ECONOMIC POLICY and the TRANSITION to DEMOCRACY Economic Policy and the Transition to Democracy the Latin American Experience
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ECONOMIC POLICY AND THE TRANSITION TO DEMOCRACY Economic Policy and the Transition to Democracy The Latin American Experience Edited by Juan Antonio Morales Professor of Economics and Econometrics Catholic University of Bolivia and Gary McMahon Senior Specialist International Development Research Centre Ottawa, Canada INTERNATIONAL DEVELOPMENT RESEARCH CENTRE Editorial matter and selection © Juan Antonio Morales and Gary McMahon 1996 Chapters 1-7 © Macmillan Press Ltd. 1996 Published in the United Kingdom in 1996 by Macmillan Press Ltd. Published in Canada in 1996 by the International Development Research Centre PO Box 8500 Ottawa, Canada KIG 3H9 Canadian Cataloguing in Publication Data Morales J. A. McMahon, G. Economic policy and the transition to democracy : the Latin American experience, Ottawa, ON, IDRC ; Houndmills, Macmillan Press Ltd 1996. 000p.: ill. /Economic policy/,/democratization/./economic stabilization/,/economic reform/,/economic administration/,/Latin America/-/ Bol iv i a/,/Argentina/, /Brazil/,/Uruguay/,/Paraguay/,/Chile/,/case studies/. UDC: 338.2:321.7(8) ISBN 0-88936-747-7 (hc) ISBN 0-88936-754--X (pb) I would like to dedicate this book to all of my friends in South America who have kept up the intellectual battle through the bad as well as the good years and, incidentally, have also made my job so much more enjoyable. GARY MCMAHON Contents List of Tables x Notes on the Contributors xii Foreword xiv List of Abbreviations xv Map of Latin America xvii 1 Economic Policy after the Transition to Democracy: A Synthesis Juan Antonio Morales 1 1.1 Introduction 1 1.2 The inheritance of the military governments 3 1.3 The first governments of the democratic transition 6 1.4 Stabilisation programmes during the transition 10 1.5 Failed stabilisations and second-round successes 13 1.6 The economic reforms 18 1.7 The interactions between politics and economics during the transition 20 1.8 Final comments 27 2 Economic Policy in Bolivia after the Transition to Democracy Juan Antonio Morales 30 2.1 Introduction 30 2.2 The return to democracy and the difficulties faced by the government 31 2.3 Efficient administrations and the new economic policy 34 2.4 Public sector reform 38 2.5 Prospects of the NEP 43 2.6 Final comments 46 vii viii Contents 3 Democratic Restoration and Economic Policy: Argentina, 1984-91 Mario Damill and Roberto Frenkel 49 3.1 Introduction 49 3.2 Background 53 3.3 The problems of economic adjustment in a democracy 62 3.4 Final considerations 92 Appendix 3.1 96 4 An Economist's Political View of Democratisation in Brazil Edward J. Amadeo 112 4.1 Introduction 112 4.2 The economic and social facts 115 4.3 Societal and political aspects of democratisation 124 4.4 Conclusions 133 5 Democratic Restoration and Economic Policy: Uruguay 1985-89 Luis Macadar 137 5.1 Introduction 137 5.2 Major trends 137 5.3 The legacy of the crisis 139 5.4 The economic policy of the constitutional government 141 5.5 Recovery and adjustment 149 5.6 Consolidation of external sector liberalisation 151 5.7 Domestic disequilibria 153 5.8 Changes in income and factor distribution 157 5.9 Summary and conclusions 161 6 Economic Policy and the Transition to Democracy in Paraguay Melissa H. Birch 166 6.1 Introduction 166 6.2 The economic legacy of the Stroessner regime 167 6.3 The Paraguayan economy in transition 172 6.4 Economic policy and the transition to democracy 174 6.5 The unfinished agenda: institutional modernisation and economic development 194 Contents ix 7 Chile in Transition: Economic and Political Strategies Oscar Munoz Goma and Carmen Celedon 191 7.1 Introduction 191 7.2 Major strategy options for the transition to democracy 191 7.3 The social market economy and the private sector 195 7.4 Macroeconomic policy 204 7.5 Democracy and governability: themes for the 1990s 212 Bibliography 223 Index 231 ix List of Tables 2.1 Consolidated non-financial public sector operations, 1980-90 39 2.2 Evolution of public sector social expenditure, 1980-8 40 2.3 Employment in the public sector, 1980-9 42 2.4 Private and public gross fixed capital formation, 1980-90 43 3.1 Inflation, growth and balance of current transactions with the rest of the world, 1960-91 96 3.2 National income, savings and investment 97 3.3 External savings, fiscal deficit and private surplus 97 3.4 Real exchange rate and real wages 98 3.5 Total external and public debt 98 3.6 External debt as percentage of GDP and of exports 99 3.7 Public sector savings, investment and financing 99 3.8 Monetary assets in the hands of the public 100 3.9 Composition of GDP by type of activity 100 3.10 Balance of payments 101 3.11 Prices of commercial exchange 101 3.12 Real rates of interest 102 3.13 Employment by sector 102 3.14 Unemployment and underemployment 103 3.15 Estimates of functional distribution of income 103 3.16 Evolution of the tariff structure 104 3.17 Public bidding for the National Telecommunications Enterprise - ENTEL 105 3.18 Revenue from the privatisation of state-owned companies and public bids for petroleum exploitation areas 105 4.1 National accounts 116 4.2 Interest rate, inflation and relative prices 117 4.3 Social and economic indicators: Brazil compared with middle- and high-income countries 120 4.4 Income distribution and enrolment in education, 1982 123 4.5 Distribution of public expenditure on education according to educational and governmental level, 1988 123 x List of Tables xi 4.6 Percentage of failures, repeaters and graduates by type of school, 1987 123 5.1 Uruguay: main macroeconomic indicators 142 5.2 Uruguay: main external sector indicators 144 5.3 Uruguay: main financial indicators 154 5.4 Transfer of revenues 159 6.1 Real rates of economic growth 168 6.2 Changes in real wages 169 6.3 Structure of the Paraguayan economy 169 6.4 Paraguay: external debt 171 6.5 Central government expenditure by ministry 176 6.6 Macroeconomic indicators, 1983-8 177 6.7 Real wages under democracy 181 7.1 Chile: evolution of the principal macroeconomic indicators 206 7.2 Chile: balance of payments, 1989-92 211 7.3 Chile: foreign debt by debtor at the end of the year and indebtedness indicators 213 Notes on the Contributors Edward J. Amadeo received his PhD in economics at Harvard Uni- versity in 1986. He is the author of Keynes's Principle of Effective Demand, Keynes's Third Alternative, with Amitava K. Dutt, and sev- eral published articles. Melissa H. Birch is Associate Professor at the Darden School of Business Administration at the University of Virginia. She received a Fulbright award to conduct research on public enterprise and economic develop- ment in Paraguay and is the author of several articles on the Para- guayan economy. She travels frequently to Latin America, especially the Southern Cone, for research and consulting on public enterprise management and privatisation. Carmen Celedon was born in Santiago, Chile in 1955. She received her undergraduate and master's degree in economics from the Univer- sity of Chile. She has been a research economist at the Centre for Latin American Economic Research (CIEPLAN) since 1989 and as- sistant to the executive director since 1992. Her main fields of special- isation are international economics, macroeconomics, and public sector reform and modernisation. Mario Damill is Professor of Macroeconomics at the School of Econ- omics of the Universidad de Buenos Aires and at the Institute for Econ- omic and Social Development (IDES). Roberto Frenkel took part in the Austral Plan, the most important stabilisation attempt in Argentina during 1980s, as the head of the Advisors' Committee of the Minstry of Economy. At present he is Director of the Graduate Program on Capital Markets at Universidad de Buenos Aires, and Director of the Graduate Program in Economics at the Institute for Economic and Social Development (IDES). Luis Macadar has been Investment and Project Expert at the govern- ment agency (CIDE) that prepared the First National Plan for Econ- omic and Social Development in Uruguay in 1965. From 1967, he was Researcher at the Institute of Economics of the University. In 1972 he xii Notes on the Contributors xiii was appointed Professor of Investment Project Evaluation. In 1975, together with other Uruguayan Economists, he founded the Centro de Investigaciones Economica (CINVE-Uruguay), where he conducted several academic research works, with support from foreign donor agencies (Ford Foundation, IDRC, SAREC), and he was Director of the Center until 1988. He has also been a consultant for several inter- national agencies (UN, IDB, World Bank, ECLA, ALADI, INTAL), and his writing includes books and articles about Uruguay in the field of economic policy, industry and trade. Juan Antonio Morales is Professor of Economics and Econometrics at the Catholic University of Bolivia. He has published widely stabilisation and structural adjustment in Latin America. Currently he is on the Board of Directors of the Central Bank of Bolivia. Gary McMahon is Senior Specialist with the International Develop- ment Research Centre (IDRC) of Canada, where he has worked since 1989. Prior to this appointment he was Professor of Economics at Laurentian University, Sudbury, Canada, for eight years. Before join- ing the IDRC he published a number of articles in the area of comput- able general equilibrium models and their application to the problems of developing countries. In recent years he has concentrated on macro- economic and stabilisation issues, especially with respect to Latin America. His more recent work includes articles on heterodox stabilisation policies, the economic lessons for Eastern Europe from Latin America, and the interaction between fiscal and macroeconomic policies.