Frieden - Classes, Sectors, and Foreign Debt in Latin America

Classes, Sectors, and Foreign Debt in Latin America
Author(s): Jeff Frieden

Source: Comparative Politics, Vol. 21, No. 1 (Oct., 1988), pp. 1-20
Published by: Comparative Politics, Ph.D. Programs in Political Science, City University of New
York
Stable URL: http://www.jstor.org/stable/422068
Accessed: 26-02-2016 15:10 UTC
REFERENCES
Linked references are available on JSTOR for this article:
http://www.jstor.org/stable/422068?seq=1&cid=pdf-reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/
info/about/policies/terms.jsp
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content
in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship.
For more information about JSTOR, please contact support@jstor.org.
Comparative Politics, Ph.D. Programs in Political Science, City University of New York is collaborating with JSTOR to
digitize, preserve and extend access to Comparative Politics.
http://www.jstor.org
This content downloaded from 130.237.29.138 on Fri, 26 Feb 2016 15:10:49 UTC
All use subject to JSTOR Terms and Conditions
Classes, Sectors, and Foreign Debt

in Latin America
Jeff Frieden
Since 1965 internationalfinancial conditionshave become a majorfactor in economics and

politics within the less developed countries(LDCs). The impactof internationalfinance on
the LDCs provides an excellent opportunityto analyze the relationshipbetween external
events and LDC domestic economic and political development. There was in fact great
variation in the response of LDC debtors to similar internationalfinancial circumstances.
Some liberalized their trade and investment policies as they borrowed; others tightened
them. Some used borrowedfunds productively;others experiencedenormouscapital flight.
The 1982-1984 financial crisis saw the rise of new democraticregimes in some countries
and the consolidationof authoritarianismin others.
This paper uses the recent experience of five Latin American nations with overseas
financial marketsto explore the effects of foreign economic trends on domestic economic
and political development. The paperdevelops a frameworkto explain why the five major
Latin American debtors-Mexico, Brazil, Argentina, Venezuela, and Chile--responded'
differently to a nearly identical set of external constraintsand opportunities.Its principal
explanatory tool is the character of socioeconomic and political cleavages within the
borrowingcountries,especially the natureof relationswithin the business communityand of
relations between the business community and the labor movement. When international
financial resourceswere readily available, the level of conflict between economic elites and
the labor movement determined whether governments relied primarily on the market
mechanism to allocate external resources or used sectoral policies to reinforce their social
bases of support.When the financial crisis hit and regimes were forced to reduce domestic
public spending, the kinds of assets held by different segments of the private sector
determined their economic and political response, which ranged from capital flight to
political protest.
The first section describesthe internationalfinancialsetting and summarizesthe analytical
issues the study addresses. The second section presents the study's analytical framework.
The third section applies the frameworkto the experiences of the five countriesin question.
The fourth section draws broaderinferences from the cases.
The Setting and the Issues

In the 1960s internationalfinancialmarketsbegan to rebuildties with LatinAmericathat had
been shatteredby the widespreadbond defaults of the 1930s. Mexico was the earliest major
Latin American Euromarketborrowerin the early 1960s, followed by Brazil around 1967,
by Venezuela in the early 1970s, and finally by Chile and Argentina shortly after their
ComparativePolitics October 1988

militaries disposed of worrisome Socialist and Peronist governments in 1973 and 1976
respectively. By 1977 the lending side of the Euromarketwas both flush with funds and full
of aggressive new entrants, so that credit was extremely easy in the late 1970s.
Euromarketinterestratesbegan to rise afterthe beginning of Paul Volcker's antiinflation
crusadein the United States in 1979. Eurodollardeposit rates went from 9 percentat the end
of 1979 to 21 percentin late 1981, yet banklendingwas still easy to obtain. Argentina'sApril
1982 invasionof the Falkland/MalvinasIslandssped a chain of events alreadyin motion, and
by mid 1983 almost no voluntaryEuromarketloans were being made to Latin America.
We can regardthe five major Latin American borrowersas having faced an essentially
identical supply of foreign finance. This generalizationis oversimplified, since the market
usually distinguished between borrowers of different nationalities, but for our purposes
supply constraintswere the same for all. Althoughthey began borrowingat differenttimes,
by 1976 all five were regularEuromarketborrowers.The supply of foreign finance began to
diminish for all five countriesat roughly the same time.
Certainfeaturesof the LatinAmericaneconomies duringthe recentfinancialexpansionand
contractionareanalyticallyunproblematical,inasmuchas they behavedas expectedin all cases.
Duringthe upswing of the latest Latin debt cycle, the greaterinflow of foreign resourcesled
to a generalizedincreasein economic activity. At the same time, the opening of new avenues
of private capital importationreduced the relative significance of more traditionalforms,
especially foreigndirectinvestment;the relativeweight of multinationalcorporateinvestment
declinedas borrowingincreased.Greaterfinancialintegrationallowed local firms with access
to foreignfundsto expandtheirshareof local economicactivity;this effect redoundedprimarily
to the benefit of government-ownedfirms and the very largestlocal privatefirms.'
The downswing of the Latin American financial cycle had two subperiods, each with a
few predictableresults. As internationalinterest rates rose after 1980, they exerted great
pressure on both Latin debtor sectors and local financial systems; these pressures were
exacerbatedby the concurrentinternationalrecession and trade stagnation. Higher interest
rates increased interest payments on the floating rate foreign debt and forced debtors to
borrow ever more abroad and at home and to divert more resources to meet debt service
payments. Because the debtors' financial systems had become quite integratedwith those
abroad,rising overseas interestrates forced domestic interestrates in Latin America sharply
higher. The result was a generalized financial and speculative boom: extraordinarilyhigh
local interest rates diverted local savings from productive investment, sucked in foreign
capital, and kept exchange rates overvalued amid rampantspeculationagainst them due to
the highly uncertainenvironment.
In 1982 the supply of external funds virtually dried up, which exploded the financial
bubble that had built up after 1979. Strapped debtors were thrown back onto already
crowded domestic financial markets. Inflation skyrocketed as governments attempted to
cover their obligationsby monetizingtheir deficits; interestrates rose even furtheras nearly
insolvent debtors attemptedto cover their obligations by borrowingeven more. Declining
investment, rising inflation, high domestic interest rates, and cuts in public spending
everywheredrove the continent into depression.
If much of the recent Latin Americanexperiencewith internationalfinancialmarketswas
predictable-prosperity duringa time of easy money, austeritywhen the spigotwas turnedoff,
all coupledwith an increasedresponsivenessof domesticfinancialmarketsto overseastrends-
Jeff Frieden
there was great frequencyand amplitudein variationsbetween nationalpolicies and the orientationof nationalprivatesectors. Policy rangedfrom extremeeconomic "neoliberalism"to
massive state intervention.Borrowedfunds were used overwhelminglyfor productiveinvestment in some instancesanddissipatedin capitalflight in others. As economiccrises brokeover
Latin Americaafter 1980, regimes were reinforcedin a few countries,toppled in others, and
weakenedbut left intactin still others. Most discussionsof the experiencearecontentto ascribe
the differences to policy peculiaritiesof a more or less random nature, but it is no more
intellectuallyacceptableto explaindifferencesamong nationalpolicies as the resultof "policy
mistakes"than it is to blame businesscycles on managerialstupidity.2
Our purpose is to explain, not simply assert, differences among national reactions to
external conditions. The variationsthat requireexplanationcan be drawn together on two
dimensions, one measuringgovernmentpolicy and the other rankingprivatesector reactions
to governmentpolicy. First, governmentpolicies can be said to vary from marketto interventionistextremes. At one end of the continuumpublic policy plays no role in channeling
privateinvestmentand restrictsitself to "the preservationof order;"at the otherend the state
actively chooses areas in which to invest and to encourage private investment, thereby
manipulatingsectoral rates of return.Second, privateeconomic agents can react either with
confidence in the governmentor with skepticism. At one extreme privateinvestorsrespond
to sectoral incentives with sectoral investmentsor to general stability with long-range investment horizons;at the other extreme privateeconomic agents regardgovernmentactions
with suspicion and search either for alternativesto investments that rely on government
policies or for a new government.On the policy dimension, Chile after 1973 was closest to
the free-marketextreme, Brazilclosest to the interventionist;the otherthreewere in between,
with Argentinacloser to Chile and Mexico and Venezuela closer to Brazil. On the other
continuum,governmentsin Brazil (before 1981) andChile enjoyed the most confidence from
the private sector, in Argentinathe least, in Mexico somewhat more than in Venezuela.
There are importantanalyticaland policy reasons to explore the tension between market
and state interventionand between private sector supportfor and wariness of government
economic policies. The implicationsof state interventionin the developing economies are of
course extremely controversial.A betterunderstandingof why some governmentsintervene
more thanothers is clearly an importantstep towardevaluatingthis intervention.In a related
way, economic policy in the developmentprocess is in its essence an attemptto stimulate
privateinvestmentin new productivecapacity, and its success depends in large parton the
private sector's confidence in the government. Private sector faith in the governmentcan
lead to increased investment and economic growth, while private sector skepticism about
government commitments can dampen investment and drive the business community to
political protest. An explanation of the factors influencing both government economic
policies and private sector reactions to them will thus help to clarify some of the central
issues in Latin Americanpolitics and economics.
An Analytical Framework
In this section we show how relations between labor and capital and divisions within the
business community can be expected to affect governmentpolicy and the private sector's

response to this policy.3 The underlyingprinciple that motivates this discussion is that all
policies, no matter how rational or necessary, have differential effects. Devaluing an
overvaluedcurrencyor stopping a hyperinflationmay be desirable for society as a whole,
but the costs and benefits of such policies are not borneequally by all, which is why they are
controversial.
The first broad cleavage in the Latin American political economies divides the modern
business community from the industrial labor movement, the most concentrated and
strategicallylocated focus of populardiscontent. The more confrontationalLatin American
labor-capital relations are, the more individual capitalists will be concerned about the
maintenanceof propertyrights ratherthan about their sectoralneeds. In such circumstances
the business communitywill be amenableto delegating a great deal of independenceto the
governmentin the interestsof law and order. For its part, the regime will be less tied to
specific groups of capitalists and freer to implement economic policies that safeguardthe
investment climate generally without picking and choosing its favorites. The reductionin
sectoral demandswill lead governmentsto undertakemore market-orientedpolicies, which
tend to have a "disciplining"effect on the labor movement.4This is especially true in Latin
America, where years of import substitutionhave allowed industrialwages to rise above
their levels in other, more open developing countries.
The more hostile the labormovementis, then, the more LatinAmericancapitaliststend to
delegate authorityto a governmentthat tends to implement market-orientedpolicies. High
levels of class tension reduce bourgeois demands for sectoral incentives, increasedemands
for the general preservation of acceptable business conditions, and override capitalist
resistance to laissez-faire economic policies. More peaceful and cooperative labor-capital
relations, on the other hand, give businessmen little reason to refrain from demanding
subsidies specific to them; indeed, they can ally themselves with "their own" workers in
lobbying for governmentsupport.The less antagonisticlabor-capitalrelationsare, then, the
more Latin Americangovernmentswill follow interventionistsectoral policies.
To understandthe economic and political reaction of the private sector to government
economic policies, we focus on the divergent interests of different sectors within the
business community. Although there are many divisions among investors, we group them
under two broad headings:holders of liquid and fixed assets.5 Liquid assets, such as bank
deposits, can easily be turned into ready money and transferredfrom one application to
another;fixed assets, such as shoe factories, are tied to a particularlocation and economic
activity. To a certain extent this overlaps with market competitiveness, since liquid asset
holderswill be found only in sectors with high ratesof return,while fixed asset holders may
be "stuck" in struggling sectors. The division is hardly stark, and the specifics vary from
country to country and over time. But generally liquid asset sectors include finance, real
estate, services, and domestic and foreign trade; fixed asset sectors include industry and
agriculture.
In theireconomic reactionsto governmentpolicies, liquid asset holdersare more sensitive
to general market conditions, while fixed asset holders respond more to government
measures specific to their lines of business. This is not to say that market trends do not
matter to industrialistsor subsidies to bondholders,only that both the intensity of policy
preferences and the relative responsiveness to policy differ. Generally, market-oriented
Jeff Frieden
policies benefit liquid asset holdersmore thanfixed asset holders, while sectoralpolicies are
more beneficial to fixed asset holders.
Different kinds of investors also have differentpropensitiesto engage in political action,
as Albert Hirschman has noted. Holders of liquid assets are better able to shift their
investmentsin response to changes in governmentpolicy and will be less likely to react to
such changes with political protests. Fixed asset holders, on the other hand, will be forced
more quickly into the political arena if their assets are threatened.In other words, when
investors in liquid assets face uncertainor unfavorablepolicies, they can "retreat"into
relianceon marketalternatives;when investorsin fixed assets find their intereststhreatened,
they will voice their dissatisfaction since market alternativesare less available to them.6
Thus increasedeconomic uncertaintyor unfavorableeconomic policies will lead liquid asset
holdersto shift theirfunds into safer outlets at home or abroad,while fixed asset holderswill
react with political protests and demandsfor more favorablegovernmentactions.
We can combine all these elements into a dynamic picture of how economic policy and
private economic agents interact in Latin America. Governments in societies with major
class cleavages will pursue more market-basedpolicies, while governments of societies
without significant labor-capitalconflict will pursue more sectoral policies. Over time,
market-orientedpolicies will strengthenliquid asset holders more than fixed asset holders,
while sectoral policies will have the opposite effect. A shift in governmentpolicies that
increases uncertaintyand/or reduces rates of returnwill lead liquid asset holders to pursue
more attractivemarketalternatives, including capital flight, while fixed asset holders will
increasepressureon the governmentfor a change in policies. Of course, since fear of labor
dominates sectoral concerns, unfavorablepolicies will call forth less bourgeois dissent the
more importantclass conflict is.
This frameworkcan be tested against the two exogenous shifts in the availability of
external finance that bracket the recent Latin American borrowing experience. External
conditions are altered at the beginning of the test by the dramaticallyincreased supply of
foreign finance, to which domestic policy responds;the countriesevolve on the basis of this
policy. Externalconditions are changed again when externalfinance dries up, which forces
a shift in governmentpolicy thatcalls forth a privatesector response. A simplified sketch of
the different nationalreactions is as follows.
1. Once the supply of external finance to a country opened up, the governmentfaced a
choice over how funds would be allocated. Capital inflows could either be channeled to
favored borrowersor allowed to follow the dictates of the marketplace.The more serious
class conflict was, the more the government tended to remove itself from the allocation
process. Of our five cases, Chile clearly had the most hostile labor-capitalrelations and
pursuedthe most market-orientedpolicies; Argentinaalso had a long history of labor strife
and followed relatively free market policies. Both Mexico and Venezuela have powerful
labormovementsthat have nonethelessdeveloped relativelystable relationswith capital and
the state; regimes in both countries tended to mix reliance on sectoral interventionwith
market-orientedpolicies. Brazil's industrialworking class has generally been weak and
nonconfrontational,and Brazilianeconomic policy has been the most sectoral in all of Latin
America.
2. From the beginning of recent borrowinguntil the early 1980s, each country evolved
along the lines set by the policies outlined above. Chilean financial and commercial
5

liberalizationstrengthenedliquid asset holders and newer groupsof entrepreneursoutside of
traditional industry; a similar but less pronounced process took place in Argentina. In
Mexico and Venezuela the mix of policies strengthened favored sectors, especially in
industry,while markettrendsallowed liquid asset holders, especially in trade, finance, and
real estate, to grow as well. Brazil's sectoral incentives helped build very powerful basic
industrial and agribusiness communities, especially in Sao Paulo state. The relative
evolution of the five countries' manufacturing,wholesale and retail trade, and financial
services sectors in the 1970s is illustrative, although the time periods are not strictly
comparableand the data are somewhat suspect. In both Chile and Argentinathe share of
manufacturingin Gross Domestic Product(GDP) declined between 1970 and 1980, while
thatof tradeand finance combinedrose: tradeand finance grew almost four times as fast as
manufacturingin Chile, and twice as fast in Argentina. In Mexico, Venezuela, and Brazil
the trend was the opposite: manufacturinggrew between one-quarterand two-thirdsmore
rapidlythan tradeand finance.7
3. The position and power of different sectors of the business community illuminatethe
five countries' response to the cutoff in external finance after 1982. The crisis forced all
governmentsto reduce spending, but the privatesector reactionvaried widely. In Brazil the
fixed asset holders who had been so strengthenedby previous policies fought back against
government austerity and eventually drove the military from office in favor of a more
congenial civilian regime. In Chile, on the contrary,the centralityof bourgeois fears about
labordampenedthe oppositionof the business community, whose protestshave been scarce
and ineffectual. In Argentina, Mexico, and Venezuela, governments have attempted to
balance the demands of both industrialconstituents and liquid asset holders with varied
results.
The following section presentsa more detailed analysis of the five majorLatin American
borrowers'economic and political reactions to external financial trends, organized around
two features of the societies in question, the characterof labor-capitalrelations and of
relations between groups of private investors. In each case we examine, first, government
policies pursuedduringthe financialexpansion and the privatesectoreconomic and political
response to them and, second, governmentpolicies during the contractionafter 1980 and
how the private sector respondedto them both economically and politically.8
Five Cases
Brazil9 The Brazilianexperience most closely approximatesour ideal type of a society in
which class cleavages are secondaryto sectoraldivisions. The Brazilianlabormovement has
never been especially radical;the three-yearorthodoxstabilizationprogramthatfollowed the
1964 militarycoup served to weaken and moderateit still further.Brazilianeconomic policy
from 1967 to 1980, then, was overwhelminglysectoral, and the governmentbuilt close ties
with favored sectors. When after 1980 internationalfinancial conditions requiredsectoral
programsto be cut back, the resultingprotestsdrove the militaryfrom power.
After 1967 the Brazilianregime developed a vast networkof subsidies and incentives to
encouragerapid industrialgrowth. The government's strongly interventionistpolicies were
led by a public sector that was a major user of overseas finance. Over three-quartersof the
6
Jeff Frieden
country'sforeign debt is owed by the public sector, and the bulk of Brazilianborrowingwas
done directly or indirectly by firms in basic industry, the provision of crucial industrial
inputs, and capital goods. There is general agreement among analysts that the Brazilian
governmentmanaged its debt well by Third World standardsand that most foreign funds
were channeledto productiveinvestment.
From 1967 to 1980 massive public investmentspulled the Brazilianeconomy forwardat a
rapidrate, as the privatesectorrespondedwith alacrityto the incentivesit was offered. In the
"miracle" period, from 1967 to 1973, industrialproductionrose by 111 percent, led by
producersof consumerdurables,especially automobilesand appliances;basic industriesalso
grew rapidly. From 1974 to 1979, often known as the "big projects"period, the government
began constructionof a series of largelydebt-financedinvestmentprojectsaimed at increasing
the supply of essential industrialinputs and/or expanding productionof exportablegoods.
Althoughthe statedominatedthe process, the investmentboom also led to impressivegrowth
in the privatesectorfirmsthatwere supplyingcapitaland intermediategoods to the parastatals.
Rapid industrialdevelopment depended on extremely close relations between Brazil's
governmentand its capitalists, especially fixed asset holders. Close ties were built between
state firms producingbasic industrialinputs and their local suppliersand customers, public
developmentbanks and local industrialborrowers,and industrialand agribusinessexporters
and various farm and export credit agencies. If this web of public-privateinteractionsped
Brazilian industrializationand immensely strengthenedBrazil's industrialbourgeoisie, it
eventually led to the military's downfall when externalconditions forced it to cut off many
of its former supporters.
As internationalinterestratesrose after 1979, pressureon Braziliandebtors,especially the
state sector, increased.The governmentwas forced to cut domestic spendingeven as heavily
indebted firms that depended on public sector orders themselves came under increasing
financial pressure. The country's deterioratingterms of trade combined with growing debt
service paymentsto squeeze the paymentsbalance, forcing a curtailmentof imports. All in
all, by 1981 the economy was in a tailspin, led downwardby Sao Paulo heavy industry.
From 1981 to 1983 manufacturingproductiondroppednearly 15 percent, and capital goods
productionby half.
Liquid asset holders could take advantageof high returnfinancial instruments,but fixed
asset holders, especially the powerful industrialists,immediatelyvoiced their displeasurein
the political arena. Sao Paulo's influential industrialists,who had come to rely heavily on
parastatalorders and inputs, swung heavily toward the opposition. This broadeningelite
opposition led to the defection from the governmentof much of the ruling partyand to the
indirect election of an opposition civilian president by a major coalition of the major
opposition party and dissidents from the official party in 1984. Upon the unexpecteddeath
of the president-elect, vice president-electJose Sarney took office in March 1985. Since
then, despite a recovery in Brazil's export earnings, the new government has pursued
generally more nationalisticpolicies on the debt issue, and domestic economic policy has
moved to favor the growth of industrialproductionfor the local market.
In Brazil, then, the lack of any major threatfrom labor pushed governmentpolicy in a
highly sectoral direction, and fixed asset holders responded industriously. After 1980,
however, as the financialcrisis forced a curtailmentof sectoralpolicies, previously favored
sectors reacted with massive, and ultimately successful, political protests.
7

Chile'O The Chilean story is virtually the polar opposite of Brazil's. The extraordinary
salience of the labor-capitaldivide in Chile dampened intercapitalistconflict, led elites to
give the militarydictatorshipa very free hand in the economy, and pulled economic policy
towardan extreme free marketorientation.The business community reactedquickly to the
market opportunitiesthe regime's policies presented. The economy boomed as foreign
finance flooded in, then collapsed violently after 1981. Despite the depth of the crisis,
bourgeois protesthas been muted by fear of labor.
Broad elite support for the coup that toppled the left-wing government of Salvador
Allende in 1973 translatedinto relative autonomy for the armed forces in power. The
dictatorshipled by Augusto Pinochetthus undertooka radicalreorderingof Chilean society,
while elite dissatisfaction was always dampened by the latent fear of a return of the
Socialists.
After taking power, the military regime temporized for a year, then subjected the
economy to a severe antiinflationprogramthat threw the country into a short but deep
depression. In 1976 the economic team began to implementits neoliberalprogram.Capital
movements were liberalized and tariffs reduced;by 1979 Chile had a uniform 10 percent
tariffon imports,extremely low by virtuallyany standard.Between 1975 and 1977 most of
the firms that had been nationalizedby Allende were sold back to the private sector.
Economic liberalization had a clear political content. The Chilean regime regarded
existing protectionto domestic industryas a majorcause of the strengthof the industrial
working class. The exposure of domestic industry to internationalcompetition would
squeeze excess labor and inflatedwages out of the industrialsector; access to foreign capital
would allow entrepreneurseither to modernizetheir businesses or to startnew ones more in
line with Chile's comparativeadvantage. More generally, the militaryexpected the market
reformsto strengthenthe privatesector both economically and politically.
The regime's policies allowed investors, especially liquid asset holders, to expand very
rapidly. A groupof new privateconglomeratescenteredon nonindustrialactivities were the
greatest beneficiaries of the free market reforms. Most of the conglomerates bought
inexpensive assets sold off by the governmentafter the 1973 coup and were thus highly
diversified, includingfirms in finance, commerce, real estate, and some industries.A large
bank was usually at the core of the group, and the bulk of Chilean borrowingwas done by
these conglomeratebanks.
Chile's per capita foreign debt is one of the world's highest, yet it was almost exclusively
privatefirms thatdid the borrowing.Between 1974 and 1981 public sector foreign debt went
from $4 billion to $5.5 billion, which representeda decline in real terms;the Chileanprivate
sector's overseas debt rose from $1 billion to $10 billion in the same period. Much of the
private borrowing was used for productive purposes, especially in the modernizationof
agricultureand some labor intensive industries.Yet a large partof the borrowedfunds went
into such less productive activities as luxury housing construction, the building of large
conglomerates, and the purchase of imported consumer durables, often through former
industrialfirms that had switched to importing.As elsewhere, the use of borrowedfunds is
difficult to measure and politically controversial;nonetheless, it is probablysafe to assert
thatChileanforeign borrowingwas aboutevenly divided between financinglocal investment
and fueling local consumptionand speculation.
Even during the boom, a few economic alarms began to sound. In an attemptto reduce
8
Jeff Frieden
inflation, which was already quite low, Pinochet froze the peso in 1979 at 39/dollar and
committed the governmentto maintainthis parity. Although domestic inflation went down
to only 10 percentin 1981, it had been far enough above world levels that the peso became
progressivelyovervalued. This made foreign capitaland goods even cheaper, and after 1979
Chile experienced a patently unsustainablespurt of foreign borrowing and imports. Yet
entrepreneurialconfidence in the government was strong enough that there were few
expectationsof devaluationuntil 1981. In the meantime, the neoliberalpolicies were indeed
reducingthe size of the industrialsector:even in 1980, at the height of the boom, industrial
productionper person was well below 1973-1974 levels.
In 1981 the rise in internationalinterest rates and stagnation in world trade signaled
impendingdifficulties. By mid 1981 the euphoriahad passed, and in late 1981 the financial
system was rocked with successive waves of bankruptcies.The economy collapsed, as
virtually all major private firms faced overseas interest payments they could not afford to
meet. Gross domestic productiondroppedby 15 percentin 1982-1983, open unemployment
shot to over 20 percent, and inflation returnedto 21 percent in 1982.
Although the Chilean depression led to a resurgence of popular discontent, Pinochet
succeeded in holding onto power in conditions at least as disastrousas those that toppled
military dictatorshipsin Brazil, Uruguay, and Argentina. A major reason for Pinochet's
staying power, and for the relative ineffectiveness of the opposition, is that the business
community did not join the open opposition to the government. The business community,
and especially the industrialists,despite great dissatisfaction with government economic
management,indeed stayed on the political sidelines. Businessmenstill confrontthe specter
of a returnto power of the Left, and their fear of the Left temperedtheirdiscontentwith the
dictatorship.
The prominenceof labor-capitalhostility in Chile led a powerful and independentregime
to pursue very market-orientedpolicies. Liquid asset holders profited greatly, while most
other investors' complaints were muffled by concern over labor. The crisis, again, led to
serious economic distress, but the threatfrom the Left served to stifle bourgeois protest.
Before moving on to the three intermediatecases-Mexico, Venezuela, and Argentinawe can make two points about the polar cases. First, in both Brazil and Chile generalized
bourgeois confidence in the government helped alleviate real or potential problems with
capital flight. Close sectoral ties in Brazil led investors there to regard the policies of the
early 1980s as aberrationsthat could be correctedwith well-applied political pressure, thus
making it unnecessaryto invest abroad.Chilean investors' faith in the governmentled them
to discount the possibility of a devaluationuntil it was too late, while their belief in the
regime's stabilityencouragedthem to accumulatetangibleassets (real estate, luxurycars) in
Chile rather than abroad. Second, there were outliers from the general pattern in both
countries. In Brazil, liquid asset holderswere relativelyunharmedby the crisis and remained
supportive of the military until the end; they were simply overwhelmed by fixed asset
holders whom the military's own sectoral policies had served to strengthen. Chile was a
mirrorimage of this: many fixed asset holderswere hard-hitboth by liberalizationand by the
crisis, but the overwhelmingweight of the military-encouragedliquid asset holders, coupled
with fear of the Left, made their concerns nearly irrelevant.
While sectoral concerns clearly dominated the Brazilian political economy, and class
concerns the Chilean, none of the three remainingcases is so clear-cut. Relations between

labor and capital are more hostile in Mexico, Venezuela, and Argentinathan in Brazil, but
not so confrontationalas in Chile. Sectoral patternsof cooperation and conflict are more
importantthan in Chile, but not so central as in Brazil. The result in all was government
policies that were neither as militantly free market as Chile's nor as totally sectoral as
Brazil's and a private sector response that combined cooperationover sectoral programs,a
flight into marketalternatives,and political protest.
Mexico" Since World War II Mexico's ruling Partido Revolucionario Institucional
(RevolutionaryInstitutionalParty or PRI) has walked an increasingly thin line between
catering to the demands of industrialists, farmers, and workers, on the one hand, and
allowing more footloose investorsfreedomto operate, on the other. The sectoralcomponent
of Mexican policy goes back to the close ties built between urbancapitalists, labor, and the
middle classes in the aftermathof the revolution. The free marketcomponent responds to
underlyingfear of the labor movement and to the ready availability of an enormous safe
haven for investorsjust across the Rio Grande.Conflictingpulls on economic policy led the
country into severe crises, first in 1975-1976, then after 1982.
Mexico led the way in the most recent roundof Latin Americanborrowing:the Mexican
governmentfloated its first foreign bond since the revolutionin 1962, and within a few years
loans from overseas banks were the country's chief source of foreign capital. New access to
overseas funds allowed the public sector to provide large-scale subsidies to the private
sector, especially in the form of artificiallycheap inputs.
About three-quartersof Mexico's foreign borrowingwas done by the public sector, and
most of it went to fund investmentin the country's rapidlygrowing basic and intermediate
industries.Some privateindustrialfirms were large borrowers,includingboth local affiliates
of multinationalcorporationsand larger private domestic firms. Private banks also funded
ever larger portions of their operationsabroad, taking funds in New York or London and
relendingto Mexican firms.
Access to overseas finance did not eliminate the conflict between Mexico's sectoral
incentives and marketstability, and the countrywent throughtwo cycles of boom and bust
between 1970 and 1983. The first began during the administrationof Luis Echeverria
(1970-1976). Echeverriaattempteda major push to both accelerate economic growth and
broaden the regime's political base by making heavy use of foreign borrowing to expand
public sector investment and social programs. Although the economy expanded as fixed
asset holders responded to many of the government's investment incentives, holders of
liquid assets were increasinglyconcernedabout the growing strengthof the Left in the PRI
and moved much of theirmoney to safer, usually American,soil. In 1975 and 1976, indeed,
much of the country's foreign borrowingwent to supportan overvalued peso, only to be
channeledright back abroadby Mexican speculatorsagainst the peso.
Unable to expand his public investmentprogram,Echeverriastepped back toward more
orthodox measures. Echeverria left his successor, Jose Lopez Portillo (1976-1982), an
already signed IMF stabilizationprogramthat committed Mexico to domestic austerityand
limited foreign borrowing. Yet the 1976-1979 adjustmentplan was overtakenby the rapid
increase in Mexican oil exports from $121 million in 1974 to $13.5 billion in 1981, due to
a combinationof massive new discoveries and the 1979 jump in world petroleumprices. Oil
both appearedto solve Mexico's export problemsand made the nation even more attractive
10
Jeff Frieden
to foreign financiers. From 1978 to 1981 Mexico experienced an extraordinaryeconomic
expansion, as GDP grew by 36 percent;the productionof consumerdurablesand investment
goods rose by 70 percent. Rapid growth was funded both by petroleum exports and by
overseas borrowing;Mexican foreign debt went from $34 billion to $72 billion in the period.
The expansion, again, ran on two tracks. The public sector offered immense sectoral
incentives:fixed asset holdersbenefittedfrom increasedgovernmentordersand subsidiesand
from easy access to credit. At the same time a measuredfinancial liberalizationallowed
footloose investors access to more diversified and attractiveinvestmentvehicles than ever
before, including "Mexdollar" deposits, denominated in U.S. dollars and earning
internationallycompetitive interestrates.
After several years of frenziedeconomic growth, strainsonce more began to appearin the
Mexican economy. As inflation mounted and the peso became progressively overvalued,
devaluationexpectationsbegan to grow in late 1980, and speculationagainstthe peso started
again. The decline in the world price of oil and the continuedrise in world interestrates also
served to increase pressureon the Mexican payments balance. The process reached absurd
proportionsin 1981 and early 1982, as the public sector increasedits overseas debt by $25
billion and the privatesector by $5 billion, while Mexican privateinvestorsare estimatedto
have sent $20 billion abroad.
By early 1982 the situation was unsustainable.In Februarythe peso was devalued, but
capital flight continued. Finally, in August 1982 the bubble burst:the governmentdeclared
a unilateral moratoriumon debt service payments and devalued the peso again. The
governmentfirst swung radically away from market-orientedpolicies: it imposed exchange
controls, nationalizedthe country'sprivatebanks, and forcibly convertedall domestic dollar
deposits ("Mexdollars")to pesos. After several months, in which the new interventionism
scared ever more liquid asset holders and capital flight continued, policy swung back. The
new administrationof Miguel de la Madrid Hurtado(1982-1988) negotiated yet another
IMF agreement, cut government domestic spending to reduce the budget deficit, and
scrambledto meet steep interestpayments. The laboringclasses were especially hard-hit,as
real wages are estimated to have droppedby nearly 45 percent in 1983-1984.12
The economic shocks after 1982 were cushioned somewhat by governmentpolicies that
included a bail-out of indebted firms, the maintenanceof below-market interest rates for
some time, and selected subsidies for consumption. At the same time, the government
moved cautiously to liberalize some commercialand financial transactions,thus bowing to
insistent pressure from liquid asset holders and the more competitive agriculturaland
industrial producers, especially in the country's North. The most salient political
developmentof the period was indeed the growth of a conservativeopposition, centeredon
the Partido de Accion Nacional (PAN), whose economic preferences are relatively
market-oriented.
Between 1965 and 1985, then, Mexico alternatedbetween economic expansions, heavily
financed with foreign borrowing,and market-orientedadjustmentsprecipitatedby payments
crises involving an overvalued peso and capital flight. Fixed asset holders expanded their
activities with each bout of majorpublic investment,but the expansions soon ran up against
the lack of confidence of more footloose investors, calling forth concessions to them in the
form of marketliberalization.Neither the sectoral policies nor the market-basedinitiatives
were concertedor consistentenough to satisfy the two disparategroupsof investors, so that
11

today the governmentfaces real difficulties in mobilizingthe resourcesof either sector. Torn
between conflicting demands, the PRI has continuedto temporize.
Venezuela'3 As in Brazil and Mexico, the government of Venezuela undertook major
sectoral programs in the 1970s. Although massive public investment had much of the
desired effect, the country's great oil wealth and borrowingalso reinforcedvery powerful
liquid asset holders. Greattension between the mostly industrialbeneficiariesof the sectoral
programs, including the country's influential labor movement, on the one hand, and the
financial, commercial, and real estate sectors, on the other, pushed the government after
1979 to reduce public spending. The result was economic stagnation and massive capital
flight, as liquid asset holders sent billions abroadwhile fixed asset holders lost many of the
sectoral stimuli they had come to rely on.
Since the establishmentof an open electoral system in 1958, Venezuelanpolitics has been
dominated by the social democratic Accion Democratica (AD) and the social Christian
COPEI parties. Although the differences between the two parties are sometimes hard to
discern, in economic policy AD has been more interventionistand developmentalistthan
COPEI. As would thus be expected, the former tends to draw elite support from
entrepreneursin protected industries, while the latter is more closely associated with the
financial, service, and foreign trade sectors.
Despite Venezuela's earnings from petroleum exports, the country had accumulateda
foreign debt of over $32 billion by 1982. This was in partdue to the easy supply of funds:
the country's oil wealth made it so attractivea borrowerthat funds were offered cheaply.
Another cause of the country's debt build-up was the near total freedom of capital
movements before 1983, which gave both private and public firms and individuals free
access to overseas financial markets.In any event, most of the foreign debt is owed by the
public sector, especially by the large state firms in petroleum, iron ore, steel, hydroelectric
power, and bauxite, and by the nationaldevelopmentagency. Privatebanks and firms also
borrowed,especially to finance industrialexpansion and urbanconstruction.
Venezuelan Euromarketborrowing began in earnest after the 1973 OPEC oil price
increases. The country's windfall encouraged the Accion Democratica administrationof
Carlos Andres Perez (1974-1979) to embark on an ambitious program to spur heavy
industrialgrowth and develop Venezuela's rich naturalresources. The petroleumand iron
ore industries, nationalized in the aftermath of the oil price hikes, made large new
investments, along with steel, hydroelectricpower, bauxite and aluminum, transportation
and communications,and public housing. Given AD's populist orientation,Perez made sure
that large portions of the country's middle and working classes shared in the prosperityof
his "GreaterVenezuela" program. Governmentemployment was expanded dramatically,
subsidized services were provided, and the flood of dollars allowed for a huge increase in
popular access to consumer durables. Concurrently,the Perez administrationencouraged
industrial entrepreneursto produce (or supply components to firms that produced) the
consumer durable, capital, and intermediategoods needed to satisfy burgeoning demand
from both the parastatalinvestmentprojects and the newly prosperousmiddle class.
The size of the Perez era economic boom is indicatedby the fact that public investment
went from a billion dollarsa year in the early 1970s to nearly six billion a year between 1976
and 1979, while annual private investment went from under two and a half to over eight
12
Jeff Frieden
billion dollars in the same period. Overseasborrowingfrom 1974 to 1978 was $13.2 billion,
four-fifthsby the public sector. This was matchedby a more or less analogous increase in
overseas assets held by the public ($9.6 billion) and private ($2.8 billion) sectors, so that
borrowing allowed reserve accumulation to proceed along with the massive sectoral
14
investments.
In 1979, Accion Democraticawas voted out of office, and COPEI took power, led by
Luis Herrera Campins. The new administration,along with liquid asset holders, was
concernedboth by a gradualincreasein inflationand by what it viewed as the Perez period's
overinvestment.The COPEIadministrationthus moved away from sectoralpolicies, wound
down many of the large projects, and concentratedon fighting inflation. Domestic interest
rates were controlled, and the increasingly overvalued Bolivar (fixed at 4.3/dollar since
1963) was supported. In both cases the intent was to avoid inflationary shocks. Yet
continued inflation, low domestic interest rates, and devaluation expectations led
Venezuelan liquid asset holders to invest more and more heavily in overseas bank accounts
and real estate. In August 1981 domestic interestrates were freed, and capital flight tapered
off, but within a few months the weak world oil market and the gathering international
financial stormled to renewedexpectationsof Bolivar devaluation.Between April 1982 and
mid February1983, $14 billion in flight capital left Venezuela;in the first six weeks of 1983
capital fled at the rate of a half billion dollars a week, a remarkablepace for a country of
eighteen million people.
By February1983 it was no longer possible to maintain the value of the Bolivar. The
currencywas devalued, which made much of the heavily indebtedprivate sector insolvent,
and a recession ensued. In the midst of the crisis the COPEI was voted out, and Jaime
Lusinchi led Accion Democraticaback into office in February1984. The new government
mixed sectoral and market-orientedpolicies: it bailed out many domestic private firms and
banks to avoid a more serious collapse but committed itself firmly to austerity and
stabilization.
Despite impressive oil wealth and easy access to Euromarketborrowing, Venezuelan
economic policy has been pulled in two opposing directions. Great prosperityallowed for
the coexistence of sectors that were tightly tied into world financial and goods markets,on
the one hand, and those that grew up behind high protectivebarriers,on the other. With the
end of easy economic growth, the former, grouped aroundthe Grupo Roraimalobby, has
applied pressure for less government interventionat home and freer trade and payments
abroad;the latter group has insisted on new efforts at import substitution. Just as these
sectoral clashes constrainedeconomic policy in the 1970s and early 1980s, their outcome
will determinethe economy's futureorientation.
Argentina'5 The depth of conflict on both class and sectoral dimensions has marked
Argentine politics for over fifty years and accounts for much of the country's chronic
political instability, the wild swings in its economic policies, and its generally poor
economic performance.16 Argentine politics has indeed been characterizedby two deep
divisions: one separates the conservative free market traditionalists of the financial,
commercial, and agroexportingsectors from the more progressive and nationalisticurban
industrialareas;the other divides the country's powerful Peronist-ledlabor movement from
the propertiedclasses. Between 1976 and 1983 the militarydictatorshipgenerally pursued
13

market-orientedpolicies, but with enough sectoral exceptions to preserve the country's
political and economic schizophrenia.
The 1976 militarycoup thatoverthrewa three-year-olddisunitedPeronistgovernmenthad
broadelite support.City and countryside, protectionistsand free traders,conservativesand
moderates,all saw militaryinterventionas the only alternativeto populist chaos and social
disintegration.
The militaryand its supportersagreedthat the labor markethad to be restructured.Import
substitutionhad created industriesthat were inefficient even by Latin American standards
and had swelled both the size and the bargainingpower of the industrialwork force. Labor
discipline needed to be reimposed, and measures to this end included repression and,
eventually, policies designed to subject industryto stiffer competition. However, the desire
to subjectthe economy to purgativemarketforces was temperedfirst by the military'sties to
some uncompetitivesectors and second by the fact that some of the country's least efficient
enterpriseswere runby the militaryitself. Policy thus combinedcontinuedsubsidiesto a few
favored sectors with more general marketliberalization.
The militarydictatorship'seconomic policies between 1976 and the end of 1978 centered
on reducingwages, in orderto both restraininflationand deflate the Peronists'supportbase,
and on making substantialpublic infrastructuralinvestments.Real wages droppedby a third
from 1975 to 1978, and the public corporationsexpanded their investments, largely with
funds borrowed abroad.'7 After the 1976 military coup opened the Euromarkets to
Argentina, the country made ample use of foreign credit. From 1976 to 1978 public firms
borrowedto fund modernizationin such sectors as telecommunicationswithout squeezing
domestic financial markets;in this period public foreign debt went from five to nine billion
dollars, while overseas privatedebt rose from three to four billion.
The military's economic team introduceda far-reachingneoliberal reform package in
December 1978. The package liberalized both foreign trade and capital flows, and the
governmentbegan announcingthe rate of currencydevaluationin advance. Freertradewas
expected to force domestic producersto improve their performancein the face of foreign
competition. The preannounced exchange rate (the so-called tablita) was to dampen
inflationaryexpectationssince the rateof devaluationimplieda belief thatdomestic inflation
would decline rapidly.
The December 1978 neoliberalprogramwas extremeeven by Argentinestandards,and it
became even more extreme in succeeding years. Concernaboutthe labor movement, which
had originally solidified bourgeois supportfor the military, was not sufficient to quiet the
discontent of fixed asset holders who were hard-hitby the military's turn toward radical
market-basedreforms. Many industrialists,who welcomed the military'srepressionof labor
militancy, were disturbedby the removal of traditionalprotectivebarriers.The progressive
overvaluationof the peso as the governmentlagged the exchange rate similarly served to
make Argentinegoods less competitive. The agriculturalsector supportedfreer trade in the
manufacturedproductsit consumed, but it too found the peso's overvaluationincreasingly
troublesomeas even Argentinewheat came close to being priced out of world markets.
The economy did not respondas hoped to the reforms. As finance flooded in, the public
sector's external debt rose from $9 billion in 1978 to $20 billion by 1981, the private
sector's from $4 billion to $16 billion. Much of agricultureand some industries bought
importedcapital goods to modernizetheir operations. Yet a large portionof the 1979-1981
14
Jeff Frieden
capital inflow was used for consumption or for purely speculative purposes. Indeed,
industrialproductionas a share of GDP droppedfrom its historical 28 percent to just 22
percent by 1981.
In the meantime, the countrywas experiencinga substantialconsumptionboom that also
helped temperdiscontent.With the peso ever more overvalued, importswere extraordinarily
cheap; more sophisticatedconsumergoods producedwith cheap importedinputs or in some
cases simply importeddirectly were suddenly within reach of middle class Argentines for
the first time. Imports as a proportionof GDP soared from historical levels of around 8
percent to 15 percent in 1979-1981. So too were foreign travel and foreign investment
increasinglyattractive;Argentine visitors flooded into Miami, New York, and Paris, and
many left sizable bank accounts behind when they returnedto Argentina.
The economic team tried to reduce public spending, but the parastatalfirms, highly
independentand often controlledby influentialgenerals, simply went abroadto borrow to
finance their operations. State petroleum, public works, telecommunications, and
transportationfirms thus undertookor continued large investmentprograms, adding to the
economic boom. The economy careened crazily between market-basedneoliberalismand
massive public investmentsof dubious worth.
In early 1980 the overextendedfinancial system began to show signs of strain. As the
peso became extraordinarilyovervalued, devaluationexpectations grew, and capital flight
increased. The government began borrowing heavily abroad to support the peso. Rising
world interest rates and stagnant world trade put even more pressure on the payments
balance, and by the end of 1980 the private sector was clamoring for a change in policies.
In March 1981 General Roberto Viola became president, with the apparentintentionof
decompressing the economic and political systems gradually in order to be able to turn
power back to moderate politicians. Viola responded to the business community's
complaints and dismissed the neoliberal economic team, discarded the preannounced
exchange rate, devalued the peso significantly, and bailed out heavily indebtedbanks and
corporations. However, in yet another Argentine swing, at the end of 1981 hard-liners
forced an ill Viola out of office and restoredthe neoliberaleconomic team. Their attemptsto
returnto previouspolicies were of course overtakenby the Malvinas/Falklandswar and then
by the generalized financial crisis of 1982-1983. In the aftermathof the military and
economic fiasco the armed forces handed power back to the elected civilian regime of
Radical Raul Alfonsin in late 1983. After a year and a half of temporizing the Alfonsin
government launched a dramatic stabilization program, even while the ruling Radicals
attemptedto consolidate their position against the Peronists.
In Argentina,then, cross-cuttingclass and sectoralcleavages pulled both economic policy
and the privatesector in conflictingdirections. The militaryattemptedfree marketorthodoxy
to breakthe labor movement but was unable to overcome entrenchedopposition from fixed
asset sectors of the business communityand the public sector itself. By the same token, the
privatesector reactedto the vagariesof governmentpolicy with increasingwariness as time
went on: liquid asset holders simply got their assets out of Argentina, while fixed asset
holderscomplainedwith increasingbitternessof the reforms.The mix was unsustainable,and
the most importantquestion today is whetherthe Alfonsin governmentwill succeed where
so many other governmentshave failed.
15

Observations and Implications
A skeletal sketch of an analytical framework and five abbreviatedcase studies hardly
constitute scientific evidence, but our survey demonstratesthe utility of an approachthat
sees Latin Americaneconomic policy as given by the characterof domestic socioeconomic
interestsand overseas economic events. Externalconditions have powerful effects on Latin
American societies, yet national responses to external events differ in accordance with
domestic relations among classes and sectors.
Class and sectoral relations in the five countries were reflected in government policy
duringboth the borrowingboom and subsequentcrisis. In Chile and Argentinathe regimes'
resolve to weaken the industrialworkingclass gave governmentpolicy a neoliberalbias that
strengthenedthe financial and commercial sectors, along with much of the urban middle
class. The Brazilian military relied primarilyon a broad network of incentives to modern
industrialistsand farmers. The Mexican and Venezuelan regimes combined interventionist
and market-orientedpolicies that strengthenedespecially the heavy industrialsectors and
domestic financial investors.
The crisis after 1981 began to strip away successive layers of regime supporters. As
industrialproductiondroppedprecipitouslythroughoutLatin American, industrialists(and
industrialworkers) clamored for relief. In Chile, an already weakened industrialsector's
dissatisfactionwith the regime was temperedby fear of the working class, and the clamor
was low-key. In Argentina, with less fear of labor, protests were louder, while in Brazil,
where industrialistswere not particularlyworried about labor militancy, industrydefected
nearly wholesale to the opposition. Eventually the Argentine and Brazilian regimes left
power and were replacedwith industry-orientedgovernments.The Mexican and Venezuelan
governmentshave tried to balance the demands of traditionalimport-substitutingindustries
on the one hand against those of the financial and commercial sectors on the other. Yet
majorbattlescontinue in both countriesbetween interventionistand market-orientedsectors.
The cases suggest some conclusions about economic development and democratization.
Recent experience highlights how importantproductiveinvestment is for economic growth
and how difficult it is for governmentsto find a stable mix of economic predictabilityand
sectoral incentives to ensure desirable levels of private investment. Brazil was perhapsthe
most successful of our five cases in providing extensive sectoral incentives that kept local
investment attractive. Both Mexico and Venezuela used sectoral programsto good effect
during the 1970s, but a growing inability to satisfy the requirementsof both traditionally
protectedinvestors and more footloose ones led to serious crises and massive capital flight.
At the other extreme, the Chilean privatesector was willing to forego sectoral incentives in
returnfor suppressionof the labor movement, and the resultantreliable investmentclimate
led the private sector to lengthen its time horizons enough to carry out some local
investment, although there was an inordinateamount of consumptionof importedgoods.
The Argentine government had the least success in juggling the provision of specific
investment incentives and the maintenance of a stable investment climate and was
chronically unable to elicit cooperationfrom the private sector.
The reactivationof domestic investment will be a central policy dilemma facing Latin
America in the next decade. Public investment must be increased in order to stimulate
private investment, but this can not be done at the expense of raising investor expectations
16
Jeff Frieden
of inflation or overvaluation.To make matters more difficult, foreign lenders, who were
majorfinancersof public investmentin the 1970s, are unlikely to returnto Latin Americain
the near future. Policymakerswill thus be faced with insistent demands for government
incentives to private investment, alongside equally insistent demands for the monetaryand
fiscal conservatismprivateinvestorsregardas necessaryfor generaleconomic stability. This
tension already affects much of the region, and it is likely to continue for the foreseeable
future.
Recent Latin Americanexperience also illustratesthe importanceof those we have called
fixed asset holders, especially the industrialsector, to the region's political future. The role
of industrialistswas indeed central when, in 1964, 1973, and 1976, respectively, the
Brazilian,Chilean, and Argentineelites agreed that democracyhad led to intolerablethreats
to social stability and supportedauthoritarianism.In Brazil in the late 1970s, movement
toward political democratizationwas given a major push by the Sao Paulo industrialists,
whose demandsbecame more insistentas governmenteconomic policy took an antiindustrial
course after 1979. In Argentinathe industrialbourgeoisie remainedworried about Peronist
labor, yet the authoritarianregime's increasing divorce from its original social base threw
many businessmen into opposition; under the currentRadical regime they are hoping for a
democratic solution in which labor will be a more pliant junior partner. The Chilean
industrialbourgeoisie, of course, remains both weak and afraid of popular opposition; its
timorouscomplaintsabout Pinochet's economic policies are far from enough to drive them
into the arms of an opposition they distrust.
The relatively open political systems of Mexico and Venezuela have been quite free with
the distributionof resourcesto strategicportionsof industriallabor and capital. Yet in both
countriesthis mix of populism and developmentalismdependedlargely on massive inflows
of petroleumrents and foreign loans. In the future neither petroleumearnings nor foreign
finance will provide the room to maneuverformerly available to the two governments. In
Mexico and Venezuela, therefore,both intraeliteconflict and labor-capitalstrife will grow.
Austerity has indeed driven a wedge between more competitive market-oriented
entrepreneurialgroups on the one hand and traditionallyprotected industrialsectors on the
other, even as it has continued to erode popular support for both Mexico's PRI and
Venezuela's AD.
Conclusions
Economic and political developments in Mexico, Brazil, Venezuela, Argentina, and Chile
respondedto externalconditionsin ways determinedby the domestic correlationof class and
sectoral forces. During the relative prosperityof the borrowing boom the five countries'
governmentspursuedpolicies ranging from free market liberalism to thorough-goingstate
intervention.The level of tension between labor and capital was, in the Latin American
context, the principaldeterminantof the degree of governmenteconomic intervention.The
countries ranged from Chile, with great class conflict and strongly neoliberal policies,
throughArgentina, Venezuela, and Mexico, to Brazil, with little class conflict and a great
deal of government intervention. In all countries, liquid asset holders were favored by
market-orientedpolicies, fixed asset holders by sectoral intervention.
17

When external shocks after 1980 drove Latin America into severe economic crisis, the
result was fierce conflict among economic agents over who would bear the principalcosts of
adjustment.The behaviorof fixed asset holders, especially the industrialsector, was crucial
to political developments during the crisis. The authoritariangovernments of Brazil and
Argentinaresisted pressure from the domestic industrialsector for relief and were swept
aside in part because of this. The Chilean military dictatorship, despite its general
unresponsivenessto the business community, remainspowerful due to general elite fear of
the popularopposition. The Mexican and Venezuelan governmentswere forced to jettison
much of their public spending underthe pressureof the crisis and face both increasedsocial
pressureand stridentelite discontent.
This paper demonstratesthe analytical utility of a focus on relations between labor and
capital to explain the extent of government economic intervention in present-day Latin
America and of an examinationof the varied interests of liquid and fixed asset holders to
explain the privatesector's responseto governmenteconomic policies. The points made here
are relevant in understandingthe importantunresolved economic and political issues that
continue to beset LatinAmerica. They may also be of some use in thinkingabout a potential
resolution to the serious problems left by the aftermathof the region's financial expansion
and collapse.
NOTES
The authorwould like to thank the following for comments and suggestions: Leon Bendesky, David Dollar, David
Felix, Al Fishlow, BarbaraGeddes, Stephan Haggard, Nora Hamilton, Robert Kaufman, David Lake, David Mares,
Tim McKeown, Angel Palerm, Manuel Pastor, Miguel Rodriguez, and Michael Wallerstein.Financialassistancefrom
the Tinker Foundation,the UCLA Academic Senate's Committee on Research, and the UCLA InternationalStudies
and Overseas Programsis also gratefully acknowledged.
1. Jeff Frieden, "ThirdWorld IndebtedIndustrialization,"InternationalOrganization, 35 (Summer 1981).
2. In an archetypicalexample, John Williamson has criticized Jeffrey Sachs' explanation of variations in national
performance with the traditional insistence that differences are due to, well, differences: "a more convincing
explanation"than that of Sachs, Williamson says, is "the simpler hypothesis of policy errors." See Jeffrey D. Sachs,
"ExternalDebt and MacroeconomicPerformancein Latin America and East Asia," Brookings Papers on Economic
Activity, 2 (1985), 523-564; Williamson's comment is on p. 568. As Stephen Krasnerput it in "State Power and the
Structureof InternationalTrade," WorldPolitics, 28 (April 1976), 319, "stupidityis not a very interestinganalytic
category."
3. The following argumentis probablynot generalizableto all LDCs, since it is closely related to certain common
Latin American peculiarities. Especially importanthere are the relative scarcity of labor today, along with the
accumulatedinstitutionsand interestsbuilt up duringthe colonial experience, the 1870-1930 export boom, and import
substitutingindustrializationsince the 1930s.
4. See, for example, Alejandro Foxley, Latin American Experimentsin Neo-Conservative Economics (Berkeley:
Universityof CaliforniaPress, 1983), and Adolfo Canitrot,"La disciplinacomo objetivo de la politica economica: Un
ensayo sobre el programaeconomico del gobiernoargentinodesde 1976," Desarrollo Economico, 19 (January-March
1980).
5. While sectoral approachesto Latin Americanpolitics are hardlynew, the division between fixed and liquid asset
holders in this context is relatively novel. The intuition, however, is familiar to political economists, and related
analyticaldistinctionsare common. They are, for example, at the core of specific factorsmodels of internationaltrade.
For a seminal statementsee RonaldW. Jones, "A Three FactorModel in Theory, Trade, and History," in RonaldW.
Jones, International Trade: Essays in Theory (Amsterdam:North-Holland, 1979). There is no question that the
dichotomy is oversimplified:capital markets allow capitalists to diversify their portfolios, as do the formation of
integrated conglomerates. Nonetheless, the framework captures certain important features of different business
interests.At this stage, it should be regardedas a hypothesiswhose rigoroustesting requiresmore systematicempirical
research. For a more general discussion of sectoral conflict, see Markos J. Mamalakis, "The Theory of Sectoral
Clashes," Latin American Research Review, 4 (1969), 9-46, and Markos J. Mamalakis, "The Theory of Sectoral
18
Jeff Frieden
Clashes and CoalitionsRevisited," LatinAmericanResearchReview, 6 (1971), 89-126. A fascinatingtreatmentof the
interactionbetween governmentpolicies and private investors, with an application to Brazil's alcohol program, is
Michael Barzelay, The Politicized MarketEconomy(Berkeley: University of CaliforniaPress, 1986).
6. The quintessentialgeneralstatementis AlbertO. Hirschman,Evit, Voice and Loyalty(Cambridge,Mass.: Harvard
University Press, 1970). Robert H. Bates and Da-Hsiang Donald Lien, "A Note on Taxation, Development, and
RepresentativeGovernment,"Politics and Society, 14 (1985), 53-70, assert that governmentswill generally be more
responsive to those whose assets are more liquid, since they can defect more easily. However, their governmentis
interestedsolely in maximizingtax revenue, while we focus on political pressureon governmentsfrom capitalists. On
the role of risk and uncertaintyin capital flight, see Mohsin Khan and Nadeem UI Haque, "Foreign Borrowing and
Capital Flight," IMF Staff Papers, 32 (December 1985), 606-628.
7. Calculated from Inter-AmericanDevelopment Bank, Economic and Social Progress in Latin America: Annual
Report 1986 (Washington,D.C.: IADB, 1986).
8. Representativegeneral and comparativestudies on Latin Americandebt include RobertAliber, "The Debt Cycle
in Latin America," Journal of InteramericanStudies and WorldAffairs, 27 (Winter 1985-1986), 117-124; Ricardo
Ffrench-Davis,ed., Deuda ex.terna,industrializaciony ahorro en AmericaLatina, special issue of EstudiosCIEPLAN,
17 (September 1985): Carlos Diaz Alejandro, "Latin American Debt: I Don't Think We Are in Kansas Anymore,"
BrookingsPapers on Economic Activity, 2 (1984), and "Da repressaofinanceiraa crise: Experienciasdo Cone Sul,"
Pesquisa e Planejamento Economico, 14 (December 1984); Joseph Ramos, Neoconservative Economics in the
Southern Cone of Latin America, 1973-1983 (Baltimore:The Johns Hopkins University Press, 1986): and Vittorio
Corbo and Jaime de Melo, "Lessons from the SouthernCone Policy Reforms," WorldBank Research Observer, 2
(July 1987), 111-142. For purposes of comparability, in what follows, except where noted, statistics on domestic
economic developments are drawn from the Inter-AmericanDevelopment Bank's annual reports on Economic and
Social Progress in Latin America;those referringto externaldebt are drawnfrom Inter-AmericanDevelopmentBank,
E\ternal Debt and Economic Developmentin Latin America (Washington, D.C.: IADB, 1984).
9. On Brazil see, for example, EdgarBacha, "Choquesexternos e perspectivasde crescimento:O caso do Brasil1973/89," Pesquisa e Planejamento Economico, 14 (December 1984); Monica Baer, La internacionalizacion
financiera en Brasil (Mexico City: ILET, 1983); Carlos Diaz Alejandro, "Some Aspects of the 1982-83 Brazilian
PaymentsCrisis," BrookingsPapers on EconomicActivity, 2 (1983); Persio Arida, ed., Divida Externa, Recessao, e
Ajuste Estrutural(Rio de Janeiro: Paz e Terra. 1982): Jeff Frieden, "The Brazilian Borrowing Experience: From
Miracle to Debacle and Back," Latin AmericanResearch Review, 22 (1987): and Paulo Nogueira Batista Jr., Mito e
Realidade na Divida Evterna Brasileira (Rio de Janeiro:Paz e Terra, 1983).
10. On Chile see. for example, ArmandoArancibia, "Chile: Mitos y realidadesdel proyecto autoritario,"Economia
de AmericaLatina, 8 (1981); Jose Pablo Arellano, "De la liberalizaciona la intervencion:El mercadode capitales en
Chile 1974-83," Estudios CIEPLAN, 11 (December 1983); Sebastian Edwards and Alejandra Cox Edwards,
Monetarisinand Liberalization:The Chilean Experiment(Cambridge:Ballinger, 1987); RicardoFfrench-Davis, "The
MonetaristExperimentin Chile: A Critical Survey," World Development, 11 (1983); Vincent Parkin, "Economic
Liberalismin Chile, 1973-1982," CambridgeJournal of Economics, 7 (September-December1983); RobertoZahler,
"Recent SouthernCone LiberalizationReformsand StabilizationPolicies: The Chilean Case, 1974-1982," Journal of
InteramericanStudies and WorldAffairs, 25 (November 1983).
11. On Mexico see, for example, Jose Manuel Quijano, ed., La Banca: Pasado y Presente (Mexico City: CIDE,
1983): Rosario Green, El endeudamientopublico externo de Me.ico 1940-1973 (Guanajuato:El Colegio de Mexico,
1976), and Estado y banca transnacionalen Mexico (Mexico City: Nueva Imagen, 1981): Isabel Molina Warner, "El
endeudamientoexterno del sector privadoy sus efectos en la economia mexicana," Comercio Exterior, 31 (October
1981):GuillermoOrtizand Leopoldo Solis, EstructuraFinancierae EvperienciaCambialMexico 1954-1977 (Mexico
City: Banco de Mexico, 1978), and Substitucionde Monedas e lndependenciaMonetaria:El caso de Mexico (Mexico
City: Bank of Mexico, 1981); Jose Manuel Quijano, Mexico: Estado y Banca Privada (Mexico City: CIDE, 1981);
Jose ManuelQuijano, Hilda Sanchez, and FernandoAntiam, Finanzas, desarrollo econoinicoy penetracionextranjera
(Puebla:UniversidadAutonomade Puebla. 1985): ErnestoZedillo Ponce de Leon, "ExternalPublic Indebtednessin
Mexico" (Ph.D. diss., Yale University. 1981).
12. Inter-AmericanDevelopment Bank, Economic and Social Progress in Latin America 1985 (Washington, D.C.:
IADB. 1985), p. 86.
13. On Venezuela see, for example, Moises Naim and Ramon Pinango, eds., El Caso Venezuela:Ulna ilusion de
armonia (Caracas:IESA, 1985): Oscar A. Echevarria,La Economia Venezolana 1944-1984 (Caracas:Fedecamaras,
1984): Ricardo Hausmann and G. Marquez, "La crisis economica venezolana: Origen, mecanismos y
encadenamientos,"Investigacion Economica, 165 (July-September 1983); Felipe Pazos, "Efectos de un aumento
subito en los ingresos externos: La economia de Venezuela en el quinquenio 1974-1978," mimeo, 1979; Fernando
Porta, Miguel Lacabanaand Victor Fajardo, La internacionaliz-acion
financiera en Venezuela (Mexico City: CET,
1983): Miguel Rodriguez, "Auge Petrolero, Estancamiento y Politicas de Ajuste en Venezuela," Covyuntura
Economica (Bogota) (December 1985), 201-227.
14. Banco Centralde Venezuela. Anuario de cuentas nacionales (Caracas:BCV, 1983), pp. 119-120, and Miguel
Rodriguez, "Consequencesof Capital Flight for Latin AmericanDebtor Countries," mimeo, 1986.
19

15. On Argentinasee, for example, L. Beccariaand R. Carciofi, "The Recent Experienceof Stablisingand Opening
Up the ArgentinianEconomy," CambridgeJournal of Economics, 6 (June 1982); Guillermo A. Calvo, "Trying to
Stabilize: Some Theoretical Reflections Based on the Case of Argentina," in Pedro Aspe Armella et al., eds.,
Financial Policies and the WorldMarket (Chicago: University of Chicago Press, 1983); Adolfo Canitrot, "Teoriay
practica del liberalismo: Politica antiinflacionariay aperturaeconomica en la Argentina,1976-1981," Desarrollo
Economico, 21 (July-September1981); JuanCarlos de Pablo, "Mas alla de la sustitucionde importanciones:El caso
de la Argentina,"TrimestreEconomico, 45 (January-March1978), and "El enfoque monetariode la balanzade pagos
el la Argentina:Analisis del programadel 20 de diciembre de 1978," TrimestreEconomico, 50 (April-June 1983);
Jose Maria Fanelli and Roberto Frenkel, "La deuda externa argentina:Un caso de endeudamientoforzado," mimeo,
1985; David Pion-Berlin, "The Fall of MilitaryRule in Argentina:1976-1983," Journal of InteramericanStudies and
WorldAffairs, 27 (Summer 1985); Oscar Oszlak, ed., "Proceso," crisis y transicion democratica (Buenos Aires:
Centro Editor de America Latina, 1984); Carlos Alfredo Rodriguez, "Politicas de estabilizacion en la economia
argentina, 1978-1982," Cuadernos de Economia, 20 (April 1983); Jorge Schvarzer, Argentina 1976-1981: El
endeudamientoexterno como pivote de la especulacionfinanciera (Buenos Aires: CISEA, 1984); Juan Sourrouille,
BernardoKosacoff, and Jorge Lucangeli, Transnacionalizaciony politica economica en la Argentina(Buenos Aires:
CET, 1985).
16. See, for two classic statements,CarlosDiaz Alejandro,Essays in the EconomicHistoryof the ArgentineRepublic
(New Haven: Yale University Press, 1970), and Guillermo O'Donnell, "State and Alliances in Argentina,
1956-1976," Journal of DevelopmentStudies, 15 (1978-1979), 3-33.
17. Ramos, p. 40.
20

Frieden - Classes, Sectors, and Foreign Debt in Latin America

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Frieden - Classes, Sectors, and Foreign Debt in Latin America

Uploaded by

Copyright:

Available Formats

Classes, Sectors, and Foreign Debt in Latin America

Author(s): Jeff Frieden

Classes, Sectors, and Foreign Debt

Since 1965 internationalfinancial conditionshave become a majorfactor in economics and

The Setting and the Issues

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

ComparativePolitics October 1988

You might also like