in the executive (the president and his staff). The executive has a strong tendency to ignore courts, legislatures, parties, and interest groups in the formulation and implementation of policies. The Menem government has had a strong tendency to practice an authoritarian policy style. As Menem declared, the economic policies of his government are not negotiable with anybody (La Nacion, 22 November 1993, International Edition, p. 5).


The private investment response has not been remarkable. The annual average rate of gross domestic investment as a percentage of GDP between 1990 and 1996 was 19.6 (Gerchunoff and Torre, 1996). The corresponding figure for the period 1980 to 1989 is 19.3% (CEPAL, 1996). The lack of dynamism in investment behavior has been acknowledged by economists linked with different political parties. According to Antonio Erman Gonzalez, minister of economy in the first Menem administration, the Convertibility Plan had failed to generate investment (Clarin, 1 to 7 June 1993, International Edition, p. 3). In 1996, Jose Luis Machinea, president of the central bank in the Alfonsin government, remarked that investment continues to be low. In Machinea's opinion, juridical insecurity and uncertainty about the continuity of economic policies is hindering private investment (La Nacion, International Edition, 31 March, 1996, Economy & Business supplement, p. 7).

Of crucial importance is that the pattern of private investment in the 1990s is very similar to the pattern before the structural economic reforms implemented after 1990. Data from interviews in 1989 with top executives of fifty-five large private enterprises in Argentina showed that uncertainty about government policies was the most important factor hindering the level of private investment (Lopez, 1994). Yet in an uncertain environment, some firms were making large investments. These firms were mostly national conglomerates (grupos economicos) and foreign conglomerates (subsidiaries of transnational corporations that were conglomerates in Argentina).(5) Firms were willing to invest in large projects under conditions of significant uncertainty only when they were quite confident that, even if there were surprises in government policies, their investments would be profitable. Such confidence was often based on being in markets with little or no competition, e.g., being a monopoly or an oligopoly.

In the 1990s, most of the private investment has gone into markets were there is little competition, e.g., in nontradable sectors dominated by oligopolies. Investments have gone mostly into activities in which profit rates are secure: privatized services, non-tradable services in general, the production of hydrocarbons, tradable sectors (e.g., foodstuffs) that have natural protection due to high transport costs, and sectors protected by political decisions, e.g., the automobile industry (Gerchunoff and Machinea, 1995; Bisang, Bonvecchi, Kosacoff, and Ramos, 1996). Data for the 1991-92 period, suggests that profit rates were negative in firms whose products face international competition, while profit rates are positive in firms whose products do not face international competition and in privatized firms in the service sector (Azpiazu and Basualdo, 1995).

In 1993, there was a marked bias in investment toward the service sector, with tradable sectors accounting for less than 9% of expenditures on total investment (Gerchunoff and Machinea, 1995). According to studies by CEPAL, the import of capital goods has been mainly due to fixed investments in nontradable areas, and such imports have not significantly increased the export capacity of the country (interview with Bernardo Kosacoff in Clarin, 27 March 1994, International Edition, Economic Supplement, p. 4). Of the total capital goods imported between 1992 and 1994, the percentage destined to the production of goods that compete with foreign goods declined from 22% to 15% (Bisang et al., 1996). Consideration of where imported capital goods are going is important because the domestic production of capital goods has been declining (Bisang et al., 1996).

Interviews in 1994 with top executives of national conglomerates show that they concentrated their investments in sectors where privatization took place (Clarin, 16 January 1994, International Edition, Economic Supplement, 6-13). Privatized firms, mostly in services, are in monopolistic or oligopolistic markets and do not face international competition. The privatized service firms are among the most profitable, with net profit rates in the range of 13 to 40%. Moreover, the rush to privatize had as a consequence a significant subvaluation of the assets sold. Foreign Direct Investment during 1990-93 went mainly into privatized firms (Azpiazu and Basualdo, 1995).

Large firms have had access to plentiful long-term loans at reasonable costs in the domestic financial market and to credits from foreign sources for the purchase of capital goods. Yet the same has not being true for medium and small size firms (Bisang et al., 1996).(6)

Faced with increased competition from imports, due to the overvaluation of the peso and reduction in tariffs, industries in the tradable sectors have engaged mainly in "defensive" measures. For example, industrial firms have reduced operating costs, e.g., by decreasing the number of workers, have incorporated a larger amount of imported components in production, and engaged in commercial activities (importing certain lines of finished products for retail) (Clarin, 13 March, 1994, International Edition, Economic Supplement, 2; Azpiazu and Basualdo, 1995; Bisang et al., 1996). The balance of foreign exchange in industrial trade had a deficit in 1993 of $6.3 billion and in 1994 a deficit of $9.4 billion (Bisang et al., 1996).

Making the large fixed investments needed to achieve a decisive increase in productivity to be internationally competitive seems to be mostly missing from the adaptive measures (Clarin, 22 August 1993, International Edition, Economic Supplement, p. 11; Kosacoff, 1993). Bisang et al. (1996) observe that for industries in Argentina to become internationally competitive, they have to make more fixed investments and introduce new and more efficient technology.

A problem for sustainable growth presented by the pattern of investment in the 1990s is that it is necessary to modernize the production of tradable sectors to make them internationally competitive, thus enabling the export sector to become the driving force of growth (Bustos, 1995; Dornbusch, 1990).

Between 1992 and 1994, the average annual trade deficit was $4 billion. In 1995 and in 1996 there were trade surpluses of $925 million and $500 million respectively, in conjunction with a recession that started in 1995 (Gerchunoff and Torre, 1996). Then the trade deficit returned with recovery of growth in 1997. In the first six months of 1997, the trade deficit was $1.2 billion and is projected to be $4 billion at the end of the year (La Nacion, 17 August 1997, International Edition, Economic Supplement, p. 1). The balance of payments situation of Argentina looks even more vulnerable if one considers that the deficits since 1992 have been consistently high. The annual average deficit between 1992 and 1995 was $6.1 billion.


A highly overvalued exchange rate and large trade deficits create uncertainty about the stability of policies and hinder a strong private investment response to economic reforms (Rodrik, 1989; Serven and Solimano, 1993). In Argentina, Bouzas (1993) observes that one of the factors hindering private investment is uncertainty about the sustainability of deficits in external accounts. Perceptions among investors that policy inconsistencies may lead to policy reversals are an important determinant of the investment response to economic reforms (Serven and Solimano, 1992). Thus, it is pertinent to consider policies implemented by the Menem administration which have contributed to overvaluation of the currency and to trade deficits and which are considered mistakes by some economists.

A number of economists call for a gradual strategy in trade liberalization. Menem liberalized trade quickly. Dornbusch (1990) cautions that when a real devaluation is not possible, as in Argentina under the convertibility law, then trade liberalization should be done in two stages. First, substitution of quotas and licenses by a high uniform tariff rate. Later, when the economy booms and the external balance can support liberalization without the risk of an exchange crisis, tariffs can be reduced. Agosin and Ffrench-Davis (1995) maintain that in order for trade reforms to be successful, it is essential that economies be opened up in a way that allows producers to have enough time to restructure. Liberalization should not entail indiscriminate destruction of existing installed capacity. In Argentina, the overvalued peso in conjunction with trade liberalization resulted in the demise of domestic manufacturing firms that otherwise would have been internationally competitive. Moreover, the overvaluation of the currency precludes incentives for new export activities (Damill, Fanelli, and Frenkel, 1996).

The overvaluation of the currency has hindered the level of exports, despite the growth trend in exports since the 1980s (Edwards, 1995). The Menem government sought to reduce the real appreciation of the currency by a disguised devaluation via increases in import tariffs, tax reductions, export subsidies, and attempts to lower labor costs. But apparently the magnitude of the adjustment has been rather small in comparison with the overvaluation of the currency (Edwards, 1995).(7)

One factor that has contributed to overvaluation of the currency is the liberalization of both the domestic financial market and international capital flows. Deregulation of capital markets, under conditions prevailing in the 1990s, has been conducive to sharp appreciation of exchange rates (Agosin and Ffrench-Davis, 1995; Edwards, 1995). Another determinant of the overvaluation of the peso is the fixed exchange rate arrangement that was established in April of 1991. It stipulates by law that the peso is convertible at parity with the dollar and that the central bank must use that exchange rate to back up all the currency in circulation with foreign currency reserves. The government has based the credibility of sustaining the economic plan to the maintenance of the fixed exchange rate.

Yet economic factors generate uncertainty about the ability of the government to maintain the fixed exchange rate, even if it wants to keep the exchange parity. The overvalued currency in conjunction with trade liberalization has produced large trade deficits which creates doubts about the possibility of continuous financing of balance of payments deficits, and thus on the ability of sustaining the fixed exchange rate. A significant shrinkage of the inflow of foreign capital or a large outflow would doom the exchange scheme. A fundamental source of financing the external imbalances has been the influx of volatile, footloose foreign capital (Clarin, 28 March and 29 August 1993, International Edition, Economic Supplement, p. 16; Damill et al., 1996). Businessmen have shown concern over time about the sustainability of the exchange rate (e.g., La Nacion, 17 May 1993, International Edition, p. 6; Clarin, 8 to 14 February 1994, International Edition, p. 8).


The dominance of the executive over other political institutions, e.g., congress and the judiciary, is a long-standing feature of the Argentine political system (Silvert, 1961; Sanchez Viamonte, 1957). Yet since Menem was inaugurated as president in 1989, the degree of concentration of power in the executive has reached new heights under a democratic regime.

Despite the constitutional provision of life tenure for supreme court justices, traditionally the executive has arbitrarily removed justices and replaced them with others sympathetic to the incumbent government. Since the tenure of justices has depended on the wishes of the executive, the Supreme Court does not have the ability to check the behavior of the executive branch without risking the tenure of its members. Consequently, legal constraints on abuses of power by the executive are weak. The Supreme Court does not have the political power to adjudicate issues of separation of powers between the executive and the legislature and has eluded ruling against the constitutionality of executive actions that challenge separation of powers. The Court declines to hear "political questions" and considers certain executive and legislative acts, e.g., those involving policy preferences, as immune to challenge under any circumstance (Bidart Campos, 1982).(8)

Menem, from the outset of his administration, sought to gain sway over the Supreme Court in order to guard against legal challenges to his policy measures (Ferreira Rubio and Goretti, 1996). In April of 1990, he obtained congressional approval for an increase in the number of Supreme Court justices from five to nine, appointing judges sympathetic to his policies and securing a favorable majority in the Court (Clarin, 2 to 8 April 1990, International Edition, p. 3). Menem ended up appointing six of the nine judges. The increase in the number of justices prompted the resignation of the vice president of the Court, Jorge Antonio Bacque; another justice also left the Court. In his letter of resignation, Bacque stated that, "to suddenly increase the number of justices from five to nine engenders the risk of a sharp change in jurisprudence . . . that risk conspires against juridical security" (La Nacion, 23 April 1990, International Edition, pp. 1 and 5).

In November 1993, in the "Pact of Olivos," Menem granted Raul Alfonsin, the leader of the main opposition party, the replacement of three supreme court justices, as part of a deal over changes in the constitution to be made in 1994 (so that Menem could run for a second presidential term). The Menem government and other Peronist politicians exerted pressure on the Court to remove three judges. Peronist congressmen in the Impeachment Committee of the Chamber of Deputies threatened with impeaching all the members of the Court unless the justices agreed among themselves what three judges would leave the Court.(9) At the end of 1993, two members of the Court resigned and one decided to retire, thus creating three vacancies (La Nacion, 22 November 1993, International Edition, p. 5; Clarin 30 November to 6 December 1993, International Edition, p. 1).

From July 1989 to August 1994, Menem had issued more than 13,500 decrees of all types (Ferreira Rubio and Goretti, 1996).(10) But the decrees that highlight the concentration of power 'in the executive are the decrees of "necesidad y urgencia" (necessity and urgency). During the period just mentioned, the Menem administration issued 336 decrees of necessity and urgency. By contrast, only 35 of these decrees were issued under democratic regimes between 1853 and 1989 (Ferreira Rubio and Goretti, 1996). By issuing decrees of need and urgency, the president unconstitutionally seized (until 1994) legislative powers without the consent of congress (Ferreira Rubio and Goretti, 1996).(11)

The executive has created, modified, and abrogated laws through decrees of necessity and urgency. Among the legislation the Menem government enacted by decrees of need and urgency are the establishment and modification of tax laws, the modification of private contracts, cancellation of debts owed by the state to private firms, the suspension of incentives to promote exports (Ferreira and Goretti, 1996).

An example of the validation of executive abuse of power by the Supreme Court under the Menem government is the case of the Bonex plan. The Court ruled that the decree of need and urgency of 3 January 1990, the "Bonex Plan," was legal. This decree converted most private short-term saving deposits (about $1.5 billion) into government foreign debt bonds (Bonex 89) with a ten-year maturity. Those who wanted to obtain cash had to sell the bonds at a price lower than their nominal value. On 23 January 1990, the Senate ratified the decree, but the Chamber of Deputies did not. Yet the Court argued that it could be inferred that Congress had approved a decree of need and urgency since it did not challenge it in a period of thirty days (Clarin, 13 June 1993, International Edition, Economic Supplement, p. 7).

A 1993 survey of opinion leaders found that 77 percent believed that there was no juridical security in the country. The insecurity ensues from the fact that laws and policies can be arbitrarily and unexpectedly changed. Interviews with entrepreneurs, economists and legal experts reveals that the uncertainty is caused by the concentration of legal and de facto powers in the executive, a Congress that does not exercise its constitutional prerogatives, and a Supreme Court that is subservient to the executive (Clarin, 13 June 1993, International Edition, Economic Supplement, pp. 2-7).

The U.S. Ambassador to Argentina, James Cheek, declared on 10 August 1993 to the Argentine press that greater juridical security was necessary in Argentina. According to Cheek, there were many U.S. firms interested in seeing greater juridical security in Argentina in order to invest (La Nacion, 16 August 1993, International Edition, p. 1). Foreign investors fear a legal system subordinated to the arbitrariness of the executive, since investments may engender litigations. Investors equate a change of government with a change of judges and a change of jurisprudence (La Nacion, 16 August 1993, International Edition, p. 3).

Rodolfo Terragno, president of the National Committee of the Radical Party, declared that it is necessary to generate confidence among businessmen for them to invest in productive activities with a long-term perspective. He pointed to the juridical insecurity entailed in "decrees and laws approved without consensus." According to him, juridical insecurity deters long-term investments (La Nacion, International Edition, March 26 to April 1, 1996, p. 4).

As mentioned above, the World Bank (1997) found a positive association between unpredictability of the judiciary and government corruption, and corruption lowers the level of private investment (Mauro, 1997).

Under the Menem government, corruption has been one of the most salient features. In addition to a subservient judiciary, a factor that seems to have contributed to the high degree of corruption is the power of the executive to remove individuals in agencies responsible for curtailing corruption. One example is the case of Martin Redrado, a former head of the Comision Nacional de Valores, a watchdog agency to oversee the stock market. Mr. Redrado had legal tenure in his post, a measure that was supposed to insulate him from political pressures. In 1994, Menem fired Redrado by decree when he criticized the unusually high commissions that Merrill Lynch and the First Bank of Boston wanted to charge for the sale of YPF (the former public oil company) stocks held by pensioners (La Nacion, 4 April 1994, International Edition, p. 6). In February of 1991, Menem fired the prosecutor of administrative inquiries (Fiscal de Investigaciones Administrativas), a post that traditionally had enjoyed the same job security as judges (Ferreira Rubio and Goretti, 1996).

In addition to legislating by decree, the power of the executive in the policy making process is also shown by the ability of the executive to force legislation through congress. The general tendency has been for congress to have little or no participation in the formulation of economic policies (Passara, 1993). When not imposed by decree, economic plans have been rammed through Congress (Smith, 1992; Epstein, 1992). On numerous occasions, Menem and members of his cabinet have publicly threatened legislators with using decrees of need and urgency to implement bills introduced in congress by the executive unless the proposals are quickly approved by congress without modifications (Epstein, 1992; Ferreira Rubio and Goretti, 1996; La Nacion, 29 March 1993, International Edition, p. 1).

Of the 336 decrees of necessity and urgency that Menem had issued up to August 1994, 8% were ratified by Congress, one percent were repealed, and in 91% of the cases congress remained silent. Of the four decrees that congress repealed, in two cases the executive acquiesced. Menem vetoed the two other rejections and the decrees remained in force (Ferreira Rubio and Goretti, 1996).

Menem's use of decrees of need and urgency show a desire to make policies in an authoritarian manner, disregarding formal institutional constraints. Menem resorted to decrees of need and urgency even when his party could control the congress, the congress was in session, and there was no emergency (Ferreira Rubio and Goretti, 1996). Menem's party had a majority in the senate since December of 1989 and was one seat short of a majority (in alliance with the UCD) in the chamber of deputies at the end of 1991 (Ferreira and Goretti, 1996).


Policies can be constrained from changing by economic and political factors. On the economic side, one can argue (e.g., see Przeworski and Wallerstein, 1988) that the policy choices of governments are limited by concerns with capitalists' economic reactions, e.g., they can withhold investment or take their speculative financial capital out of the country. Yet the fact that there are economic constraints on policy choices does not imply that there is no meaningful role for politics in determining policies. Hirschman (1979) indicated that in Latin America policy makers had a tendency to act against economic constraints.

If politics matters in determining policies, then the concentration of policy making power in the executive is a source of policy uncertainty under a democratic regime in which politicians with different policy positions alternate in office. This is the case of Argentina. One would expect policy changes with changes of governments, since incumbents have wide discretion in formulating and implementing their policy preferences. Given the policy making power of the executive, claims by major opposition politicians that they will change policies if elected are likely to create perceptions among businessmen that policies may not endure, and investment depends as much on perceptions as on facts (World Bank, 1997). Moreover, disagreements among politicians over policies is exacerbated by the exclusionary policy style typical in Argentina.

One line of cleavage over economic policies is between the policy orientations of the Menem government and that of the Radical Party. Former President Alfonsin, in his speech upon his election as president of the Radical Party in November 1993, declared that it was necessary to reverse the current neoliberal economic model (La Nacion, 15 November 1993, International Edition, p. 3). At the end of March 1996, the Radical Party made public an economic and social program as an alternative to the economic program of the Menem government. The economic program of the Radical Party was presented as a "180 degree turn" (e.g., a gradual abandonment of the convertibility of the currency) from the actual economic policies of the Menem government (La Nacion, International Edition, March 26 to April 1 1996, p. 4)

Another arena of conflict has been within the Peronist Party. In May 1993, there was an indirect, public interchange between politicians opposed to governmental economic policies and Domingo Cavallo. Antonio Cafiero, Senator from the Buenos Aires province, stated that Menem's policies were fragile, a fashion that would end because it was based on a coalition that did not represent the majority of Argentines (Clarin, 11 to 17 May 1993, International Edition, p. 5). Senator Jose Octavio Bordon, who at the time was a potential presidential candidate from the Peronist Party for the 1995 election, promised that, "from 1995 on, a new phase of peronism will begin, with new styles, methods, and proposals" (La Nacion, 17 May 1993, International Edition, p. 4). Cavallo, then minister of economy, attempting to calm businessmen after Bordon's remarks, argued that there was a possibility that the economic model would continue regardless of who occupied the presidency and the ministry of economy. According to government officials, Cavallo's declarations were necessary to project an image of the continuity of the economic model to prevent undermining the possibility of long-term investments (Clarin, 16 May 1993, International Edition, Economic Supplement, p. 16 and La Nacion, 17 May 1993, International Edition, p. 6).

In a roundtable to discuss the achievements and pending issues of the first ten years of the current democratic regime in Argentina, Fernando de la Rua, an influential national Senator from the Radical Party, indicated that currently there was a climate of political conflict and intense confrontation between the government and the opposition and called on politicians to attain policy consensus to achieve continuity in government policies (La Nacion, 9 August 1993, International Edition, p. 3). Acuna (1991) also observes that in Argentina participation in policy making by organized actors who are affected by policies (and agreement among these actors with the policies made) is necessary to guarantee enough support to sustain policies over time.

There have also been policy differences within Menem's cabinet. In March of 1996, Domingo Cavallo revealed to a group of entrepreneurs in Argentina that there were divisions within the government concerning economic policies due to fear about the recession and the high levels of unemployment. Cavallo declared that a group of ministers, among whom was the minister of interior, Carlos Corach, wanted to implement interventionist policies that sought to reverse the economic opening (Clarin, March 12 to 18, 1996, p. 6). Unemployment and underemployment have been steadily increasing since 1993. In 1996, unemployment was 17% and underemployment 12.7% (CEPAL, 1996). Since March 1995, public approval of the neoliberal economic reforms has been declining. In July 1996 (the end of the data series) public approval for the reforms had sharply dropped, reaching the lowest point, 17%, since Menem came into office in 1989 (Gerchunoff and Torre, 1996).


The arguments here go against the grain of much of the evaluations of the economic reforms under the Menem administration. Yet despite the extensive neoliberal economic reforms in Argentina since 1989 and their economic successes, there are grounds to question whether the reforms have launched the country into a path of sustained economic growth. One problem is that the private investment response seems inadequate for sustained growth. The current pattern of private investment is quite similar to the investment behavior prior to the Menem period. Firms are willing to make major investments mostly in projects where satisfactory rates of return are pretty much guaranteed. This pattern of investment in itself suggests an important degree of uncertainty for investment.

Indirect evidence suggests that an important degree of uncertainty among entrepreneurs continues to deter fixed investments. In-depth interviews with business executives in a large number of firms about determinants of their investment behavior, like Lopez (1994) conducted in 1989, would provide more definitive data.

However, there are theoretical and empirical reasons to believe that the Argentine case points to the importance of political institutions for the success of economic reforms in generating sustained growth. An institutional context in which executives are unconstrained by other political institutions in the process of policy making, leaving the executive with the freedom to act arbitrarily and avoid a participatory style of policy formulation, hinders investment in a number of ways. One is by creating juridical uncertainty. The experience in Argentina supports Elster's claim that the absence of checks and balances is a threat to property rights. A powerful executive can violate property rights due to his political expediencies, for example, the need to collect more revenues. Also, such an institutional context seems to be a propitious ground for corruption. In addition, an exclusionary policy style is more conducive to policy mistakes that may create economically unsustainable situations, thus fostering expectations of policy changes. One of the factors that businessmen examine closely in evaluating the endurance of economic plans is the policy consistency of the programs. Lastly, the absence of checks and balances engenders uncertainty that changes of government can produce significant alterations in economic policies. In Argentina, persistent uncertainty about the future evolution of government policies seems to be an important part of the explanation for why the level of private investment has not been higher under the Menem government (e.g., see the editorials in Clarin, 29 June to 5 July 1993, International Edition, p. 2; Clarin, 1 to 7 February 1994, International Edition, p. 2).

Dominguez and Lowenthal (1996) argue that effective democratic governance requires that executive authority be constrained and held accountable by an independent and autonomous judiciary and by additional countervailing powers. If this is so, then there is a congruence in requirements for effective democratic governance and for sustainable economic development under democracy.

The observations I have made here about Argentina seem applicable to other cases of delegative democracy in Latin America and Eastern Europe. Smith (1993) points to the widespread practice of authoritarian policy making by executives in Latin America. World Bank (1997) data from a 1996 worldwide survey of domestic firms shows that Latin America was second, after Eastern Europe, in the perception that businesses are seriously affected by fear of policy surprises. Latin America ranked first in insecurity of property and second, behind the Commonwealth of Independent States, in the perception that unreliable judicial enforcement of rules (arbitrary enforcement of rules by the judiciary) is a major problem in business operations. A lesson reached by the World Bank (1997) is that economic reformers cannot afford to focus solely on improving policies; they must also look for ways to improve the institutional environment for the policies.

Acknowledgment: This is a revised version of a paper prepared for presentation at the 1997 meeting of the Latin American Studies Association, Continental Plaza Hotel, Guadalajara, Mexico, April 17-19. I want to thank Susan C. Stokes, Carlos H. Acunam, Adam Przeworski, Ben Ross Schneider and Patricia Mizrahi for comments.


* Direct all correspondence to: Juan J. Lopez, The University of Illinois at Chicago, Department of Political Science (M/C 276) 1007 West Harrison Street, Room 126 B, Chicago, IL 60607-7137. <>.

1. For a recent account of the evolution of macroeconomic variables, see Gerchunoff and Torre (1996).

2. Lopez (1994) found in interviews with high level managers in large firms in Argentina that businessmen perceived many projects in which they would invest under an environment of greater certainty in government policies.

3. Survey data show that corruption is an important problem for investors because of the need to pay bribes to get things done. Sometimes bribes do not provide a guarantee that services will be provided, and often businessmen fear that government officials will ask them to pay more (World Bank, 1997).

4. Smith (1993) indicates that most attempts at pact-making have failed in Latin America. But, these have mostly been attempts by dominant executives to gain the adherence of social actors to policies already unilaterally formulated by executives.

5. Note that in the 1990s, national conglomerates and transnational corporations are making most of the investments (Bisang et al., 1996).

6. Some scholars (Rodrik, 1990; Serven and Solimano, 1992) associate uncertainty about policies, especially about exchange rates, with higher interest rates. In Argentina, there are indications of this link (Clarin, Economic Supplement, 17 March 1996, p. 8; Clarin, 13 June 1993, International Edition, Economic Supplement, p. 12).

7. According to Canitrot (1994), the peso was overvalued by more than 30 percent in 1991, the first year of the Convertibility Plan, and the overvaluation was increasing.

8. Although the Constitution does not state that the Court has the power of judicial review, the Court has this power as a result of the Court's Sojo decision in 1887.

9. The justification for the impeachment was a scandal in the Supreme Court due to a change of a ruling adverse to the central bank. Allegedly, the change occurred under pressure from minister of economy Domingo Cavallo.

10. Many of these decrees were based on powers delegated to the executive by congress or on constitutional prerogatives of the executive (Ferreira Rubio and Goretti, 1996).

11. The modification of the constitution in 1994 strengthens the policy-making power of the executive by establishing the right of the president to issue decrees of need and urgency under certain conditions. Decrees of necessity and urgency are prohibited in cases of penal, tax and electoral legislation (Ferreira Rubio and Goretti, 1996).


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Title Annotation:The Changing Role of International Capital in Latin America
Author:Lopez, Juan J.
Publication:Quarterly Review of Economics and Finance
Date:Sep 22, 1998
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