6 The Political Economy of Latin American Development One of the most pervasive themes in previous chapters has been the relation between institutions and growth-enhancing policies. In sharp contrast to our opening chapter, which focused on income inequalities and long-term growth trajectories dating back to Latin America's colonial period-when the region was predominantly rural-this chapter is closest in spirit to chapter 3 on state interven­ tion under ISL Specifically, this chapter analyzes the underlying political economy of populist upsurges in predominantly urban areas in which macroeconomic populisf!l has taken hold. The phenomenon is not new. Populism in Latin America dates back to the 1920s.1 More recently, political economy issues that emphasize the ethnical divide between Latin America's Europeans and mestizos and between indigenous and nonindigenous populations have been added to the new wave of populist topics in contemporary Latin America. Populism is difficult to define. In Latin America, however, the meaning of popu­ lism is slightly less difficult to determine. From an economist's standpoint, and paraphrasing Dornbusch and Edwards's groundbreaking work, largely inspired by twentieth-century Latin America, macroeconomic populism is an approach to economics that emphasizes growth and income distribution and deemphasizes the risk of inflation and deficit finance, external constraints, and the reaction of economic agents to aggressive nonmarket policies.2 Contrary to what chapter 4, with its focus on structural reforms of the 1980s and 1990s, may seem to indicate, macroeconomic populism is not just a ghost from the past. Populism in different forms and shapes is a twenty-first-century Latin American reality. It has reappeared in a handful of countries, regions, and 148 Chapter 6 subregions, despite the fact that income inequalities have declined. Indeed, as we document in chapter 5, income inequalities have also decreased in just about every country. Along with poverty and income inequality reduction, an emergent middle class is becoming increasingly important. Yet in countries like Argentina, Bolivia, Ecuador, and Venezuela populist rhetoric and policies are back. Oil-rich Venezuela is a dramatic example,3 but even in other countries, regions, and subregions, populist leaders resist market-oriented reforms under the veil of anti-imperialist ideology. What are the roots of such populist revivals? Does the absence of populist rhetoric hide all-powerful entrenched interest groups, which are threaten the development of nascent democracies in the region? In contemporary Latin American countries such as Mexico, at least three new challenges have emerged. First, private monopolies' and oligopolies' ability to protect entrenched benefits is enormous. Second, public sector workers and unions often resist market-oriented reforms in order to defend insiders at the expense of the truly excluded, to the detriment of foreign investment inflows and consequen­ tial productivity enhancements. Third, decentralization has led to local capture by interest groups at the state and municipality levels. Decentralized expenditures for public works and social programs are common examples. How can policy makers effectively fight against institutional capture and all other prevalent forms of corruption? Section 6.1 in this chapter presents a brief overview of populism dating back to the 1920s. In section 6.2, we deliver concrete examples of macroeconomic popu­ lism during the lost decade of the 1980s and beyond. Then, we discuss the decline of macroeconomic populism triggered by the structural reforms of the 1990s in section 6.3. In section 6.4, we analyze the persistence and rebirth of populist poli­ cies in extraordinarily diverse regions across Latin America. Twenty-first-century populist movements in Argentina, Bolivia, Ecuador, and Venezuela are covered here. In section 6.5, we develop the theme of regulatory capture of private sector monopolies following privatizations. Section 6.6 discusses SOEs and the most recent nationalization wave in some regions. In section 6.7, we present a summary and some concluding remarks. 6.1 Populism: Historical Background Conniff (2012, 4) gathers a truly exceptional historical account of populism in Latin America from a political scientist's perspective. He defines populism as "an expan­ sive style of election campaigning by colorful and engaging politicians who could draw masses of new voters into their movements and hold their loyalty indefi­ nitely, even after their deaths."4 The Political Economy of Latin American Development 149 Populism first appeared in Argentina, which by the end of the nineteenth century was the most advanced economy in Latin America. Argentina then fea­ tured among the world's top five countries in terms of per capita income. Its growth prospects were rivaled only by those of Australia, which according to most recent statistics ranks fifth among the richest countries on earth.5 In comparison, Argentina these days ranks sixtieth.6 Populism was probably a contributing force in Argentina's precipitous descent during the twentieth century. The country's first populist leader, Hipolito Yrigoyen, was democratically elected in 1916. The constitution did not allow for Yrigoyen to be reelected in 1922, but he nonetheless managed to successfully appoint a suc­ cessor.7 His policies identified him with a working-class rural elite at the site of one of the southern-cone Latin America's first upsurges of industrialization: Argentina's meatpacking plant. The region's most vigorous labor movements since have gathered support from the middle class, first under Juan and Evita Peron's administration at the start of ISI in Latin America in the 1940s. Peron's indelible policies (and tactics) have been replicated by Nestor Kirchner and his wife, former president of Argentina Cristina Fernandez de Kirchner-who succeeded her husband as president of Argentina in 2007, was reelected in 2011, and somewhat reluctantly stepped down in 2015 ending thirteen years of Kirchnerism. ( In section 6.4 we explain Argentinean populism under the Kirchners in greater detail). Patriotic rhetoric during most of the twentieth century is a prevailing feature of populism, and not just in Argentina. Since the 1938 nationalization of the oil industry in Mexico under the Lazaro Cardenas administration, the entire Latin American region has been plagued with anti-foreign-investment leaders.8 Unsur­ prisingly, recent energy reforms involving foreign investment into the oil industry and other sectors considered "strategic" for Mexico's economic development have confronted fierce opposition from successors of the ISI ideology-former members of the center-right PRI.9 Following the Acci6n Democratica (AD) party-under the leadership of left-wing President Romulo Betancourt in the 1940s-and its legacy, democratically elected and/ or military leaders in Venezuela have often pledged nonintervention fro_m business representatives in national policy making, particularly with regard to FDI. 10 Under Carlos Andres Perez's administration, the 1976 Great Venezuela Plan called for an official nationalization of Petroleos de Venezuela S.A. (PDVSA) and production diversification under ISI policies. President Hugo Chavez strength­ ened state intervention in PDVSA and other industries starting in 1999 and explic­ itly dictated that a portion of Venezuela's oil industry revenues should be allocated to social programs. Like Argentina under Peronist policies and Mexico under 150 Chapter 6 Echeverria-style PRI policies,11 Hugo Chavez appointed a successor: Venezuela's current president, Nicolas Maduro. Chavez's ongoing policies via President Maduro have driven the economy of the seventh largest oil exporter in the world into complete chaos. Venezuela's GDP dropped 4 percent in 2014, and experienced a further decline in excess of 7 percent in 2015, according to recent IMF official statistics. At the same time, the country suffered from exceedingly high inflation rates of over 40 percent in 2013, 62 percent in 2014, and approximately 40 percent in 2015.12 Despite the fact that former President Luis Inacio Lula da Silva from Brazil is not characterized by political scientists as a twenty-first-century populist, Lula­ as he came to be known-had close business ties to the Chavez administration, which date back to 2003. 13 These included a loan to Venezuela for the construction of a US$14 billion refinery in northeastern Brazil to process oil production from PDVSA and Petrobras (Petr6leo Brasileiro S.A.)-Brazil's state-run oil company. However, Brazil's president until 2016-Dilma Rouse££, Lula's former chief of staff-had managed to distance herself from Venezuela's current leader via, for example, calling off the northeast refinery project. To address populist ideology and practice in every Latin American country is beyond the scope of this chapter. Suffice to say-for the sake of exposition-that the Chavez populist legacy in twenty-first-century Latin America has become a benchmark for populist practices in other regions. According to Drake 2012, Chile is one of the few Latin American countries where populism-as defined earlier by political scientists-never took hold. Econ­ omists tend to disagree, however. Larrain and Meller (1990), for example, con­ clude that the Allende government was a socialist-populist experiment that left an indelible imprint. In the future, Drake (2012, 67) warns, with regard to Chile in the twenty-first century, "keeping