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Distributional Coalitions and Economic Reform

 

For many scholars, distributional coalitions - that is, groups oriented towards struggle over the allocation of wealth and income - play an entirely negative role in the process of economic reform. Neoclassical political economists, for example, argue that, because state intervention in the economy generates rents (excess profits), distributional coalitions will engage in collective action in order to secure these rents, thereby promoting state intervention. But, they say, these coalitions will not engage in collective action to promote market-oriented reform because, in market-based economic systems, rents are dissipated by competition. All firms can only earn 'normal' profits. Hence, according to neoclassical political economists, market-oriented economic reform will only occur where 'heroic' technocrats are willing to push ahead with reform despite resistance from distributional coalitions.

For scholars working under the heading "the politics of economic adjustment", the story is similar. Many of these scholars - and especially those influenced by economics - argue that economic reform concentrates costs on the beneficiaries of state intervention and disperses initially uncertain benefits to a broad range of groups. Losers will have a strong incentive to engage in collective action to block reform, while potential winners will remain unorganised because they face uncertainty about whether they will benefit. This in turn suggests that economic reform requires the neutralisation of the distributional coalitions that benefit from state intervention. In other words technocratic policy elites need to be 'insulated' from these coalitions in order for reform to occur.

Hector Schamis, by contrast, argues that distributional coalitions can play a more positive role in the process of economic reform. This, he says, is because economic reform may not in practice eliminate rents and hence incentives for distributional coalitions to engage in rent-seeking activity. In fact, it may generate new rents and new incentives for them to engage in such activity. Referring to the Latin American case, he says: 'It is not only that the supporters of the reform process organised around short-term distributional considerations or that they often colluded with the reformers in order to get their preferences translated into policy. It is also that particular combinations of liberalisation policies can concentrate benefits upon a small coalition and disperse costs among a larger set of groups, leading to less than optimal aggregate results and to a setting favourable to rent appropriation'.

Schamis's analysis of the Chilean experience with economic liberalisation under the Pinochet regime illustrates these points nicely. During the 1970s, he says, economic reform in Chile reflected the interests of a coalition of diversified economic conglomerates that had interests in primary and manufacturing export industries and liquid asset sectors such as finance and real estate. He says that the members of this coalition forged tight links with Pinochet's military supporters prior to the coup that brought Pinochet to power. After the coup, these links were strengthened, with numerous business figures assuming senior government positions. In these positions, they were able to engineer a range of reforms that benefited their firms, most notably the privatisation of dozens of state enterprises to a select group of firms at heavily subsidised prices. During the 1980s, a similar privatisation programme was introduced, this time benefiting new business groups in which former Pinochet government officials were key figures. Many business groups gained monopoly control over key industries as a result of this programme.

In short, Schamis argues, Chile's experience with economic reform reflected a particular collective action pattern: 'key policy-makers of the Pinochet government served on the boards and in the executive offices of large economic conglomerates before and after holding cabinet and central bank positions, leading to collusion between economic power and political power. Beneficial policy contexts allowed these firms to extract rents and consolidate positions of leadership, even monopoly ones, in their respective sectors, at times in the context of negative aggregate outcomes'.

Significance?

Schamis's analysis suggests that economic reform is as much about empowering the winners as it is about neutralising the losers. This finding has important implications for international development agencies and other organisations that support economic reform in developing countries. It suggests that these organisations should design programmes so that they not only disempower opponents of reform but also strengthen those elements that support reform. At the same time, it also suggests that these organisations should be selective about the types of reform that they support given that reform programmes can be hijacked by vested interests and the apparent negative welfare effects that this can produce.

Source: Hector E. Schamis, 'Distributional Coalitions and the Politics of Economic Reform in Latin America', World Politics, Volume 51, January 1999, pp.236-268.
World Politics is published quarterly by Johns Hopkins University Press (www.press.jhu.edu).

Keywords: economic reform, distributional coalitions, Latin America, neoclassical political economy

Commentator: Andrew Rosser, IDS (April 2002)

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