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Inflation and Social Pacts in Brazil and Mexico*

Published online by Cambridge University Press:  05 February 2009

Ian Roxborough
Ian Roxborough
Affiliation:
Professor, Department of Sociology and Department of History, at the State University of New York – Stony Brook.
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Abstract

The politics of inflation in Latin America

In recent years inflation has accelerated in Latin America to become a seemingly intractable problem. In many countries, even when high inflation or hyperinflation has been brought down, the inflationary ‘floor’ has remained high, with all the appearance of a series of upward and irreversible steps. The underlying average annual rate of inflation has tended to rise steadily, as can be seen in the table overleaf.

The reasons for persisting high inflation and for the seeming inability of government policy to bring inflation down in a lasting manner are complex and controversial. Moreover, as a number of authors have noted,1 the reasons for the failure of anti-inflationary policy are often, in some measure, political as well as purely economic. For one thing, inflation, and efforts to control inflation, involve a redistributive struggle the political costs of which the government may be unable or unwilling to bear. In addition, the government simply may not have the administrative capacity to implement certain measures effectively. For example, one way of restoring fiscal balance may be to increase taxes on wealth-holders, but this may not be a politically feasible option for many governments. Central governments may have limited control over the spending of regional and local governments, or over state-owned corporations, and may therefore have difficulty in controlling expenditure. Moreover, effective anti-inflationary policy may require political conditions that may simply not be present in many Latin American political systems. For example, in September 1989, towards the end of the Sarney government in Brazil, inflation was running at 38% per month.

Type
Research Article
Information
Journal of Latin American Studies , Volume 24 , Issue 3 , October 1992 , pp. 639 - 664
Copyright
Copyright © Cambridge University Press 1992

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References

1 Dornbusch, R. and Edwards, S., ‘La macroeconomía del populismo en América Latina’, El Trimestre Ecdnomico, no. 225 (Enero-Marzo 1990), pp. 131 and 157.Google Scholar

2 Maier, C., in Recasting Bourgeois Europe (Princeton, 1975)Google Scholar gives an account of the conflicts generated by inflation in Europe in the post World War One period, and of the incapacity of political institutions adequately to channel these conflicts, leading to widespread political decay. Numerous authors have noted the distributive conflicts which are associated with inflation in Latin America.

3 By democracy here I mean a political system in which major offices are rilled by free and fair elections involving a widespread franchise. The notion of ‘free and fair’ elections implies a series of preconditions such as a free press, freedom of association, rule of law, etc.

4 Known previously as the Partido de la Revolucion Mexicana (PRM) and the Partido Nacional de la Revolucion (PNR).

5 Wilkie, J., ‘Six Ideological Phases of Mexico's “Permanent Revolution” since 1910’, in Wilkie, J. (ed.), Society and Economy in Mexico (Los Angeles, 1990) p. 50Google Scholar argues that the opposition PRD probably won the 1988 President election, but not the count.

6 Whether Mexico is headed in the direction of democracy remains, at present, an open question.

7 García, D., ‘Democracia y ajuste estructural’, Argumentos, no. 7, (Agosto 1989).Google Scholar

8 The term, of course, comes from Huntington, Samuel, Political Order in Changing Societies (New Haven, 1968).Google Scholar It refers to the difficulty of creating political institutions in a rapidly changing society.

9 Opening the economy to international competition is by no means the same thing as reducing the role of the state in the economy. The experience of export-led growth in Asia frequently depended on active state intervention and support for exporting industries. Haggard, S., Pathways from the Periphery (Ithaca, 1990).Google Scholar In contemporary Latin America, as in much public discussion, neo-liberal orthodoxy has pushed policy-makers in the direction of simultaneously reducing the role of the state in the economy and opening the economy to foreign competition.

10 It should be noted parenthetically that the reasons why Latin American governments undertake privatisation programmes may be quite various. The Menem government in Argentina, for example, in its rapid pursuit of privatisation, appears to be responding to fiscal and ideological constraints rather than to the need for long-term structural reform. Selling off state assets has the immediate effect of either reducing the fiscal deficit through an immediate cash inflow and/or reducing the foreign debt burden by selling state enterprises for dollars. At the same time, the Menem government can hope to develop credibility among foreign economic actors by displaying, symbolically, its commitment to orthodoxy.

11 While the neo-liberal position seems hegemonic, this does not mean that all debate has ceased, of course.

12 Inter-American Development Bank, Economic and Social Progress in Latin America: 1990 Report (Washington D.C., 1990), p. 5.Google Scholar

13 Inter-American Development Bank, Economic and Social Progress in Latin America: 1991 Report (Washington, D.C., 1991).Google Scholar

14 It is possible, for example, to identify imported inflation, inflation due to fiscal deficits, inertial inflation, and inflation stemming from structural inefficiencies and market imperfections.

15 The Prisoners’ Dilemma is so-called from the following story: The police have apprehended two criminals and are certain that they have committed the crime, but have no evidence. They place each prisoner in a separate cell and offer him or her a deal if he or she confesses. The prisoner who confesses will get a light sentence, and the other will get a heavy sentence. In this situation, if each prisoner can trust the other, both will keep silent and both will go free. This is the optimal solution. It requires that each prisoner co-operate with the other. But other outcomes are possible. Either prisoner may be tempted, if he or she does not fully trust the other, to ‘rat’ on his or her colleague, who will be a ‘sucker’. Further, faced with this possibility, both prisoners may decide to defect. In this situation the police no longer have an incentive to reward the defector, and both prisoners are likely to receive substantial prison sentences, though not as stiff as they would get if they were ‘suckers’. The payoff structure is usually diagrammed as in the text. The numerical values attached to the various payoffs in this example are arbitrary.

16 Smith, W., ‘ Heterodox Shocks and the Political Economy of Democratic Transition in Argentina and Brazil’, in Canak, W. (ed.), Lost Promises: Debt, Austerity and Development in Latin America (Boulder, 1989), p. 151.Google Scholar

17 Smith, W., ‘Heterodox Shocks…’, p. 152.Google Scholar The passages quoted by Smith are from De Riz, E. et al. , ‘El contexto y los dilemas de la concertacion en la Argentina actual’, in Dos Santos, M. (ed.), Concertación Politico-Social y Democratización (Buenos Aires, 1987).Google Scholar

18 And is not entirely dissimilar from the position developed independently by myself in ‘Organized Labor: a Major Victim of the Debt Crisis’, in Stallings, B. and Kaufman, R. (eds.), Debt and Democracy in Latin America (Boulder, 1989).Google Scholar

19 The assumption that we are dealing with unitary or homogeneous actors must be questioned. The categories designated as ‘unions’, ‘employers’ and ‘government’ are, in fact, constellations of large numbers of organisations and individuals, each with rather different interests, strategies and interpretations. Typically, governments tend to be divided between the Finance Ministries and the Labour Ministry, and between technocrats and political managers. As William Smith says, ‘The Sarney regime's willingness to resort to the use of draconian antilabor legislation negated its official discourse in favor of a pact and underscored the persistence of technobureaucratic modes of policymaking inherited from the authoritarian period’. ‘Heterodox Shocks…’, p. 154. Unions are almost always divided between proponents of a confrontational strategy (defection) and proponents of a cooperative strategy. Employers’ associations likewise will probably be divided on strategic issues. There may well be divisions between producers oriented towards export markets and those aiming primarily at the domestic market; there will be sectoral clashes, and divisions between large and small businesses. How these potential divisions between business groups work out in practice will depend on the concrete organisational forms in a given society.

20 Coherence refers to the compatibility of the various elements of the programme with each other; consistency to continuity over time.

21 One common mechanism for building inflationary expectations into the system so as continually to reproduce inflation is to index future prices (including wages) to past inflation. This, however, is only one concrete mechanism by means of which inflationary expectations operate: indexing is one manifestation of the problem, rather than necessarily being the central issue. Inertial inflation is primarily a matter of expectations.

22 A DataFolha poll in May 1987 asked respondents whether they thought wage and price controls were useful as an anti-inflationary device. No less than 83% thought they were useful. It should be added that 70% thought wage and price controls would be difficult to achieve.

23 According to the DataFolha poll, Sarney's popularity went from 33% in October 1985 to an astounding 82% in March 1986. With the ending of the Cruzado Plan in November 1986, his popularity dropped back to the previous level of 34%. By May 1987 Sarney's showing in the polls had reached the equally remarkable level of eight per cent.

24 Dornbusch, R., ‘Debt Problems and the World Macroeconomy’ in Sachs, J. (ed.), Developing Country Debt and the World Economy (Chicago, 1989).Google Scholar

25 At least, not to my knowledge. It is not obvious how economists might attempt to measure the speed of adjustment of expectations. One possibility would be a general population survey which asked respondents how long prices would have to remain stable for them to adjust their behaviour accordingly.

26 It may be objected that when economists talk about changing inflationary expectations they have in mind, not the mass of the general public, but rather key economic players: banks, large investors, etc. These sophisticated economic agents will respond much more rapidly to signals from the government. There is some validity to this argument. However, even if these key players take the role of leaders in signalling the new rules of the game to the rest of the economy, it is still necessary to estimate the lag with which other economic agents follow their lead. Here one must consider the mass of retailers and small traders and manufacturers on the one hand, and trade unions on the other. How rapidly do unions, for example, change their expectations about inflation, and how does this influence their wage demands?

27 The reasons for this are not hard to find. The inability of governments to develop viable institutions for concerted action against inflation, together with the technocratic distaste for and distrust of the political process, predisposes them to seek solutions that appear to be entirely under government control. The secret planning of the Austral and Cruzado Plans, and the notion that they could be effectively imposed on a society by a technocratic state are clear examples of this attitude. Needless to say, the argument advanced in this article is that this is a counterproductive attitude to the political process.

28 1 use the phrase semi-permanent to indicate a system in which the use of wage and price controls is seen as a normal aspect of public policy. There may be periods when wage and price controls are not used, and when prices (including wages) are set exclusively in the market, or more accurately, without concertation between the actors or direction by the government. However, if inflation appears to be getting out of hand, in this sort of political system there will be a tendency to revive the use of institutional mechanisms for wage and price control.

29 There is now an enormous literature on corporatism, both in Europe and in Latin America. In general terms I have found the discussion in Przeworski, A., Capitalism and Social Democracy (Cambridge, 1985)CrossRefGoogle Scholar very useful.

30 It is not uncommon to talk about capital-labour accords or pacts as implicit phenomena. That is, when the various actors behave as though they all knew and agreed upon the ‘ rules of the game’ and had arrived at tacit understandings. I wish to distinguish this use of the notion of ‘pact’ from the sense in which I use the word in this article. Here I refer exclusively to formal, explicit pacts.

31 Roxborough, I., ‘Organized Labour’.Google Scholar

33 Rogerio Magri was leader of the Sao Paulo electrical workers’ union. This union had adopted a conscious strategy of using its strong bargaining position to strike for increased wages but not to engage in unnecessary confrontation or to risk defeat in adverse circumstances. Hence the label ‘sindicalismo dos resultados’, unionism of results, designed to distinguish this current from the ideological and political unionism of the CUT. Rogerio Magri led a split in the CGT in 1990, taking over the position of Secretary General from the old ‘pelego’ leader Joaquim dos Santos Andrade, Joaquinzão. One of Magri's allies has been the leader of the São Paulo metal-workers’ union, Luis Antonio Medeiros.

33 Pensamento Nacional das Bases Empresariais was formed by a number of businessmen dissatisfied with the policies of the principal employers’ organization, Federação de Industrias do Estado de São Paulo, FIESP.

34 E. Buffie with the assistance of Krause, A. Sangines, ‘Mexico 1958–86: From Stabilizing Development to the Debt Crisis’, in Sachs, (ed.), Developing Country Debt.Google Scholar

35 How realistic this perception of political stability is may be questioned.

36 It has been argued by some that the agreements reached in the pact have been agreements among elites and have not involved the rank-and-file. This is, of course, the case, and it is unlikely to be otherwise.

37 Bolívar, A., ‘El periodo de la transición a la modernidad’, in Garavito, R. and Bolívar, A. (eds.), México en la Década de los Ochenta: la modernizatión en cifras (México, 1990), pp. 54–57.Google Scholar

38 The interviews were carried out in March-April 1989, March-April 1990, in January 1991 and in January 1992. Most labour leaders believed that without the PECE inflation would accelerate and real wages would be eroded even more rapidly.

39 Interview by author, 14 Jan. 1991.

40 It may be objected that, in a capitalist economy, labour will always be the weaker partner, and that therefore corporatist institutions will necessarily work in favour of capitalists. Two points need to be made: firstly, this is not always the case; secondly, even if it were the case, the argument would apply to all institutional forms of class conflict, and would apply as much to non-corporatist forms as to corporatism. It could not therefore be used to argue against corporatism.

41 By authentic I mean a leadership that responds to the desires of the rank-and-file as expressed through internal democratic procedures in trade unions and political parties. There is no intention here of introducing any notion of ‘ correct’ class consciousness.

42 ‘Mexico 1958–86’.