3 - Federalism and the Decentralized Politics of Macroeconomic Policy and Performance

Summary

The politics of market reform has been at the heart of political economy research on developing nations since the debt crisis of the early 1980s. In large part this interest has been a response to the increases in international trade and capital flows, collectively known as globalization, which have increased the incentives for developing nations to discard statist models of development in favor of free market policies. With globalized markets, the capacity of developing nations to maintain macroeconomic stability increasingly determines their success in the search for international investment, competitiveness, and economic growth. International motives, however, often run headlong into the survival instincts of politicians who are averse to the budget cuts, tax increases, and the like associated with macroeconomic reforms. As a result, questions about the ability of nations to adjust their economies to this reality have assumed tremendous importance. We must ask: Under what conditions do governments carry through politically difficult macroeconomic reforms? What are the key political and economic institutions that mediate a nation's insertion into, and relationship with, the global economy? What are the political preconditions for successful free market reforms?

Consistent with the theoretical expectations outlined in Chapter 2, this research takes as its central point of theoretical departure the potentially negative consequences of federalism for economic adjustment to the challenges of globalization in the developing world. At the broadest level, this manuscript theorizes that the capacity for market reforms decreases with the divergence of political interests across levels of government within nations.