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

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Summary: A novel and powerful cognitive-psychological theory
Review: 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.