Interpreting Contemporary Latin America through the Hypotheses of Institutional Political Economy

Abstract:

This article analyzes the weak economic performance of Latin America since the end of the Import Substitution era, emphasizing the structural impediments that led to the dissipation of opportunities for viable economic policies that arose during the latest commodity boom, 2002–2012.

The theoretical/analytical framework for this article derives from the developmental hypotheses of Veblen, Gerschenkron, Innis, Abramovitz, Amsden, and Chang. All addressed, in their related but varied approaches, the “catching-up” problématique—with Veblen and Abramovitz analyzing “falling-behind.” In Latin America—the theoretical formulations regarding catching-up have had minimal explanatory power, for reasons explored in the text.

Pioneering institutionalists, modern “revisionist” institutionalists (e.g., Amsden) and the Latin American Structuralists (e.g., Furtado and Prebisch) often converged regarding their confidence in the efficacy of rational, operative, developmentalist policies and programs. However, only those drawing from the work of Veblen—including Innis with his analysis of the “staples trap”—seriously considered the “falling-behind” hypothesis.

During the latest commodity boom, Latin America’s elite failed to exploit favorable circumstances to diversify from low-value added, volatile, commodity production due to pre-Import Substitution (i.e., nineteenth century) institutional legacies. Endogenous industrialization was fragile, while the agro-mineral-financial export elite was persistent.

Keywords::

• Veblen
• falling-behind
• agro-mineral-financial elite
• national production base
• national innovation system

JEL Classification Codes::

• 013
• 025
• 033
• 043
• 054

Notes

¹ Hereafter, all references to institutional economics, institutionalism, etc. will reference only that which is sometimes referred to as “traditional” or “original” institutionalism. Neo-classical efforts to incorporate that which is referred to as “New” Institutional Economics is outside of the methodological scope of this article largely due to the fact that, as Dugger has argued, it is neither new (in terms of political economy) nor institutional—it is merely an effort to bolster neo-classical economics by attempting to address one of the many analytical areas that cannot be done using the methods and constructs of neo-classical analysis (Dugger 1990; 1995). While the focus of this article is on the political economy of New Developmentalism, it shares nothing with the underlying precepts that were once advanced by neo-classical economists who endeavored to launch something known as the “New Political Economy of Development’ in the late 1980s. For an analysis of this unmoored, decontextualized misadventure see (Toye 1991).

² By 1904 when Veblen published the Theory of Business Enterprise he had concluded that the dichotomy between the contending “captains” had lost its crispness: “Veblen anticipated the dominance of Wall Street because of the very nature of the modern business corporation. Moreover, the distinction between a captain of industry and a captain of finance is not very important for Veblen to the extent that their interests are directed by the prevailing culture and institutions of the time. A captain of industry, like J.P. Morgan, can also be a captain of finance, or one “mutates” into another. A captain’s primary interest lies in the making of “pecuniary gain” by means of (or the disruption of) productive activities or financial capitalization” (Jo and Henry 2015, 25).

³ Chang elaborated on the possessive individualism imbued concept of ersatz developmentalism as embodying: “the belief that, if you educate them better and make them healthier and give them security of property rights, rational self-seeking individuals will exercise their natural tendency to ‘truck and barter’ and somehow create a prosperous economy. However, this vision is fundamentally at odds with the reality of development. In reality, development requires a lot of collective and systematic efforts at acquiring and accumulating better productive knowledge through the construction of better organizations, the cross-fertilization of ideas within it, and the channeling of individual entrepreneurial energy into collective entrepreneurship” (Chang 2009, 9).

⁴ For Veblen there was no real line to draw between an analysis of the state and an analysis of the (“business”) elite—the one demanded the other. As Henry noted, “Veblen, while not averse to government intervention, was not sanguine about the possibilities for effective government action. A necessary assumption for effective government action is that, at a minimum, such an organization must be neutral in setting policy…” (Henry 2014, 4). However (as cited by Henry) Veblen’s theory of the state was straightforward:

[…] modern politics is business politics, […] This is true both of foreign and domestic policy. Legislation, police surveillance, the administration of justice, the military and diplomatic service, all are chiefly concerned with business relations, pecuniary interests, and they have little more than an incidental bearing on other human interests (Veblen [1904], 1958, 128).

Representative government means, chiefly, representation of business interests. The government commonly works in the interest of the business men with a fairly consistent singleness of purpose (Veblen, [1904] 1958, 136).

Given that much of institutional economics is rooted in the work of Veblen, it is notable that of the approximately 150 entries in the comprehensive two volume survey The Elgar Companion to Institutional and Evolutionary Economics there are no entries for either “The Theory of the State” or “Political Economy” (Hodgson, et al. 1994).

⁵ Regarding institutional change and technology, this paragraph is an extreme condensation of a more detailed argument in (Cypher 2014, 36-38).

⁶ The word “buying” is inadequate since every form of force and fraud was used to transfer public lands to private ownership (Bétrola and Ocampo 2012, 104-107). The conventional use of the word “buying” implies the existence of a clearly established set of market institutions, including some ability to reach agreement between buyer and seller as to the discounted present value of land. Absent this, a monopsonistic hacendado “buyer” would generally offer a meaningless price, under the implied-threat of expropriation by some combination of force and fraud, and “legally” abscond with the land title. This process of fraudulent transfer was then re- institutionalized and at the close of the ISI era nearly all the public property—mostly industrial, rather than agricultural (built at great expense in terms of social commitment to a developmentalist project) was transferred en masse to the private sector—a considerable portion went the new business elite which had been constructed during the ISI era in the vain hope that some within this group might prove to be “entrepreneurial.” The remainder was received by transnational capital. For a well-constructed analytical account see Teichman (1995; 2001). For the most recent example of pillaging—the turnover of Mexico’s PEMEX to private interests—see Cypher (2014b). Following this period when the business-based elite absconded with the jewels of the industrial sector, the commodity boom commenced in 2002, if not slightly before. This caused a rapid rise in land-based assets which then provoked a new wave of turnovers of public lands—effectively resulting in another epoch of privatizations throughout Latin America, with leases of 20 or more years—for mining, oil and gas drilling and extraction, as well as forestry and agribusiness pursuits (Bebbington and Bury 2013).

⁷ Regarding a comparison of the impact of the commodity boom in the nineteenth century with that of the twenty-first, see (Cypher, 2010; Pérez Caldentey and Vernengo. 2015). Regarding North’s New Institutional Economics (NIE)-based attempt to capture the institutional dynamics of late nineteenth century Latin America— certainly an accurate and representative gauge of the depth of the NIE (as well as the scope of its hubris)—note J. Coatsworth’s comments: Coatsworth, a towering eminence of Latin American economic history, found North’s intervention to be risible. He notes that North’s attempt to analyze the chestnut “how Latin America fell behind” was based on egregiously getting the facts wrong, making a “bizarre” and “anachronistic” presentation and misrepresenting virtually the entire corpus of previously published Latin American political economy (Coatsworth 2005, 132).

⁸ For an extremely well-researched study of the industrializing elite in Argentina, Brazil and Mexico in the 1920-1970 period, which parallels Amsden’s analysis without negating the argument presented here, see: (Perissinotto, et al., 2014).

⁹ Regarding the illustrative case of Mexico see (Cypher 1990b). For further contextualization, analysis and sources see note 7, above.

¹⁰ More recently some analysts have used the term “Open Economy Industrial Policy” (OEIP). Yet, in some nations—such as Brazil—greater emphasis has been placed on Industrial Policy per se, creating some national “policy space” clearly beyond the framework of the WC. Amsden argued that the new accords of the WTO and other agencies that have been viewed as national policy straightjackets were relatively porous and that nations of the periphery could—under developmentalist policy guidance—exercise considerable autonomy regarding national policy (Di Caprio and Amsden 2004).

¹¹ Regarding the landowning elite as concerns their affinity for right-wing socio-economic policies and their unappreciated role as the prime elite faction in the determination of the parameters and content of national policy, Montero (2014, 298) noted that:

Traditional conservative elites in Brazil trace their roots back to the nineteenth century, during which time political machines, landed families, and local strongmen known as “the colonels” ruled over peasants who depended upon these figures for their livelihoods. Conservative modernization of the countryside during the military regime [1964-1985] accelerated the region’s economic growth but left unchanged erstwhile patron-client relations. In exchange for their abiding political support, the generals transferred agricultural credit and subsidies to large landholders and channeled capital investment into once-defunct export enclaves in the sugar zone by creating the sugar cane gasohol program, Proálcool. The expansion of agribusiness crowded out subsistence agriculture, increased demand for imported staples and raised average food prices.

…What sustained the conservative, dominant class in these policies was their continued hegemonic control of the state apparatus… (Montero 2014, 299 italics added).

¹² On agribusiness’ duplicitous ability to twist national “free trade” policy to its own ends in order to shield it from foreign investors while also receiving state support for its own FDI see (Ferrando 2015).

¹³ Instead, Reinert’s “Other Canon” approach casts back to a distinction made by Francis Bacon whose 1620 Novum Organum disputed the three conventional differences cited to explain economic strength or weakness— race, soil, and climate (Reinert 2009, 335). Bacon argued that the variance in conditions of economic well-being were to be explained by what he termed “the arts.” By this, Reinert argues, Bacon was essentially focusing on production processes because they are, under constructive and enabling institutional structures, the ways in which new knowledge (the “arts” or “technology”) can be created, adapted and applied.

¹⁴ In contrast, the German Historical School believed that—in the 1893 formulation of Karl Bücher’s Die Entstehung der Volkswirtschaft (The Origins of Economics)—the focus of economics should be on “the totality of institutions, measures and processes which are called upon to satisfy the needs of a nation,” since these are the formative structural elements of the National Economy” (Bücher 1910; Reinert 2009, 346).

Additional information

Notes on contributors

James M. Cypher

James M. Cypher is professor of economics in the doctoral program in development studies at Universidad Autónoma de Zacatecas, Mexico.