The Politics of Market Reform in Fragile Democracies: Argentina, Brazil, Peru, and Venezuela [Hardcover]

Kurt Weyland (Author)

Book Description

Publication Date: November 4, 2002

An examination of a question central to comparative politics and economics: Why do some leaders of fragile democracies attain political success - culminating in re-election victories - when pursuing drastic, painful economic reforms while others see their political careers implode? Kurt Weyland examines, in particular, the surprising willingness of presidents in four Latin American countries to enact daring reforms and the unexpected popular support. He argues that only with the robust cognitive-psychological insights of prospect theory can one fully account for the twists and turns of politics and economic policy in Argentina, Brazil, Peru, and Venezuela during the 1980s and 1990s. Assessing conventional approaches such as rational choice, Weyland concludes that prospect theory is vital to any systematic attempt to understand the politcs of market reform. Under this theory, if actors perceive themselves to be in a losing situation they are inclined toward risks; if they see a winning situation around them, they prefer caution. In Latin America, Weyland finds, where the public faced an open crisis it backed draconian reforms. And where such reforms yielded an apparent economic reco

Editorial Reviews

Review

" combines theoretical novelty with substantive breath yet gives others theoretical approaches clear and reasonably fair treatment. Highly recommended." -- C.H. Blake, Choice

Anyone interested in the politics of public policy should read Weyland's clearly written, stimulating book, which combines theoretical novelty with substantive breath yet gives other theoretical approaches clear and reasonably fair treatment. -- Review

Anyone interested in the politics of public policy should read Weyland's clearly written, stimulating book. -- Choice

From the Inside Flap

"Kurt Weyland has written an important book. From now on, it will be very hard to write about Argentina, Brazil, Peru, and Venezuela or about complex political transitions without relying on the findings and insights that he offers here."--Moises Naim, Editor in Chief, Foreign Policy Magazine

"This is a truly original book. Weyland draws on the rich literature of cognitive psychology and behavioral economics to undertake a careful and illuminating analysis of decisions to initiate, or not, economic adjustment policies in several contemporary Latin American countries. He contrasts his innovative approach with the ones prevailing in the literature, and persuades me that his approach accounts much better for these policies than do the others. The value of this book goes well beyond the countries and the policies it discusses--this is comparative political theory at its most fruitful."--Guillermo O'Donnell, University of Notre Dame

"This is an excellent and original piece of work--a very solid piece of scholarship and clearly a contribution to the literature on the politics of reform. It fits in nicely with the tradition established first by Joan Nelson and colleagues, and then by Haggard and Kaufman."--Carol Graham, Brookings Institution, author of Private Markets for Public Goods

"This book makes a very significant contribution to the field. It is rare that a book is so ambitious in terms of both its breadth of empirical material and its effort to apply a theoretical framework that is, in this context, quite original. At a time when rational choice theories are increasingly dominant in comparative politics, the introduction of an alternative microlevel theory is quite refreshing. Weyland writes very well, in a clear and easy-to-read style that makes the theoretical chapters, in particular, especially accessible to those unfamiliar with the material."--Philip Oxhorn, McGill University, author of Organizing Civil Society

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Product Details

• Hardcover: 360 pages
• Publisher: Princeton University Press (November 4, 2002)
• Language: English
• ISBN-10: 0691096430
• ISBN-13: 978-0691096438
• Product Dimensions: 9.7 x 6.5 x 1.1 inches
• Shipping Weight: 1.5 pounds
• Average Customer Review: 4.0 out of 5 stars  See all reviews (2 customer reviews)
• Amazon Best Sellers Rank: #1,094,259 in Books (See Top 100 in Books)

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1 of 1 people found the following review helpful:

4.0 out of 5 stars Market Reforms: Prospect and Retrospect, February 15, 2007

By 

Fellow Traveler (North America) - See all my reviews

This review is from: The Politics of Market Reform in Fragile Democracies: Argentina, Brazil, Peru, and Venezuela (Paperback)

The market reform process in Latin America over the past two decades has inspired any number of political and economic explanations concerning the motivations of politicians and policymakers for their change in attitude. Amidst an already crowded field, Kurt Weyland offers an intriguing account based not upon the underlying assumptions of political science, but instead upon experimental economics. His cognitive psychology-based prospect theory rests upon the willingness of actors to take risks depending upon the conditions of the status quo.

Weyland starts by carefully defining all competing explanatory approaches---rational choice, economic structuralism, and political institutionalism---as a prelude to their dismissal. Rational choice models, for example, come closest to challenging prospect theory; yet, while based on similar psychological micro-foundations, Weyland contends that these differ from prospect theory in that the former method posits that decisions are made according to that option which carries the highest expected value.

Prospect theory, in contrast, acknowledges that decision-makers do not always choose on these grounds alone.

As background, Weyland references the 1984 work of experimental economists Kahneman and Tversky, who constructed an S-shaped value curve that weighted expected value according to whether a respondent is experiencing gains or losses from the status quo. Their conclusion: decision-makers facing dire circumstances are more likely to take risks and make decisions that have lower expected values. For instance, if today is worse than yesterday, then respondents are more likely to take risks that could facilitate a return to "normalcy." Conversely, if today is better than yesterday, respondents are less prone to accept change. Thus, Weyland argues that rational choice assertions based upon expected utility fall short of a full explanation.

In conjunction with prospect theory, Weyland discusses the somewhat fuzzier notion of prior option bias. This holds that once an actor has made a decision, s/he is more likely to stay the course even if conditions have worsened as a result of it. New actors, on the other hand, are more predisposed to taking risks.

After establishing prospect theory's virtues, Weyland applies it to four Latin American cases---Argentina, Brazil, Peru and Venezuela---and argues that this regional focus helps to reduce the range of explanatory variables. First, all of these countries have deep cultural and historical similarities, which simplifies their comparison. Second, each was plagued by debt and hyperinflation to different degrees in the 1980's, but the threat of further economic deterioration was visible in each case.

Using hyperinflation as a gauge of gains or losses, Weyland shows that in the countries where politicians and the electorate perceived hardship, all were willing to take risks. Citizens took risks by withdrawing their support from established parties and throwing it behind little-known candidates. Politicians took risks by implementing sweeping market reforms. Politicians in all four countries used neopopulist rhetoric to convince their citizens of the need of such drastic reforms for "the good of the common man," as well as to distance themselves from entrenched political forces.

In Argentina and Peru, reforms brought enough people into the domain of gains that the presidents who enacted the plans were re-elected. However, once politicians and voters returned to a comfortable state, both were less willing to gamble on further reforms - even if economic policymakers declared deeper measures to be a necessary condition for future growth. In Brazil, the results of the reform package were not sufficient to bring large numbers of voters into the domain of gains, and President Collor was unable to garner support for additional reforms. Venezuela was unique in that the public's perception of economic strength was high to begin with. Thus, when President Andres Perez adopted the same draconian measures as his contemporaries, his plan was very unpopular. In each case, support was lacking for a continuation of reforms. Corruption, inefficiency, and trade barriers remained in place and hindered further economic development, but according to Weyland prospect theory can account for this by taking stock of the economic winners and losers.

In search of further validation of prospect theory, Weyland uses it to explain such historical phenomena as the rise of Nazism and Roosevelt's implementation of the New Deal. Although prospect theory seems relevant to the cases analyzed in the book, the difficulty of measuring a populace's perception of crisis limits its ability to forecast change. Nevertheless, Weyland does a masterful job of merging this well-established economic approach with comparative political economy and backing up his argument with a host of rich empirical evidence and historical examples.

3 of 4 people found the following review helpful:

4.0 out of 5 stars A novel and powerful cognitive-psychological theory, March 17, 2004

By 

Carlos A. Mendoza A. (Notre Dame, IN United States) - See all my reviews

This review is from: The Politics of Market Reform in Fragile Democracies: Argentina, Brazil, Peru, and Venezuela (Hardcover)

A pessimistic view about the vulnerability of Latin American democracies confronting the need to adopt harsh economic reforms predicted that any attempt at adjustment would be blocked by the population in order to avoid its high costs or, in the worst scenario, a painful reform could generate massive protests that would undermine the regime. However, the cases of Argentina and Peru refuted those predictions of incompatibility between democracy and market reforms. This book explains under what circumstances it is possible to implement successful economic reforms without destabilizing fragile democratic institutions.
Weyland applies a novel and powerful cognitive-psychological theory to explain the behavior of both policy makers and the public regarding the macroeconomic stabilization and structural adjustment programs implemented in four Latin American countries during the late 1980s and 1990s. He uses prospect theory to frame this unconventional analysis of "adjustment politics". The most fundamental findings of this theory of decision-making are that individuals behave as risk-seekers when they face losses and, on the contrary, individuals avoid risk when they are situated in the domain of gains. By using an empirically supported theory of the "new behavioral economics", Weyland challenge rational choice scholars that explain decisions according to the less plausible assumptions of expected utility theory. The latter theory would predict very different outcomes in the countries under analysis, supporting the pessimistic view of incompatibility between democracy and market-oriented reforms.
The central argument of this book stresses the role of severe economic problems in triggering intrepid market reforms. The author's theoretical framework suggests that both political leaders and common citizens are more likely to accept risky measures when they share the perception that the national and household economies are trapped by a grave crisis (e.g. hyperinflation). As an implication, this micro-foundation for the "crisis argument" should also explain why in fragile democracies it is possible to put into practice tough economic reforms without regime damage. In fact, the author claims, it is the other way around: "by empowering the populace, the institution of democracy - in the context of severe crises - paved the way for market reform" (p. 283).
The book contains a case-oriented study that takes into account context factors. It is a synthetic effort based on extensive field research. The first three chapters are an introduction to the research question, a discussion about the rival theories, and a summary of the theoretical framework used for the description of the cases. These chapters are especially enjoyable for those who are interested in solving theoretical puzzles. Chapters four through eight are the core of the book. The author analyzes the political economy of the mid-1980s (i.e. "heterodox experiments"), and the reforms of the 1990s (i.e. "neoliberal adjustment") implemented by the new leaders - if not political outsiders - of the four countries. He also describes the peculiar combination of populist politics and free-market oriented reforms, and explains the causes of differential outcomes: the political failure of reforms in Brazil and Venezuela, and the political sustainability of liberalization in Peru and Argentina. In the final chapter the author summarizes the central findings: "chief executives succeeded in enacting a large part of the market reform program where both aspects of the crisis - conjunctural and structural problems - were acute and grave. By contrast, where conjunctural or structural problems were less severe, as in Venezuela and Brazil, respectively, neoliberalism ran into serious political difficulties" (p. 252).
Definitively, the main notions of prospect theory are very important to understand individual choice. The key idea about how individuals respond to crises is, as Weyland suggests at the end of the book, a powerful one that most be applied in depth in the fertile soil of comparative politics. The seminal work of Kahneman and Tversky (1979) showing how people manage risk and uncertainty was the beginning of an impressive research agenda in several economics domains (e.g. stock market, labor economics, saving and consumption, and insurance). Yet in political science, only the international relations subfield scholars have been exploring the applicability of prospect theory. Thus, Weyland's book is one of the first attempts to apply the recent cognitive-psychological findings in the field of comparative politics.
Paradoxically, a shortcoming of this book is its ineffective use of prospect theory. There is a lack of formal modeling to explain with parsimony and deductive rigor the payoffs and probabilities that the actors have faced during the decision-making process. Weyland affirms that precise information about payoffs and probabilities attached to different decision options is unavailable and he recognizes that this limitation makes difficult to prove the hypotheses. Additionally, there is not a systematic procedure to demonstrate whether a political leader was in the domain of losses when he decided to take a risky measure. There are descriptions that assume a specific position of the subjects along the value function, but these assumptions are based on the subjects' choices in a later moment. There are many arguments about the level of risk that different policy options had, but it still unclear which was the riskiest. Without numbers or algebra, the fundamental distinction between "more or less risk" is difficult to grasp. Certainly, it is harder to measure the political behavior of the President and the common citizen in order to show risk aversion than the economic behavior of a customer to prove the "asymmetric price elasticities of consumer goods" (Camerer 1998). However, some degree of formalization is desirable for the advancement of this approach in comparative politics. Precisely because "prospect-theory explanations rest on well-established empirical findings, not on unrealistic ideal-typical postulates," (p. 7) it is necessary to organize the historical facts and context factors according to previous experiments. At least, it is crucial to know whether the conditions that can be controlled during an experiment are present in the real world.
This provocative book will be useful for graduate students who have interest in political economy, especially as a complement to the abundant literature on economic reforms in Latin America.