Review: [untitled] Author(s): Eduardo J. Gómez Reviewed work(s): The Politics of Market Reform in Fragile Democracies: Argentina, Brazil, Peru, and Venezuela by Kurt Weyland Source: Latin American Politics and Society, Vol. 45, No. 4, (Winter, 2003), pp. 152-157 Published by: Distributed by Blackwell Publishing on behalf of the School of International Studies, University of Miami Stable URL: http://www.jstor.org/stable/3177135 Accessed: 18/06/2008 22:39 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=black. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission.

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Weyland, Kurt. The Politics of Market Reform in Fragile Democracies: Argentina, Brazil, Pern, and Venezuela. Princeton: Princeton University Press, 2002. Figures, tables, bibliography, index, 335 pp.; hardcover $39.50. The politics of free market reform in LatinAmerica continues to draw a lot of scholarly attention. A plethora of theoretical and empirical approaches exist-indeed, too many to be listed in this essay-and they discuss the institutional, economic, and ideological explanations of the reform process in Latin America. Nevertheless, in this new book, Kurt Weyland submits yet another contribution to this literature. Many Latin American scholars may ask at this point: What else is new? What else can be said about the politics of market reforms that we don't already know? Quite frankly, a lot: with eloquence and detailed case analysis, Weyland provides a seminal theoretical approach to understanding this subject, one that should be taken seriously by scholars of LatinAmerica and anyone interested in understanding the politics of market reform in nascent democracies. Weyland claims that the best way to understand the politics of market reforms in Latin America and in other developing nations is to specify the psychological, institutional, and economic conditions most conducive for chief executives (presidents) to initiate austere market reforms. Drawing from psychological theory-namely, prospect theory-Weyland explains that executives initiate costly market reforms when they and civil society consider themselves to be in the domain of losses; that is, when they experience acute economic crisis, such as hyperinflation. In brief, prospect theory argues that actors initiate seemingly irrational decisions in the domain of losses; that there is absolutely nothing to lose when undertaking risky, costly decisions in this setting. Thus, decisions that appear to contradict the actors' preferences do not impose costs. Quite the contrary: the domain of losses provides a new window of opportunity, inducing new actors-for example, political "outsiders" from opposition parties-to introduce bold reforms previously considered too politically costly. In the domain of losses, prospect theory contends, societal actors support experimental policy choices, even if they entail short-term costs. Weyland argues that prospect theory breaks from the traditional rational choice (RC) approach to reform in two fundamental ways. First, executives in the domain of losses decide to take the risk and initiate costly reform programs, such as privatization and exchange rate reform, in periods of economic crisis; for example, hyperinflation, in the cases of Brazil, Argentina, and Peru. This presents a paradox if one assumes, as most RC theorists do, that market reforms are often introduced in order to advance politicians' career prospects, especially in times of

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crisis. Yet Weyland asserts that this assumption simply does not hold in precarious democratic settings, especially as perpetual economic crisis and institutional breakdown provide new windows of opportunity for bold policy innovation. Second, prospect theory does not rest on theoretical assumptions, as RC theory does. Instead, prospect theory provides a microfoundation (like RC theory) for the logic of decisionmaking while using empirical evidence to illustrate why and how elites make decisions (unlike RC theory). Thus, prospect theory is both empirically supported and more theoretically convincing, as the assumptions inherent in RC models assume fixity in elite goals within stable, predictable institutions (pp. 260-61). To illustrate the efficacy of applying prospect theory to the politics of market reforms in Latin America, Weyland submits several detailed case studies. Through data collected from a host of surveys and primary literature, he shows how newly elected executives initiated bold market reforms in periods of crisis. He explains the politics of reform in two periods: the early 1980s and the 1990s. In the early 1980s, previous development models, such as import substitution, were supplanted with market reforms. In particular, Weyland argues that hyperinflationary crisis in Argentina and Peru created a domain of losses and new incentives for executives to initiate austere structural adjustment policies. In Brazil and Venezuela, by contrast, because of modest economic growth levels, economic conditions did not approach crisis level, so newly elected executives had no incentive to initiate bold reforms. Weyland emphasizes that the critical difference between the more successful cases of Argentina and Peru and the latter two cases was the degree of economic crisis and the belief by politicians and civil society that they were in the domain of losses; that is, that they could afford to take a risk with new market reforms. These beliefs, in turn, created a new window of opportunity; newly elected executives thus had greater incentives to press for costly economic reforms, supplanting traditional development models (pp. 166-67). The second era of market reforms saw bold initiatives undertaken throughout the 1990s. During this period, newly elected political outsiders implemented a combination of austere fiscal and structural adjustment programs in order to tame inflation and rejuvenate the economy. Weyland explains how, in Argentina, President Carlos Menem's interest in reducing inflation and increasing economic growth led to the implementation of new fiscal and privatization programs while delegating more authority to technocrats. With incentives to try for a third term in office, Menem implemented several austerity measures that worked, for the most part, to curb inflation and reduce deficits. These initiatives, however, ultimately generated political rifts in Menem's Peronist party,

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leading to the election of Fernando de la Rua of the Radical (opposition) Party. It is interesting that despite ongoing political conflicts, civil society still supported the free market model, and societal interest in finally implementing an effective stabilization program provided new opportunities for political outsiders, such as Eduardo Duhalde of the Peronist party, who succeeded de la Rua, to implement new market reforms, in the desire to escape the domain of losses. Similarly, in Peru, President Alberto Fujimori's effort to curb hyperinflation led to the draconian implementation of several fiscal adjustment and privatization programs. Because the degree of intra- and interparty contestation seen in Argentina was absent, Fujimori enjoyed wide latitude in hastily implementing austerity measures that society, for the most part-especially in order to stabilize the big business-desired His undemocratic efforts to circumvent the constitution, economy. and via fiat laws, ignore impose policy notwithstanding, Fujimori quelled inflation. These undemocratic practices ultimately delegitimated his position and led to the election of Alejandro Toledo in 2001. Economic stability notwithstanding, without a secure political and societal support base, Toledo had to rely on neopopulist tactics in order to muster and secure political support for continued economic reform (p. 208). In Brazil, for another contrast, Weyland explains how political corruption and poor economic performance under Fernando Collor de Mello and Itamar Franco paved the way for a new political outsider, Fernando Henrique Cardoso, serving as finance minister under the Itamar Franco administration, to rise and propose new market reforms. Seeking to curb inflation permanently, Cardoso, as soon as he was elected president in 1994, implemented the real stabilization program, which introduced a new currency pegged to the dollar and gradually imposed new fiscal and structural adjustment policies. In line with prospect theory's predictions, this case shows how Cardoso and society viewed themselves in the domain of losses, and consequently how the executive and society had new incentives to implement the real currency measures (pp. 221-25). After the Real Plan was implemented, however, and as inflation receded, the domain of gains emerged, and interest in pursuing the implementation of new economic programs waned-in accordance with prospect theory. In Venezuela, Weyland shows, President Rafael Caldera could not rely on a supportive populace for the implementation of the Agenda Venezuela, an austerity program aimed at reforming fiscal policy and introducing structural adjustment measures. The lack of popular support led to a temporary commitment to stabilization. Although Caldera succeeded in taming inflation throughout the early 1990s, by the late 1990s,

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as oil prices increased, the domain of losses quickly turned into the domain of gains, prompting Caldera and society to refrain from following through with the agenda (pp. 233-50). Society consequently lost trust in Caldera, while the economy continued to slip, creating fewer incentives for political outsiders to propose new policies. Under the new administration of Hugo Chavez Frias, elected in 1999, however, new orthodox stabilization measures were introduced, helping to quell these problems. After Chavez delegated economic decisionmaking to a cohort of technocrats, the economy rebounded, mainly through an increase in oil prices in 1999. Chavez thus entered into the domain of gains; and with this, the incentive to propose new reforms dissipated-again, as prospect theory predicts (p. 246). With the economy on a rebound, Chavez shifted his attention to political reform. After he illegally increased his political authority by purging the judiciary and sidelining Parliament, political and societal unrest ensued, leading to an ongoing political and economic crisis. Weyland thus illustrates how effective prospect theory is in explaining the seemingly irrational economic policy reforms that chief executives took in the four countries. Present in all four cases was the element of new political outsiders initiating costly reforms in the domain of losses, as acute economic crisis compelled executives and society to support austere market reforms. Conversely, incentives to reform waned as elites and society entered the domain of gains. Thus Weyland demonstrates that when combined with an analysis of how institutional structures and social forces influence decisionmaking, an application of prospect theory may provide a more effective approach in explaining policy reforms than traditional RC-based models, especially if reforms are taking place in precarious democratic settings, where institutions, interests, and goals are plastic and therefore unpredictable. While Weyland's application of prospect theory to several cases in Latin America goes far in explaining the politics of free market reforms, a principle concern of mine is why he decides to limit the application to decisions made at the executive and societal levels. Are these the only actors involved? What about other parts of the state that are consistently trying to influence the reform process? For example, can prospect theory also be applied to economic ministries, bureaucracies, and the "institutional crisis" of enforcing new market reforms? There is no question that economic ministers and bureaucratic officials have considerable influence not only in the politics of introducing new market reforms, but also in enforcing reforms once they have been implemented. Effective policy enforcement, in turn, necessitates a concomitant reform of market and bureaucratic structures in order to enforce new economic measures. Thus the question is: do economic ministers and bureaucrats press for bold institutional reforms during and after the

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market reform process? And if they do, should we expect the domain of losses to be transferred to the bureaucratic (enforcement) realm even when, economically, the government may be entering a domain of gains? This certainly seems to be the case, especially when ministers and bureaucrats realize that an immediate reorganization of institutions is needed to ensure that policies will work. Weyland argues, for example, that in Brazil in 1995, after the Real Plan stabilization program was introduced, the "alleviation of the state's fiscal problems-together with the success of the Real Plan in guaranteeing economic stability and stimulating moderate growth put the government into the domain of gains. As a result, it soon became riskaverse and further moderated its push for structural reforms" (p. 230). While the domain of losses may have dissipated at the fiscal level (which I doubt, considering that fiscal crisis-let alone banking-continued at the subnational level during this period; see Dillinger and Webb 2001), the domain of losses may have remained and shifted to the ministerial-bureaucratic realm; this would have incited ministerial officials to work hard at reorganizing fiscal regulatory institutions, which were highly inefficient, in order to enforce the Real Plan. Indeed, by 1999, the Department of the Treasury pushed for an increase in its evaluation of subnational loan applications and the authority to enforce fiscal penalties (through reductions in fiscal transfers) for noncompliance; this, in turn, immediately reduced the Central Bank's discretion in this area-where it was criticized for adjudicating loans subjectively (G6mez 2002). Thus, bold ministerial reforms were carried out by ministerial officials after the Real Plan and other stabilization policies were introduced. Cardoso worked closely with these ministers and, for the most part, agreed to their proposal to increase the Treasury'sauthority in regulating subnational fiscal accounts (G6mez 2002). Future research therefore may need to apply prospect theory to other "partsof the state." Institutional reforms, for example, entail the participation not only of economic ministers but also of bureaucratic officials and technical staff serving within legislative committees; these reformers play decisive roles in implementing new economic and social policies (Corrales 2002; Carpenter2001). As chief executives continue to lose their legitimacy-as seen recently in Argentina and Venezuela-one can only surmise that the role of institutional actors will continue to increase. Despite these omissions, I find Weyland's book to be a seminal contribution to the literature. His intriguing application of theories from other disciplines, such as psychological prospect theory, provides insight into the reasons why political and policymaking paradoxes abound in LatinAmerica. Moreover, this book demonstrates the efficacy of using theoretical tools from other disciplines in the social sciences to account for differences in policy outcomes. In the future, as explaining

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the politics of market reforms becomes more challenging with the increased participation of various actors in government, society, and the international community, Weyland's theoretical approach will illustrate the benefits of combining various schools of thought outside the established political science discipline. Scholars of bureaucratic and social policy reforms, as well as those of free market reforms, in Latin America and other developing nations stand to gain from applying and building on Weyland's analysis. Eduardo J. G6mez Brown University REFERENCES Carpenter, Daniel. 2001. Forging Bureaucratic Autonomy: Reputations, Networks, and Policy Innovations in Executive Agencies, 1862-1928. Prince-

ton: PrincetonUniversityPress.

Corrales, Javier. 2002. Legislative Oversight of New Democracies: The Case of Argentina. Paper presented at the conference "The Politics of Reform 'After' Reforms,"Thomas J. Watson Institute for International Studies, Brown University, November 1. Dillinger, William, and Steven Webb. 2001. Fiscal Management in Federal Democracies: Argentina and Brazil. Washington, DC: World Bank. G6mez, Eduardo J. 2002. Building Fiscal Responsibility in Brazil. Paper presented at the conference "The Politics of Reform 'After' Reforms," Thomas J. Watson Institute for International Studies, Brown University, November 1.

Norden, Deborah L., and Roberto Russell. The United States and Argentina: Changing Relations in a Changing World. New York: Routledge, 2002. Maps, tables, figures, 166 pp.; hardcover $75, paperback $18.95. I welcome the publication of this book for three basic reasons. First, it is the result of a larger project coordinated by Rafael Fernandez de Castro and Jorge I. Dominguez, which looks into the changing foreign relations between the United States and ten LatinAmerican countries. A fruitful exchange between nations of the hemisphere must be examined in the light of new paradigms driven by the legitimation of democracy and a trend toward increased intercountry cooperation. Such a task in itself justifies the existence of this book. Also, the coordinators of the project have proposed shared analyses made by different scholars from the countries involved in the respective bilateral relations under study; that is, those who represent both poles of the relationship. This unusual method must have entailed hard work. It provides, however, a wider and richer view of the multiple interrelations linking actors in Argentina and the United States.